CMA study highlights risks to competition posed by algorithms

Out-Law News | 26 Jan 2021 | 9:24 am | 2 min. read

The UK’s Competition and Markets Authority (CMA) has launched a programme of work on analysing algorithms with the release of a study focused on the potential harms caused by algorithmic systems to consumers.

The CMA study found that algorithms and other automated online tools can provide benefits to consumers by personalising recommendations and increasing efficiency and effectiveness, with a potential cost benefit.

However its study also found algorithms can lead to direct and indirect harms. These include personalised pricing and personalised search rankings, which could manipulate consumers’ decision-making. The CMA said algorithms could manipulate user journeys online and the misuse of algorithmic systems could lead to illegal discrimination.

The report said algorithmic systems were also used by dominant firms to deter competitors from challenging their market position, for example by featuring listings that are more profitable for a particular platform.

The CMA also said algorithms could be used to facilitate collusion and sustain higher prices, either through explicit collusion or without any explicit agreement or communication between firms.

The report outlined ways in which these harms could be investigated and the role of regulators such as the CMA in addressing harms caused by algorithms. The CMA said there was a strong case for intervention due to the opacity of systems and operations, which made it hard for consumers to effectively discipline firms. It added that some practices involved the algorithmic systems of firms that occupy important strategic positions in the UK and global economies.

It said it was prepared to open investigations and order remedies if it found a firm’s use of algorithms put it in breach of competition law.

Competition law expert Richard Snape of Pinsent Masons, the law firm behind Out-Law, said the report was a key development in the way regulators were addressing the use of algorithms.

“The CMA’s research reveals a number of concerns regarding the use of algorithms including price collusion, self-preferencing and personalised pricing. These issues have been known about for a number of years, generating much discussion among regulators about how to respond – indeed the CMA references numerous global developments in its report. However, the CMA’s study represents one of the most detailed examinations of the issues to date, and could provide a stepping-stone to greater enforcement in the future,” Snape said.

Snape said the study and the launch of the specialist Data, Technology and Analytics (DaTA) unit in 2018 underlines the CMA’s intention to be recognised as a world leading regulator in the field of digital markets.

“In recent years, the CMA has invested significantly in a unit to assist in its investigatory work, and the study represents a further significant commitment to understanding and resolving important and complex issues surrounding the use of algorithms,” Snape said.

“The publication of the study is particularly interesting in the context of the anticipated introduction of the Digital Markets Unit [DMU] in April 2021. The DMU will be a specialist unit within the CMA regulating certain elements of digital markets (including algorithms), with a forthcoming consultation regarding its future powers and related regulatory regime expected to begin soon. It is clear that the CMA intends for its DMU to hit the ground running, and intends to use its pricing algorithm study to inform the DMU’s early work,” Snape said.

Snape said while the DMU regime was an added tool in the CMA’s arsenal, the algorithm study showed the regulator would also use its existing powers including anti-trust investigations and market studies and investigations to target the harms it had identified.