In context

Ex-ante regulation and new competition tool: now is the time to decide direction of travel

June 16, 2020
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In context

On 2 June 2020, the European Commission published its Inception Impact Assessments (IIAs) for new legislative proposals that will, if implemented, have a radical impact on the Commission’s ability to regulate and shape markets. The ex-ante regulatory instrument for large online platforms and the new competition tool are game changers allowing intervention without having to initiate Article 101 or 102 TFEU infringement proceedings.

 

Feedback on the roadmaps for the Ex-Ante RI and the competition tool (as well as the Digital Services Act package as a whole) can be provided until 30 June 2020. The public consultation is open until 8 September 2020. We outline some key elements below.

Ex-ante regulatory instrument (Ex-Ante RI)

The Commission wants to build on the foundation laid down by the Platform to Business Regulation, which will apply as of 12 July 2020. This regulation aims at establishing a fair and transparent business environment, by supporting SMEs who deal with large platforms to access and offer services online. The Ex-Ante RI proposal would take these principles significantly further by:

  • identifying large “gatekeeper” platforms;
  • permitting the collection of information from those gatekeepers;
  • adopting a new and flexible ex-ante regulatory framework for these gatekeepers, applied on the basis of a clear set of criteria (for example, significant network effects, the size of the user base and/or an ability to leverage data across markets); and
  • offering options to create “blacklisted” practices by gatekeepers, which would be a set of behaviours considered to create market distortion or entrenched economic power (for example, self-preferencing, unfair supplementary contractual provisions, interoperability and access, algorithmic transparency, and online advertising) as well as adopting tailor-made remedies for such behaviour.

 

New competition tool (NCT)

The Commission outlines four options to extend the competition toolkit by:

  • a dominance-based competition tool with a “horizontal” scope (option 1);
  • a dominance-based competition tool with a “limited” scope (option 2);
  • a market structure-based competition tool with a “horizontal” scope (option 3); or
  • a market structure-based competition tool with a “limited” scope (option 4).

 

According to the Commission, a tool with “horizontal” scope would be generally applicable across all sectors of the economy (online and offline), while the “limited” scope would have a narrower focus, limited to the area where the specific issue is identified (for example, within certain digital or digitally-enabled markets). “Horizontal” should not be taken as an indication that only horizontal competition concerns will be dealt with by this tool, as such an interpretation is misleading. The Commission is likely to want the tool to be sufficiently flexible to tackle vertical issues which arise as a result of the structure of a horizontal market; self-preferencing, zero-priced or one-sided pricing structures, price parity, interoperability and other elements with a vertical dynamic which could potentially be addressed with the new powers.

 

Option 3 is extremely wide-ranging, enabling the Commission to review a whole market or sector, regardless of whether a “gatekeeper” or dominant undertaking has been identified. Option 2 would lead to the narrowest set of powers. It is difficult ascertain how far-ranging the implications each of these options could be, even on the narrowest basis, without more detail on how the NCT would be used in practice.

 

Is the Commission going too far?

Views on the IIAs are extremely varied: some complain that this is the death knell of a market-based economy, with a “Big Brother” regulatory approach which will examine the activities of significantly-sized (or strategically important) digital players before there is even a whiff of anti-competitive or abusive conduct. Others are broadly supportive, indicating that the UK has had powers to launch market investigations for many years and those powers have been used diligently and transparently for the greater good.

 

No matter what side of the fence companies and competition experts may sit, it is clear that the Commission must be able to answer a number of extremely difficult questions when designing the scope of its new powers. It would take a thesis to outline all of them, but here are a few of the most important ones.

 

How do you accurately define a “gatekeeper” and what degree of certainty do you require in order to state that a market has “tipped”?

In this article, published at the beginning of 2020, we outlined the conundrum of the rise (and rise) of TikTok in a social media market viewed by many as “tipped” towards Facebook.

 

For how long does a gatekeeper need to maintain its position to be identified as such?

In digital markets, where the game theory can often be “winner takes all” or “winner takes most”, what effect will regulation have on incentives to innovate if, once you win, your gains are then subject to heavy regulation, with your business model adapted to support rivals who may be less efficient or less innovative? Indeed, is the new framework actually seeking to support less efficient competitors or will competition law continue to be based on consumer protection?

 

How do you formulate an accurate counterfactual in markets that constantly surprise us with their pace of change and innovative transformations?

It is clear that traditional enforcement cannot keep up with the fast pace but a solution based on predicting future behaviour or market dynamics before such events even happen, is also fraught with difficulties.

 

What importance will be placed on profitability when evaluating gatekeeper status?

In the digital economy where many important players struggle to break even or are permanently loss-making, how do we reconcile the long-term benefits to consumers (players remaining in the market, the possibility of making a sustainable profit, investing in innovation, and focusing on quality) with the short-term benefits (free services, ample choice, and price-based competition).

 

How will the Commission ensure that remedies are proportionate to the perceived issue being corrected?

Remedies will certainly increase costs for the companies that have to implement them, and in a situation where no competition infringement has (or can be) established. While some comfort can be taken from the Commission’s insistence that no sanctions will be imposed, the costs of adjusting market behaviour could be huge, with the cost of disincentives to innovate potentially being even bigger.

 

How will these developments impact the development of competition law outside of the EU?

At a time when many countries still struggle to establish a transparent and legitimate basic competition framework, companies could face even harsher and unpredictable treatment in non-EU countries, if they seek to mirror these proposals without the requisite judgment and expertise. Without legal certainty, companies could find it even harder to navigate their global businesses through politicised or costly and unnecessary red tape.

 

Will the Commission ensure a sound legal basis?

Lastly, it is interesting to note that the Commission seeks to rely on Article 103 as well as Article 114 TFEU as the basis for adopting the NCT. Whilst Article 103 permits additional legislation to “give effect to the principles set out in Articles 101 and 102“,  this would by itself appear insufficient for the Commission to introduce powers to address market concerns before an Article 101 or 102 infringement can be identified. It is therefore important that Article 114 is cited as the basis for the Ex-Ante RI and NCT, as this provides more room to adopt measures to ensure “consumer protection…taking account in particular of any new development based on scientific facts“.

 

Let’s hope science gets the upper hand here and any new measures are rolled out and used by the Commission with diligence, considering all parameters of competition (short and long term) and “consumer protection” in the most objective sense. Competition law should be a referee to the workings of the market economy. It should not make the game so unappealing that no one wants to play.

 

 

 

 

 

 

Fields of expertise

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