The milieu of the 21^stcentury has triggered a wave of unprecedented changes across traditional market structures, igniting disruption and necessitating evolution in firms big and small.

A brief survey of the current global climate reveals the digital economy largely requiring some form of intervention – lest market abuse arise to the detriment of the consumer. In the United States, the Gordian Knot of walled gardensin the social media industry has triggered antitrust attention; where ‘Google’ and ‘Facebook’, juggernauts of the social media industry, have largely created a confined duopoly system. The ability for said companies to access much sought-after consumer data, led to regulation being necessary to prevent market abuse.

Winging this issue to the UK, technological developments have led to a necessary change in regulations – to facilitate innovation, while at the same time ensuring adequate consumer protection. In this article, I will adopt a two-pronged approach – Firstly, an economics-focused view will be adopted to examine the present digital economy; and in the second – the current regime in the UK will be analysed from a legal perspective, focusing on how Art 101 TFEUand Chapter I of the UK Competition Act 1998affects firms from a top-down level. In the final analysis, I argue that more governmental intervention is required in three sub-areas; namely in the areas of (i) data sharing, (ii) self-learning algorithms and finally, (iii) marketplace(s) with walled gardens.

I – The Digital Economy 

The G20 defined the digital economy as “a broad range of economic activities that include using digitized information and knowledge as the key factor of production, modern information networks as an important activity space, and effective use of information and communication technology as important drivers of productivity growth and economic structural optimization.” In essence, said term refers to daily economic activities stemming from the multifarious online transactions between businesses and consumers, accelerated by the Internet, Artificial Intelligence, Cloud Computing, Fintech and also the Internet of Things.

Viewed thus, the digital economy is transforming at an unprecedented rate, with a myriad of new technologies constantly being introduced. ‘Adapt or fade’ has largely become the mantra of the twenty-first century – over the past decade, companies have been forced to adapt to the ever-changing playing field. Those failing to re envision their business could lose previously attained competitive advantages and market share. Indeed, Uber, Facebook and Airbnb are but prime examples of how firms have leveraged on the digital economy, staying ahead of the curve at breakneck speed in displacing traditional companies.

II – Market Failure of the Digital Economy

Market Failure is defined as the inefficient distribution of goods and services in the free market. Fundamentally, as the marketplace is driven by demand and supply, a failure to consider all costs and benefits leads to a change in one of the forces, thereby resulting in a divergence from the equilibrium. This article argues that three main areas of market failure continues to plague the digital economy, leading to opportunities fresh for government intervention.

First, the collection and sharing of data. As consumers may not have the technical knowledge to comprehend lengthy terms for access to online services, they may tend to bypass information which could be relevant to their decisions, therefore leading to imperfect information. In addition, asymmetric information may exist when there is a lack of transparency on companies’ data security and utilization of consumer data.  The capacity to store data also increases the possibility of data breaches. Cybercrimes emanating from data breaches include identity theft, extortion and financial crime. Further, negative externalities would arise; third party consumers suffer distress for fear of becoming a victim while businesses may lose the public’s trust being associated with the targeted company.

Second, algorithms may also make tacit collusion easier. Algorithms increase transparency in data and enable firms to react to competitors rapidly. Hence, with escalating interdependence on each other’s behaviours, firms strategically replicate actions using algorithms and set supra-competitive prices without explicit communication. In an oligopoly, tacit collusion is a crucial problem as prices may reach monopolistic levels. Barriers to entry are further exacerbated by costly machine learning and datamining software vital to superior predictive algorithms. Smaller firms may not necessarily have the financial capacity to acquire these assets, and without any intervention a ‘David v Goliath’ situation could never emerge in the digital economy.

Finally, the increasing emergence of walled gardensgenerates monopolies. A walled garden is a corporation which retains user data and information, having no desire to share it. In the advertising technology (Adtech) domain, the Facebook-Google duopoly has largely been dominating the market, accounting for almost 59% of digital advertising spending in 2019. Identical to algorithms, walled gardens can amplify barriers to entry. Most have dedicated in-house developers to update and debug advanced software and tools which are unsustainable for smaller firms. When monopolies or duopolies are created, user data will be dominated. Ultimately, this could inflate other advertisers and firms’ expenses, adding costs to society and causing market failure.

The present stance is clear – government intervention is required; lest market failure forces loom amidst the UK Digital Economy. Viewed thus, the current legislative regime governing the Competition marketplace will first be analysed, before solutions to tackle market failure be suggested.

III – Current Competition and Consumer Protection Law & Policies

The Competition Act 1988 largely forms the framework within the UK, integrating traditional market structures with new industry models ushered in by the digital economy. Yet, in the UK’s 2018 Furman Review, concerns were expressed by the panel commissioned by the Government in the adequacy of said act to address the economic challenges posed by digital markets. Indeed, said Panel viewed the Competition Act as ‘insufficient to address the challenges of the digital market’, with said policy reforms being ‘slow and unpredictable’, due to how regulators are at an ‘enormous informational disadvantage’ – as compared to conventional technological companies.

The Furman Panel concluded with six main suggestions – (i) that a pro-competition digital markets unit should be created; (ii) that the Competition and Market Authority (‘CMA’)  should be strengthened with enforcement powers against anti-competitive conduct; (iii) that merger control rules should be adopted to enhance the CMA’s ability to challenge mergers detrimental to consumer welfare; (iv) that a formal CMA study be conducted specific to the digital market; (v) that developments relating to self-learning algorithms be conducted; and (vi) that international engagement to increase cross-border cooperation across countries. I argue that this narrows down to three principal areas of concern – the issues associated with (i) data sharing, (ii) self-learning algorithms and, (iii) marketplace(s) with walled gardens. I will address each limb part by part, weaving the economic concepts posited in the first part of this Article to conclude the optimal level of governmental intervention required in each area.

Data Sharing

The surge of big data has led to an increased risk of anti-competitive behaviour – particularly in agreements between firms for ‘exclusive access’ to a specific data set. Akin to exclusive access to intellectual property rights between firms which may likely breach s2 of the Competition Act 1998, exclusive licenses may similarly hamper market efficiency in the digital economy, very much to the detriment of consumers.

The orthodox elements of competition between firms in the free market are typically on factors such as price, quality, ability to create consumer loyalty and the like. The milieu of the digital economy has then led to firms competing on the level of privacy protection offered to said consumers as well (cf Whatsapp, Telegram on end-to-end encryption services offered to users). In said realm, competitors in this largely oligopolistic market may agree to reduce the level of protection offered to consumers, enabling them to largely drive down internal costs. However, this may potentially breach s 2 of the Competition Act, and regulators should hence remain alert of such situations.

Another issue related to data sharing involves agreements between firms to practice price discrimination based on consumer preference. For instance, data on the willingness of consumers to pay for a certain item, or information on amount of ‘clicks’ a certain item has may signal potential future market trends. If data sets are shared widely between huge oligopolistic firms on the market, this could distort competition and impact consumer welfare. In this light, it is argued that the United Kingdom should adopt an approach similar to that of the Competition Commission of Singapore – so long as said data set is (i) historical; (ii) sufficiently aggregated; (iii) cannot be attributed to particular business; (iv) not confidential; and (v) shared with consumers or governmental agencies, data sharing should not be prohibited.

However, Quan-Hasse and Sloan (2016) posits that where said data exceeds the earlier mentioned boundaries, particularly in markets with large oligopolies as opposed to monopolistically competitive industries, a regulator should arm itself with an antitrust alarm bells to prevent any adverse effects on competition in the free marketplace.

Self-Learning Algorithms

Paroche (2019) warns that the increased use of algorithms by large firms could lead to ease of collusion amongst companies. Three main concerns are at play here. Firstly, algorithms may be used for real-time analytics, allowing for collection of prices, decisions and data of competitors; they may be used to detect “intentional deviations from collusion” (DAF/COMP(2017);p20;Paragraph 46); and can be used to also suggest optimal reactions to changes in competitor behaviours, market conditions, or mistakes.

Picture this – self-learning algorithms, operating unfettered in the free marketplace, may communicate with other separate algorithms used by further independent market operators, where said algorithm(s) may conclude that the best way for profit maximisation would be through collude through price. The lack of a human agent, in reaching said agreement – brings to light questions of liability attribution – indeed, the toolkit offered by the Competition Act may not be sufficient robust in handling such developments presently.

Currently, s 2 will only catch instances where said algorithm is used to facilitate any agreement already breaching said provision; or when said algorithm is used through a 3P intermediary to rig or fix prices to detriment of consumers. Hence, self-learning algorithms are not caught under s 2.

Marketplaces With Walled Gardens

The main issue in marketplaces with walled garden stems from the relationship between data held by an organisation and the competitive advantage to which it will ultimately derive. In this situation, the kindof data ought to determine whether said company should be subject to scrutiny. I believe that in the context of analysing data, the ability for said data’s ability to generate (i) network effects; (ii) multi-homing properties and (iii) dynamism within marketplace ought to be factors a regulator should account for.

(i) Network Effects

Mitomo (2017) posits that network effects are especially amplified in E-Commerce markets. Network effects are an economic phenomenon where the value of one product increases as it gains an increasing consumer following in the marketplace.

Bifurcating said market into two limbs, data could potentially lead to two effects, one termed ‘traditional’, and another ‘spill-over’. For the former, value of said product largely depends on how many end-users there are on the market. For the latter, an increase in users on one side of the marketplace attracts more sellers (cf digital marketplaces, whereby more downloads attract an increased number of sellers to the marketplace). In this context, the use of data, particularly through customised advertising leads to increased advertising, and hence more advertisers and sellers in the E-Commerce market.

Said network effects are responsible for increasing barriers to entry for SMEs; for Grunes (2016) posit that if a player is able to harness data to ‘tip’ the market in favour of a number of suppliers, the leading firm may have such dominance hence drowning out competition and preventing small firms from gaining said quantity and quality data necessary to achieve any competitive edge.

It is ultimately in the interest of a regulator to find out the minimum efficient scale, before the scale is ‘tipped’ and regulate the marketplace at said point.

(ii) Multi-Homing

The digital economy introduces ‘multi-homing’, as Digital marketplaces, compared to the conventional industry, have created marketplaces where ‘membership’ is required to access said digital services.

Loyalty programs advanced by a myriad of digital companies (cf Cab hailing apps in the UK) shows an array of ‘loyalty programs’ locking consumers into said service unless a certain amount is spent in a given time. Viewed thus, switching to a new service requires one to give up on said benefits on another platform, and points towards market power of the digital company in examination.

It is in the interest of a regulator to examine the existence of multi-homing in anygiven digital economy, in order to detect any type of anti-competitive behaviour.

(iii) Dynamism Of Digital Markets

Large oligopolistic firms have huge resources for R & D, allowing smaller firms to be easily edged out. This points back to the Gordian Knot of walled gardens, which should not be an issue discounted in the UK. The FCO’s investigation into Facebook; the European Commission’s raids into alleged agreements by Polish Banks in refusing to provide data to rivals in the Fintech marketplace; alongside Google’s walled garden advertising methods are but three instances of this emerging issue.

Furthermore, the merger of walled gardens (cf Google/DoubleClick; Facebook/WhatsApp) still fall outside of the ambit of the CMA. Likewise, in Asnef-Equifax(C-238/05), the ECJ opined that privacy concerns arising as a result of the digital economy were outside the scope of powers which a competition authority may interfere in.

Taking stock, the present position appears rigid. Yet, the boundaries may be shifting, particularly following the 2018 Furman Review. This Article concludes with a few suggestions on where Competition Law should move ahead as we forge towards a new digital unknown of tomorrow.

IV – Conclusion

The conclusion of the Furman Review Panel is striking – the lacuna in the UK legislation governing competition law in the Digital Economy is insufficiently robust. In addition to the six recommendations offered by the Furman panel, I argue regulators should take a more interventionist approach in areas of (i) data sharing; (ii) self-learning algorithms; and (iii) marketplaces containing walled gardens, and the normative view as argued in the earlier part of this Article is relevant – indeed, market failure is rampant in the present digital economy. The optimal level of intervention would be for CMA to address asymmetric information and cybercrime issues in the area of data sharing; setting key standards on ethical and permitted usage of self-learning algorithms for the second; and weakening barriers to entry, equipping smaller firms with the ability to penetrate into said market, largely reanimating a ‘David v Goliath’ situation in the modern world.

In the final analysis, the legislative champagne should not be put on ice – CMA should be encouraged to intervene in the aforementioned areas to ensure an open and fair digital marketplace of tomorrow.