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Out-Law Analysis | 12 Feb 2015 | 12:07 pm | 8 min. read
According to the Competition and Markets Authority (CMA) those businesses hold enormous power to sway consumer decision-making in the UK "digital economy".
The CMA has outlined its intention to look more closely into potential distortions of competition in this area from April this year. Recent publications and speeches given by some of its senior officials suggest that price comparison websites, search engines, websites providing peer reviews or feedback and online trusted trader schemes might be among those to come in for scrutiny.
We recently looked at the effect on price comparison websites of changes in industry regulation. But what activity does the CMA frown upon, and what possible remedies will it seek if it identifies competition concerns?
Practices likely to be under the microscope
Maintaining effective competition in online markets and the digital economy was one of the priorities identified by the CMA as it outlined in its proposed annual plan for 2015/16 (35-page / 661KB PDF).
In this publication it set out its intention to conduct at least four market studies, calls for information or market investigations in 2015/16 with a particular focus on "new markets work … on issues relating to the digital economy".
The CMA said that there are "risks and challenges" in online markets and the digital economy and explained its concerns in more detail in its strategic assessment paper (31-page / 857KB PDF) published alongside the plan.
The authority flagged that it would be particularly interested in potential restrictions to the online distribution of goods. It also said the way businesses are using personal data could cause competition issues unless consumers are given greater control over how their data is used.
We therefore expect the CMA's work to focus on two areas in particular. First, the behaviour of internet intermediaries and gatekeepers, and secondly antitrust enforcement activities in relation to 'traditional' restrictive practices and the abuse of dominant market positions.
Internet intermediaries and 'gatekeepers' are increasingly vital in channelling consumers to available goods and services online. We anticipate that the authority will allocate material resources to a broader review of how online/digital markets function, and whether they operate in a way that is to consumers’ detriment.
We believe that such work will focus on the behaviour of internet intermediaries and ‘gatekeepers’ including search engines, price comparison websites, websites providing peer reviews/feedback and online trusted trader schemes. A central theme is likely to be how consumers exercise choice in an online environment. These issues would most likely be investigated in the context of a review into widespread commercial practices, for example through a market study.
Restrictive practices in the digital arena which the CMA is likely to focus on are likely to include retail price maintenance as well as online sales and advertising restrictions. Depending on the authority's appetite for venturing into particularly complex areas of antitrust laws, the CMA may also prioritise the investigation of the behaviour of companies with substantial market powers on online platforms. We note that the CMA has expressed concerns about the potential 'tipping' of such markets.
Wearing its consumer protection law enforcement hat, the CMA is also likely to be on the look out for activity that serves to distort consumers' decision-making. The use of drip pricing, for example, where additional charges are added to a basic price as the sales process progresses, or the use of confusing or misleading pricing practices and special offers, may not be tolerated by the authority.
The CMA provided some insight into other issues which are on its radar and which it might look at more closely as part of its focus areas.
Barriers to new 'challenger' companies in established markets as well as in newer markets, such as the peer-to-peer lending market and other sub-sections of the so-called "sharing economy", could be studied, as could the licensing of standard-essential patents and other intellectual property. Contracts between intermediaries and consumers could also be examined to check they are clear and fair. The CMA has also said it will be monitoring the growth in cloud computing and the internet of things marketplace to ensure they remain competitive places in which to do business.
In our view, we will also see a fuller assessment of big data in the merger control framework given that the European Commission has already taken steps into this direction in its recent decision on the transaction involving Facebook and WhatsApp. It also recognised data implications when examining the merger between Google and DoubleClick.
The CMA's interest in the 'digital economy'
Its interest in this area is unsurprising given that research conducted by the Boston Consulting Group (BCG) published in 2012 found that 8.3% of the UK's gross domestic product in 2010 stemmed from the "internet economy". This compared with a 4.1% average across G20 countries.
By 2016, the BCG predicted that 12.4% of the UK's GDP would stem from the internet economy and total $347 billion and added that, by that time, 23% of total retail sales in the UK would be made up of online sales. At 11.7% in comparable terms, Germany was second on the list of online retail adopters in the G20, with the developed market average of online sales' proportion of total retail sales predicted to be just 8.5%.
"Thanks in part to high internet penetration, efficient delivery infrastructure, a competitive retail market, and high credit-card usage, the UK has become a nation of digital shopkeepers," the BCG said.
The BCG research is supported by figures published by the Office of National Statistics (ONS). For 2012, the ONS said the total value of UK website sales was £164 billion.
The internet is a particularly valuable channel for businesses looking to reach UK consumers and its importance has been recognised by the CMA – senior personnel at the authority have placed on public record what they see as the need for consumer choice in online markets.
In a speech given in Lithuania last year on the enforcement of competition in online markets, Philip Marsden, inquiry chair at the CMA, said that it is not "price, quality or any other factor of the product itself that is determinative" of competitive and "efficient markets". Instead, he said that "ensuring that consumers can exercise their choices effectively, particularly in online markets” should demand more authority attention.
The CMA's chief executive Alex Chisholm similarly stated at an event in London in October that although "price matters a lot", it is important that online services delivered to consumers are of sufficient quality to be of value to them: "If we focus ever more on price we are likely to get more and more products and services that are cheap because they offer low value,” he said.
In his speech, Chisholm recognised that the CMA needs to become "better informed and more digitally capable", and "more flexible and agile in the face of fast-changing markets". He admitted that intervening in markets can sometimes be the wrong decision.
The CMA confirmed its cautious approach to regulating competition online in its draft annual plan by stating it will "carry out careful analysis of the issues" before making any "regulatory interventions". "We need a better understanding of developments and practices, considering both the potential benefits and risks to consumers," it said.
Late last month, the CMA took a first step towards gaining a better understanding of the commercial use of consumer data. It issued a 'call for information' inviting consumers, businesses and academics to provide it with details of the ways businesses currently exploit consumer data and the barriers to this activity. This is part of a wider CMA project to understand fully how businesses collect and use consumer data – including how it affects consumers, businesses, competition and the wider economy. It is at this early stage that the CMA would be most receptive to views on acceptable practices.
A market study to be launched?
Given the CMA's rhetoric, it is most likely that the authority will launch one or more market studies or market investigations into the way online intermediaries operate and their business models. These reviews are likely to be cross-sectoral.
Market studies form part of the authority’s toolbox and can also be launched by sectoral regulators such as the FCA or Ofcom. Indeed the FCA has conducted a thematic review into price comparison websites. Such studies can be launched to tackle market-wide concerns without failings by individual market players first having to be identified.
Market studies are examinations into why particular markets may not be working well, taking an overview of regulatory and other economic drivers and patterns of consumer and business behaviour. They can focus on features within a particular UK market or relate to practices across a range of goods and services markets.
Market studies can last for up to a year and lead to a range of outcomes, recommendations to government on changes to regulations or public policy; the undertaking of competition or consumer enforcement action; or the referral of a market for a market investigation.
Market investigations are more detailed and lengthy examinations into whether there is an adverse effect on competition in the market for the goods or services referred. If adverse effects are identified they can be remedied through the imposition of structural and/or behavioural changes.
The CMA or a sectoral regulator can make a market investigation reference, if it has reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in all or part of the UK.
The regulators can also make a cross-market reference to bring in for scrutiny a specific feature, or a combination of features, existing in more than one market, if it has reasonable grounds for suspecting that a feature of combination of features, of more than one market in the UK prevents, restricts or distorts competition in connection with the supply or acquisition of goods or services in the UK or a part of the UK.
This mechanism clearly allows the CMA to review how suppliers advertise and sell goods or services online. In addition, how consumers act online can amount to a "feature" of a market; so consumers' failure to shop around for the best deal, or even how they shop online, could be a market feature that is considered to prevent competition.
In light of the CMA's recent announcements, there are perhaps a number of cross-sectoral features which could become subject to such scrutiny.
These include, advertising techniques that focus consumers’ attention on specific features and away from others, the packaging of products or services into complex bundles, and 'astroturfing' - the posting of fake reviews.
The CMA might also examine for misleading commercial practices, such as undisclosed commercial blogging and the skewing of search results on price comparison sites, and also take a dim view of price-dripping.
The CMA will want to be careful to avoid unnecessarily intervening in the rapidly changing internet markets, but as its recent call for information shows, it is in the process of gaining a sufficiently good understanding to surgically crack down on unfair commercial practices and potential market distortions.
The market study and market investigation regimes equip the CMA with tools which are unique in Europe to undertake this task. Making use of these powers in the digital arena could satisfy the CMA's ambition to be one of the leading competition and consumer agencies in the world.
We therefore recommend that internet intermediaries and companies that could be considered as gatekeepers revisit their activities relating to online personalised pricing, the commercial use of data and other practices impacting on consumer choice.
Guy Lougher and Sammy Kalmanowicz are competition law experts at Pinsent Masons, the law firm behind Out-Law.com
Out-Law Legal Update
High Court guidance will reassure banks acting to freeze accounts suspected of holding proceeds of crime