Is Furman right to propose ex ante platform regulation as the best way to address competition concerns in the digital economy?

(by Elias Deutscher) Last month, the Digital Competition Expert Panel, chaired by Professor Jason Furman, published its report ‘Unlocking digital competition’ (the ‘Furman report’). The report had been jointly commissioned by the Chancellor of the Exchequer and Business Secretary due to concerns about prevailing high levels in industry concentration, the accumulation of data in the hands of a handful of players and the rise of a few vertically integrated super-platforms. The same concerns have fuelled a European-wide policy debate about the challenges of competition law enforcement in the digital economy (e.g. by the German Federal Ministry for Economic Affairs and Energy and the European Commission).

The Furman report singles out the strategic importance of data and the gatekeeper function of intermediary platforms as central features of digital competition and the most important challenges for competition policy. These features make digital markets more prone to tipping in favour of a few powerful incumbents. Amongst other recommendations, the report proposes to address these concerns through the creation of a specific ex ante regulatory regime for digital platforms. While it outlines some of the basic features of the proposed new regulation, the report omits to clearly set out the underlying rationale and implications of such a regime. It also gives little guidance on its exact scope and implementation. Most importantly, it remains unclear whether the proposed framework will apply only to large, dominant firms, or also to smaller, non-dominant platforms.

An ex ante regulatory framework for digital platforms

The suggested regulatory framework for digital platforms is inspired by the recent EU Commission proposal to regulate the fairness of platform-to-business terms and conditions. Yet, by envisaging two types of conduct regulation, the Furman report goes considerably beyond the proposed EU regulation, which mainly confines itself to lay down rules on the transparency of platform-to-business terms and conditions. First, the report recommends the drawing up of a code of conduct which would subject intermediary platforms holding a ‘strategic market status’ to a set of regulatory principles promoting free and fair competition. The exact scope and substantive content of this code of conduct is to be determined through a collaborative process, involving all relevant stakeholders and a newly created ‘Digital Market Unit’ as sector regulator. The Panel suggests that the code should prohibit a platform with ‘strategic market status’ inter alia from:

  • excluding rival products/services to give its own product/service an advantage;
  • granting its downstream products/services an unfair advantage by ensuring them more prominent display/ranking in its search function;
  • penalising business users who offer their products/services under more attractive conditions on other sites. (pp. 60-62)

Second, the Expert Panel also suggests that the digital market unit should use data mobility and data openness remedies to boost consumer switching and data sharing (pp. 64 – 77). Besides enhancing consumer choice, these measures are specifically geared towards addressing competitive advantages that incumbent platforms might derive from the control of significant volumes of data.

A paradigm shift

The Expert Panel’s recommendation of a sector-specific ex ante regulatory framework for online platforms constitutes an important change in the approach of competition policy towards unilateral conduct in the digital economy. So far, unilateral conduct by online platforms has been mainly regulated on a case-by-case basis through the ex post enforcement of Article 102 TFEU and/or Chapter II of the Competition Act 1998. The Furman report significantly departs from this ex post approach, in so far as it advocates conduct regulation in the form of a code of conduct that prohibits designated platforms from engaging in specific business practices from the outset.

This proposal constitutes an important paradigm shift in at least two respects. First, the report jettisons the widely held opposition to interventionist antitrust policy towards technology-enabled markets. It thus casts doubt on the assumption that market power in those markets is short-lived, as incumbents remain constrained by dynamic, potential competition ‘for the market’. Second, if implemented, the proposed regulatory framework would mark a significant departure from the overall trend towards a more economic/effects-based approach, which relies on a case-specific analysis of the economic effects of business conduct. What is proposed here instead is an ex ante regulatory framework for online platforms, that would rely to some extent on per se prohibitions of, or at least rebuttable (?) presumptions of illegality for certain types of conduct by undertakings holding ‘strategic market status’.

The Furman report justifies this paradigm shift by pointing out that traditional tools of ex post antitrust intervention are often too slow and insufficient in addressing potential anticompetitive practices that might tip digital markets in favour of a powerful incumbent. It assumes that the welfare costs of under-enforcement of traditional competition rules in digital markets outweigh the potential costs caused by over-enforcement of more or less broadly construed ex ante rules (pp. 54 -55). Further policy debate is needed to test these assumptions and to clarify the extent to which they are specific to digital markets. It is, for instance, not entirely clear how the gatekeeper function of digital intermediary platforms differs from that of other brick-and-mortar intermediaries, such as supermarkets. All the more so, as supermarkets increasingly rely on digital technology to better understand consumption patterns and personalise their offers.

What is the rationale and scope of the proposed ex-ante regulatory framework?

Despite the fundamental change the Furman report calls for, the scope and operation of the proposed regulatory regime is unclear. For example, it does not explain what is meant by ‘digital economy’, which makes it hard to determine the extent to which the proposed ex ante regulation is necessary in the first place (p. 21). It is also unclear which undertakings and markets would be caught by this regime, as the report offers little detail about the relevant methodology to determine which platforms have ‘strategic market status’. It merely describes it as ‘enduring market power over a strategic bottleneck market’ (pp. 10, 55) and observes that the ‘significant market power test in telecoms regulation provides a good starting point’ for devising a ‘strategic market status’ test (p. 81). Leaving the exact definition of ‘strategic market status’ open, the Panel dodges a crucial question: namely, what is the requisite market power threshold for regulatory intervention under the strategic market status test?

In discussing economic dependence, relative market power and access to markets as appropriate factors for the ‘strategic market power’ test (p. 81), the Furman Report considers benchmarks which are traditionally not associated with the notion of a dominant position, but rather with abuses of relative market or superior bargaining power. The report also mentions that the regime could follow the logic and design of the EU telecoms regulation, which relies on the so-called Significant Market Power (SMP) regime to identify market players that should be subject to ex ante regulation. However, SMP was originally different to dominance as defined by the Article 102 TFEU case law, and the two have only subsequently been aligned by more recent reforms of the EU telecoms regulation.[1] This suggests that in contrast to Article 102 TFEU/Chapter II of the Competition Act 1998, the proposed regime could apply to digital platforms that do not hold a dominant position and therefore lower the bar for prohibited unilateral conduct in digital markets (see in particular p. 62 § 2.45).

It is also unclear how the regulatory framework will apply the proposed data mobility and data openness remedies. The report states that the Expert Panel should use these remedies with caution after undertaking a cost-benefit and proportionality analysis but does not explain how this would work (pp. 71, 75-76). For example, would such balancing test follow the blueprint developed under the refusal to deal case law? Most importantly, the report leaves open the question of whether data-mobility and data-sharing remedies should be applied to platforms with strategic market status or across all platforms irrespective of their market power.

Without further direction on these points, the proposal opens the door to contradictory policy outcomes. For example, does the proposed framework simply have the effect of reversing the burden of proof on dominant platforms engaged in abusive conduct under Article 102? [2] Does it introduce new types of abuses in relation to dominant platforms? Or does it expand rules on abuse of dominance to non-dominant platforms?

Concluding remarks

The Furman report makes a bold and innovative proposal to address growing concerns about the anticompetitive conduct by powerful ‘gatekeeper’ platforms. The problem is that its proposed ex ante regulatory regime leaves many questions open. It is unclear whether it would merely complement the existing ex post antitrust regime, or in effect lower the bar for antitrust intervention by prohibiting certain categories of unilateral behaviour by non-dominant firms. Either way, the added value of the proposed regulatory framework as compared to the already existing tools of ex post and ex ante antitrust intervention, such as market investigations, commitments and interim measures also merits further policy debate.

[1] Alexandre de Streel, ‘The new concept of “significant market power” in electronic communications: the hybridisation of the sectoral regulation by competition law’ (2003) 24(10) European Competition Law Review 535 539–540.

[2] Recent proposals by the special advisers to the European Commission also suggest a reversal of the burden of proof under Article 102 TFEU for certain conduct by dominant, vertically integrated platforms Jacques Crémer, Alexandre-Yves de Montjoye and Heike Schweitzer, ‘Competition policy for the digital era’ (2019) 4, 7, 68-69 <http://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf&gt; accessed 4 April 2019.

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