Competition in Digital Markets – Part II

Competition in Digital Markets – Part II

Would service-specific regulation help or harm business and innovation in Australia?

On 13 December, Access Partnership convened a second online dialogue in a series discussing regulation and innovation in Australia. The discussion focussed on the half-way report released by the Australian Competition and Consumer Commission (ACCC) as part of its five-year digital platforms inquiry. The speakers shared their expertise and the most recent evidence available to unpack the implications of the ACCC’s recent recommendations, and primarily those on service-specific designation.

ACCC report summary

The report presented three different sets of reforms: i. consumer protection; ii. digital platform specific recommendations directed to specific consumer harms; iii. competition reforms. As part of the latter suite, the ACCC is recommending service-specific codes with targeted obligations guided by legislative principles to address anti-competitive conduct, barriers to entry and unfair treatment of business users. The ACCC is recommending introduction of primary legislation that includes: a power to create codes of conduct and legislative principles, and a designation power to establish the designation criteria. A code of conduct would be developed for a service, a platform would be designated in respect of that service, and the designated platform that provides a designated service would then be subject to the obligations of the code.

Moderator:

  • Kirsten Webb – National Competition Practice Group Lead, Clayton Utz.

Speakers:

  • Stephen King – Commissioner at Australia’s Productivity Commission.
  • John Yun – Associate Professor of Law at the Antonin Scalia Law School, George Mason University, and the Deputy Executive Director at the Global Antitrust Institute.
  • Greg Houston – Founding Partner at HoustonKemp.

During the discussion, the speakers covered the following:

Platforms do not operate in their own markets, nor do they only compete with other platforms. Digital platforms are a way of organising business; they provide a way to organise production efficiently. There are, however, other ways to organise production, and, in fact, some platforms are both single- and multi-sided, depending on the types of markets. Digital platforms per se are not defining power in markets, but form one part of a larger competitive market.

Regulatory intervention is only required when one or more firms have enduring market power. The prospect of some market power is, however, always needed – to drive innovation and incentivise firms to provide better products at lower costs. Service-specific designation will therefore require clearly identifying the parameters around concentration of market power to minimise disincentives to firms.

Concentration of market power is not a new debate. In the pre-digital era, electricity and utilities companies, railway companies, gas pipeline companies – all exhibited varying degrees of market power. The solutions entailed developing “declaration” criteria, as opposed to designation, and putting in place particular regulation around these companies. Historically, it’s proven challenging to establish designation criteria, that would capture only what they were intended to capture, and to subsequently implement a code that constrains the behaviour of designated businesses.

“We’ve learned from Part 3A that it is really, really, really hard to come up with a set of designation criteria. We will spend the next 25 years going through the courts, it’s going to take time”. – Stephen King

New regulatory intervention should not impose higher administrative costs than existing competition regulation. Sector- and firm-specific regulation will entail much larger costs – new legislation or codes of conduct, designation criteria, a ruling body set up to designate businesses, another body to enforce legislation and an appeals mechanism. Service-specific regulation might also, in turn, encourage conduct to circumvent new constraints.

The decision to introduce sector-specific interventions should be informed by cost-benefit analyses. Critical to regulatory policy is the cost-benefit to the particular jurisdiction in which it is being applied. For example, new policy should consider aspects such as the efficiency or resource allocation effect of a regulatory change, or the dollar-value gains and losses for all people affected. Regulatory considerations should also prioritise consumer welfare over proliferation of competitors.

The retail sector is dynamic and highly competitive. Like many other parts of the economy, retail has undergone significant technological change. This has resulted in integration of online retailing with other channels. Consumers have a diversity of choice and search information at unprecedented levels – through apps, social media, online marketplaces or through the online presence of brick-and-mortar stores, alongside in-store purchases. On the supply side there are low barriers to entry – there are a total of 150,000 retailers in Australia, and an estimated 25,000 new retail businesses were set up in 2021 alone.

“We need to challenge the idea that entry of low-cost products is bad for consumers; the burden has to be more than disadvantaging third-party sellers”. – John Yun

The external environment is changing faster than reflected in evidence collection exercises. Within three years, new digital platforms have emerged and are rapidly expanding their market share. Established large platforms are seeing their market capitalisation decline or their future prospects deteriorating. Some, even if they did have market power two years ago, are facing entirely new competitors with innovative business models. Past observations becoming dated means any regulatory proposals need to revisit past assumptions and consider current market dynamics. Flexible, as opposed to bureaucratic, criteria-heavy approaches will help design new interventions that stand the test of time.

Are there are potential alternatives to service-specific ex-ante regulation? Some would argue closer dialogue between regulators and firms could bring about changes faster, and in ways that are better aligned with policies being pursued in other jurisdictions. However, the search is open for cheaper, more effective ways to reach the same outcomes sought by the ACCC. It will take a long time to implement and get new policies right so that they better preserve pro-competitive effects, while addressing anti-competitive ones.

“When you design a process to alter or constrain behaviour in a competitive market, then necessarily the codes are going to be so general that they probably start to look like the competition law we started off with”. – Greh Houston

The recoding of the full discussion is available here.

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