Professor Jason Furman, Professor Amelia Fletcher CBE and Professor Philip Marsden gave evidence.

Good afternoon, everyone. Could each of the witnesses introduce themselves, please? One witness is in the room and two are joining us virtually.

Professor Fletcher:

I am Amelia Fletcher, Professor of Competition Policy at the University of East Anglia. I should mention that I am also a non-executive director of the Competition and Markets Authority; I know you heard from our chief executive officer this morning. I am very much here, I believe, with my academic hat on and because of my role on what has become known as the Furman review, which kicked all this off.

Professor Furman:

I am Jason Furman, Professor of Economic Policy at Harvard University; I am jointly at the Harvard Kennedy School and in the economics department. I was chair of the expert panel on digital competition, and I am thrilled to be with you—this morning for me, and this afternoon for you.

Professor Marsden:

I am Philip Marsden, Professor of Law and Economics at the College of Europe in Bruges. I am deputy chair for enforcement at the Bank of England. I was a member of the panel here and was formerly inquiry chair at the Competition and Markets Authority.

Thank you all very much for joining us. I call shadow Minister Alex Davies-Jones to kick off with questions.

Good afternoon professors and thank you for joining us today. We have had a lot of chatter about whether the Bill will help or hinder the growth of innovation in the UK’s digital market. What are your opinions about that and do you feel that the Bill goes far enough?Q30

Professor Marsden:

In the branch of legislation being considered internationally in this area, this is the only Bill with a pro-innovation approach written into it. That was our original intention in the Furman review—not to sacrifice any innovation by large tech platforms, but simply to unlock the opportunities for innovation from smaller, more diverse firms so that there were more ideas and more flow. I do not see any correct arguments at all that this will hinder innovation; if anything, it will do the opposite.

Q Professor Fletcher?

Professor Fletcher:

I fully endorse that. When we did the review, we spoke to a lot of firms that were seeking to innovate in the digital space but were struggling. We heard that they really needed access to a whole number of things such as data. They needed access to customers and to be interoperable with systems out there. They needed access to finance. They found, essentially—some of them, at least—that the way in which the biggest platforms were working was making all that very difficult. They were concerned that although there had been a huge amount of innovation, at that point—and still, I think—firms’ ability to innovate was being gradually increasingly stymied by the conduct of the biggest tech platforms. We very much saw the Bill as a pro-innovation piece of regulation.

Professor Furman:

This question is so fundamental. This legislation would have benefits for consumers in terms of price and choice, but far and away the most important benefit would be innovation. It was designed with that in mind; our recommendations, which the legislation took on, established firms with strategic market status. They would fall under these rules, which would give a lot of leeway to small and medium-sized UK businesses to really innovate and come up with their own models rather than being constrained. More competition would help innovation by the large platforms as well.

The other thing that is so important is that the speed in the digital sector is just so much faster than in other parts of the economy, so traditional anti-trust rules just take too long: by the time a case is settled or decided, everyone has moved on. Getting there at the front end and having something that is much more flexible and faster is critical in this sector.

Q Thank you very much for your answers. Amazon has recently said the complete opposite of what you are saying. It has said that the Bill will stop it from innovating. It has started these new stores where you can go and shop and there are no staff—people just go in, take the stuff off the shelf and walk out. Amazon says that this Bill would have stopped it from taking forward that kind of innovation. What particular areas in the Bill is Amazon referring to? Do you recognise those as valid concerns?

Professor Fletcher:

Amazon would have to be more precise about what it thought in the Bill would stop that. I think the Bill has trod a very careful, innovation- focused line between stopping the biggest tech platforms from inhibiting innovation by third parties and facilitating them to innovate themselves. The Bill is designed to only address the very biggest platforms in the first place, but also only to address the elements of their business where they have very strong market positions and entrenched market power. I think that way is the right way. As far as I know, Amazon would not be inhibited by the Bill from setting up those stores.

Q There is a forward-looking provision, is there not, for the CMA to look five years into the future and decide whether a company will have entrenched market power then? Is that what Amazon is referring to? Is that their concern, and would that be valid?

Professor Fletcher:

I think the concern is to ensure that it is entrenched market power that we are addressing. The CMA recognises, as do we, that these are intrusive measures and you do not want to do them unless you are trying to address entrenched market power.

Professor Marsden:

Personally, I agree that there is an aspect where the five-year period, which I find a bit too long, can be gamed by some of the potentially SMS—strategic market status—firms, but I understand why it is in there. I probably would have been more comfortable with a two or three-year period, because that is traditional for competition authorities and as far as they can look ahead in terms of crystal ball gazing. But I understand why it is there.

Q How would they game the system, Professor Marsden? What do you mean by that?

Professor Marsden:

They could game the system in the sense of one thing being done by just slowly walking backwards, for example—“We are introducing so many innovations and having so many thoughts and thanks from various small businesses.” They could drown the CMA with a range of evidence that actually does not go to the point, which is: who is being excluded, who is being locked out and what are we as consumers and citizens missing by relying only on three or four types of seed in the environment, as opposed to a whole globe of seeds? That is the metaphor I would like to use.

Professor Fletcher:

It is worth highlighting that if you compare the UK regulation with the equivalent in the EU, the EU has taken a less bespoke, less evidence-based approach. It basically gets a quantitative presumption, and that presumption is going to be relatively hard to shake. What we have done is much more evidence-based, bespoke and proportionate. Whenever you do that, it makes it slightly less administrable and slightly harder to actually make stick.

Again, I think a very delicate balance has been trodden, and it is the right balance. I think all of us would agree on that, and on the fact that Brussels has made it easier for itself, but it is arguably then not proportionate nor sufficiently bespoke. It is a very delicate thing, but I think it is in the right place.

Q Professor Furman, I saw your hand up. Do you have any comments?

Professor Furman:

Look at the tools that the Digital Markets Unit would have under these provisions; the conduct requirements, such as fair dealing and open choices, are not brand new inventions. They largely draw on existing roles under anti-trust measures. It is just that they would be more explicit and clearer up front, and enforced more quickly. To some degree, at least in terms of the conduct requirements, this is not about imposing some brand new set of rules; a lot of it is about taking existing things and ensuring that they can be enforced in a clear and transparent manner.

I call shadow Minister Seema Malhotra.

Thank you very much for coming today. I want to pick up on the argument that the legislation will enhance innovation. In your excellent report, which underpins much of our work, you mention hearing from businesses that were finding it hard to innovate.Q

Some conversations that we have had have been more explicit about the increased costs of innovation, and the difficulties when there is no interoperability or access, and increased costs being passed on to customers. Is that consistent with your experience, and what are the likely economic benefits to businesses and consumers of this legislation? I will take Professor Fletcher first, and then we will come back to Professor Furman and Professor Marsden.

Professor Fletcher:

That was exactly our experience. We heard about the importance of interoperability with systems, and access to data and consumers, and how all those things were not always effective. Some innovation was fostered by big tech and some was less fostered by it, but the point is that they were in control of what happened in a way that we felt was not right for a proper, innovative environment, and certainly not right if you want to see real, disruptive innovation coming through—and I think that is what we do want to see.

We also thought that interoperability, data portability and data access were all pretty intrusive interventions. Therefore—unlike what has been done in the EU, where they have particular rules that require interoperability and require data portability on a fairly widespread basis—we instead thought that that should not be part of the core code of conduct, and that the aim could be achieved via pro-competitive interventions that were evidenced, bespoke and really well targeted. Again, that has been taken through into the Bill’s design, and shows that it is targeted at the barriers to innovation that we identified.

Q Professor Furman, I would be interested to know whether you think the Bill strikes the right balance. Does it give the CMA too much power? Does it put the right amount of power in the new digital markets regime?

Professor Furman:

The short answer is yes, I think it gets it right. It strikes what my colleagues have described—and I agree—as a delicate balance. It depends on who is the head of the DMU and who is the head of the CMA.

In general, my experience with the regulators in the UK is that they are very thoughtful in understanding the importance of markets, competition and taking evidence seriously. The legislation gives them a certain amount of discretion. As my colleagues have testified, that is unavoidable; in a market and an environment where things are changing very rapidly, it would be very difficult to try to write into the legislation every single detail. This sets the standard for what the world should do. Frankly, part of the reason I agreed to do this project is that I would love to see the United States following legislation like this. I hope the UK serves as a model for the world in this regard, and I think it is doing so.

On innovation, I agree with Amelia that what we heard from businesses and reviewed in the academic research is that it is not just a question of how much innovation, but what type of innovation. Are you trying to innovate so you can be acquired by Google or are you trying to become the next Google? There is one thing that motivated us. It is very hard to see the future of this space, but four years ago we thought the next big thing would involve artificial intelligence and machine learning. Unlike the past waves of innovation—where IBM was dominant, and then it became about PCs so it was Microsoft, and then it was about the internet so it became Google, and we saw one wave after the next displacing the previous—we were very worried that because artificial intelligence required large amounts of data, it would not necessarily lend itself to a new upstart competitor, but would instead entrench the power of the existing ones. So far, what we are seeing with OpenAI and the role that Microsoft plays in it, and with what Google is doing in this space, is that it is largely playing out along the lines that we were concerned about. That is partly motivating us looking forward.

Q Thanks for those responses. Professor Marsden, how much we will need some global leadership to ensure this legislation has the impact it needs to have? Some of these issues and the companies’ operations do not stop at borders. To what extent are there tools in the legislation and more widely for the CMA to operate with sister regulators abroad?

Professor Marsden:

Let me take your first point with respect to evidence related to economic benefits. We had a natural experiment before this, called open banking. You will have heard things about this before. No matter what hopes or disappointments people had about open banking, we seemingly had the power at the time to investigate a market that had competitive problems but no anti-trust violations, so there was nothing we could address with anti-trust law. We identified certain competitive structure problems, and there was an expectation on us perhaps to break up the banks, and we hear that with respect to some platforms.

That power is there in the Bill, but with the Furman review and this Bill, which has been kindly carried forward by the excellent civil servants, our emphasis is on the idea of opening up these markets with the same kinds of ex ante obligations on the larger platforms that we imposed on the big banks. Did we break up the banks? No. Did we see massive amounts of switching from one bank to another? No, but we have evidence that British people switch their spouse more frequently than they switch their bank.

What we want is more engagement. We want customers, users and small businesses to be engaged with their platform—with their bank—and that is what we will be seeing. We saw new offers coming in without the extensive capital requirements to bring in a full new entry, but there were new services offers in real intermediation and disintermediation of various products. If anything, open banking allowed consumers and users to—I hate this term—have affairs. It allowed them to check out where they could get the best mortgage, the best loan and those kind of things. That disciplines the incumbents, especially HSBC and Barclays, to provide competitive offers themselves. That is an example, to me at least, about how a pro-competitive, ex ante set of rules on very large platforms with a lot of data can help diversify the economy without harming the platforms. If anything, it puts a little bit of heat under them. I think that was a good achievement, whatever people think politically about it. It was supposed to be a balanced, gradual attempt to try to fix a market that had competitive structure problems, and I believe that is what the Bill does here.

In terms of global leadership, the UK is definitely still leading, despite a bit of a delay. It is the most bespoke, nuanced and balanced bit of legislation that has been proposed so far that I have seen, as we have already discussed this afternoon. At the same time—I completely understand your jurisdictional point—there is a real zeitgeist politically around the world to introduce measures like these of some sort. Of course, they depend on the economic, political and legal backgrounds of the society, but I cannot imagine like-minded authorities and Governments not trying to work hard or co-operate in this space.

We are seeing some examples of that already in the digital space. It is not really an area where there is a competition of competition laws; it is more that this is a regulated solution that we are putting forward in various jurisdictions through a democratic process. It does not depend too much on the discretion of the authority. It depends on the process that the authority undergoes to understand the markets and to then work with the tech platforms to find out which remedies would be available. That participative nature is a very important part of this, rather than an adversarial nature where we just chase after the companies after they have done something that is alleged to be wrong.

Professor Fletcher and Professor Furman, do you want to add anything?

Professor Fletcher:

A lot of jurisdictions around the world are looking at this space. We talked earlier about how some of what we will achieve through this is stuff that can be achieved through competition law, and almost all jurisdictions have competition law. In a way, the more jurisdictions that have regulation, the easier it becomes for other jurisdictions to achieve some of the same things through competition law, because it changes the costs and benefits for the firms to change their business model.

The firms have quite an interesting decision to make on a global basis anyway about how much they do the same thing globally as they are required to do locally. I think it will vary depending on what thing it is. If it is terms and conditions, they can easily change that on a local basis. If it is interoperability, it is quite hard or rather more hard to design a system so that it has different interoperability standards in different places. We may well see an extraterritorial effect—not a deliberate one—because of the cost considerations and reputational considerations of the firms themselves. That will have a positive benefit in terms of providing a more consistent framework globally for the third parties that we are hoping to innovate. The more consistent global framework they have to compete upon, the better it is for innovation.

Professor Furman:

The ideal thing would be if the whole world sat down and agreed how it was going to approach this problem and there was a single global system, or lots of countries co-ordinated and did the same thing. In practice, that is impossible, so what one should aspire towards is having essentially correlated actions in different countries, where different countries have similar rules and are looking at each other and learning from each other.

This puts the UK in a position to be a leader in that global process, and that, frankly, is the way mergers work already. It is not like there is a single global merger authority; there are merger authorities in economies around the world, but they use similar rules, are looking at similar evidence, come up with similar decisions and all, to some degree, talk to each other. That is what this is—an emerging correlation of approach.

We have seen in the United States in both the House of Representatives and the Senate legislation being put forward and in some cases being passed out of Committee that would accomplish some of the different pieces of what this legislation would do, frankly, more comprehensively than anything I have seen in the United States.

Q Thank you for coming before us. You are right: you cannot have a monopoly of monopolies commission. That would be wrong, but if we can have more regulatory certainty across the globe, that is good. There are three areas that I can see the different interests pushing on. There is the appeals system, whether it is judicial review or a full merits review, the final offer mechanism and the countervailing benefits exemption. On appeals, do you think judicial review is sufficient, proportionate and fast enough? That is what we are trying to do here—is it fair and fast to get that remediation? It would be interesting to hear your comments.

Professor Fletcher:

I know this is something that Philip cares a great deal about. I will come in first and then let him have a go. We have talked about it being a delicate balance. I discussed the EU regulation, where they have gone very far towards ensuring administrability and enforceability by having the rules set out in the legislation with quantitative thresholds. That is how they have dealt with the need for administrability and enforceability.

We have tried to be more bespoke, as I have said, and more evidence based, but there is a real risk in terms of administrability and enforceability that we end up in the same place as we have been with competition law, whereby the cases get hugely burdensome and hard to bring to a conclusion within a sensible timescale, and there are insufficient agency resources really to do everything that is needed.

I think there is a real risk that if you play around with what might seem like tiny changes to the legislation, that could really threaten the administrability and enforceability of it, and we could lose the benefits of it over competition law and put us in a bad place relative to the EU—whereas at the moment I think we could show ourselves to be better in terms of getting the right balance by being more bespoke and evidence based. The appeals standard goes to that point. I strongly support the JR appeals standard because if we went for a full merit standard, it would be too far and would become inadministrable. I am sure the CMA would find a way to try to administer it, but I do not think it would be the right balance. I feel the same way about the customer benefits exception.

Professor Marsden or Professor Furman, do you have any views on that? Professor Marsden, your screen has frozen. Professor Furman?

Professor Furman:

That is unfortunate because everything I know about this topic has come from him. [Laughter.] I do not have anything to add.

Okay. Thank you.

Professor Fletcher, imagine I am a growing business: I am successful, I have an online presence, I am doing lots of great stuff and I am a challenger to the global big businesses. What does the Bill mean to me? What difference will it make?Q

Professor Fletcher:

It would make quite a lot of difference, but quite small differences. It would depend on the business that you were in. You might be an app developer. First of all, at the moment we have categories of rules rather than specific rules, so I cannot say exactly what it would do. For example, it could give you fairer access to app stores. If you were a seller through Amazon, which we were talking about earlier, it could give you fairer access to your own data on your own sales. I could probably talk for a long time about all the things that it could do, but I will highlight that you are, in that role, exactly who the law is targeted at helping.

Thank you. I notice that we have lost one of our witnesses, so I will go to Professor Marsden—I mean Professor Furman. My apologies; I forget my own name sometimes!

Professor Furman:

Fair dealing, open choices, and trust and transparency are three of the main conduct requirements. They are all designed to make sure you could not have a search engine hiding searches from your business, and that you could not have them preferencing themselves and directing to themselves instead of to you. You might benefit from some of the interoperability and data access by being given access to the data or access to a system that you could operate on, which right now one of your bigger competitors is doing, so I think it is preventing harmful and unfair things being done to you, but also affirmatively opening up some options. By the way, all that is good not just for innovation but for the consumer, because it will make things easier and more streamlined for them.

Q Excellent. If I may follow up and spin that question on its head, Professor Marsden—hopefully I have the right person. I was asking before about what difference the Bill will make to a small business or growing business, but what will it mean for big businesses—the global giants—especially those that work in the online space? What will it make them better at doing? What will it stop them doing that might be harmful to competition at the moment?

Professor Marsden:

I will deal with that first, then I can go back to the appeal point, if you would like my views.

The Bill will make those big platforms compete, basically for the first time. You will hear a lot of guff about how they are in some sort of monogopoly competition with each other all the time, and some of that might be true, but they are not really—they really are not. We see that in the competitive structure of the market, in the profits and in the concentration levels and so on. We are not trying to reduce profits or anything like that; we are trying to allow others to have a chance. If anything, like with open banking, that will light a fire underneath some of the big platforms, which are telling you they are innovative, and they are, but they are usually innovative in a way that makes us more dependent on them. We are not that fond of dependence in such markets; we are fond of diversity, choices and allowing competition on the merits—for products to rise and fall based on their merits, rather than on whether they have satisfied the terms and conditions of a particular platform.

On appeal, briefly—I am sorry for cutting out; Zoom might not be a platform of strategic market status—I have heard many advisers to tech platforms that might be subject to the Bill argue that the appeal issue is not just a small thing in the legislation, but absolutely fundamental. I agree with them on two things: first, the Bill itself and the ex ante approach that we have been discussing are absolutely fundamental—that is the big change. Secondly, the change with respect to ex post enforcement—the review of the conduct requirements, the investigations, anything imposed on the platforms and so on—to me involves such an involved, open and participative process between the platform, the digital markets unit and other entities that it gives me a lot of comfort about due process. If anything, if there were a full appeal standard, we might as well move to a prosecutorial approach, where the DMU is a prosecutor and everything is adversarial, and takes 18 years in court.

That is kind of what we have now so, if anything, this is an opportunity really to understand the business models, to put in bespoke requirements, to test ably the remedies—that is an important aspect—and to release remedies if they are not working or if they need to be tightened up. That therefore shows internationally what the UK thinks about such practices, which might help with the global spread that Amelia was mentioning. However, I have to state firmly that I believe that judicial review takes a lot longer than a substantive appeal, and I think that if the Bill were amended to allow a substantive appeal or even a few years of substantive appeal, we might as well have not done the study at all and might as well not pass the Bill in respect of the digital prior arrangements, because it will just return us to what we have seen before, basically.

In contrast, the European Commission is allowing substantive appeal rights. If anything, I think that means that they will code for prohibitions. As Amelia said, the law is not as bespoke, so we are going to see: “Here’s your general obligation. I don’t think you are satisfying it.” Then there will be an appeal to the Court and a wait of 18 years for Luxembourg to make a ruling. Here, those issues we hope will be dealt with at the administrative stage, and whether the authority of the DMU or the process itself was fair and reasonable is something that the courts should obviously review. We welcome that scrutiny. In fact, if I were involved in any of this, I would very much welcome that kind of scrutiny at the judicial review level, which is itself a very intense form of review, so it feels perfect to have this JR standard, but I appreciate that you will have already heard a lot against that and will in future.

Thank you, professor. I have a follow-up from the Minister.

No, that is fine.

Okay. In that case, I will bring in Jerome Mayhew.

I understand the evidence that you have given about the need under clause 194 to have a JR approach to the appeal process. What that does, however, is underline the power that the CMA has. Professor Furman, you mentioned earlier in evidence that it really matters who the leader of the CMA is. The area that I want you to comment on is whether you think that, under this process, there is sufficient political accountability for the decisions of the CMA. Such organisations are big, with the potential to have a huge impact on the economy of this country. Inevitably, they are deeply politically sensitive—or it is foreseeable that they will be—so are we not in danger of passing the buck too much to an arm’s length organisation like the CMA? Perhaps we should recognise that the decisions are inevitably political and that we therefore need a greater sense of political accountability. Professor Furman, could you start off on thatQ ?

Professor Furman:

Political accountability is very much the broad approach. It is important that you have a body that approaches this transparently and predictably. I have a lot of respect for the role that you all play in the political system. You think that you should set the goals for consumer choice, innovation and so on, but it is important that what ultimately gets done is done in a much more judicial, regulatory way so that it is predictable for all the parties involved and does not change dramatically over time. In that, there is obviously the appeals process that was just discussed. That is not a political appeals process; it would be within the legal system.

I confess that I am not familiar with exactly how things would work in the UK. In the United States, Congress would have the head of the Federal Trade Commission, or whatever body was charged with this, up to testify. Generally, Congress would not ask, “Why did you bring that case yesterday?” but “Why aren’t you being more aggressive?” or “Why aren’t you being less aggressive?” They would try to oversee things at a strategic level, while leaving each case, decision and regulation to the regulator. Something like that system—I do not know exactly how you would do it in the UK—would be ideal.

Q Professor Fletcher, you are nodding. Would you like to expand on that?

Professor Fletcher:

I fully agree. I can see why there is concern about discretion, but the CMA has shown that it takes its responsibilities seriously. It also understands that it is answerable to the Government of the day on a strategic level, rather than on individual cases.

To follow what Philip said, JR is not a walk in the park. It is a pretty serious test, which the CMA has faced occasionally in the past. It is a very serious expectation on the CMA. I support the view that if you want investment and open and competitive markets, you must have a transparent, consistent framework, which has lots of legal certainty. I worry that too much political intervention risks undermining that.

Thank you. We have time for one more question, so I call Andy Carter.

Q Professor Fletcher, picking up on something that you mentioned earlier, I want to look at innovation and investment. You said that we are leading the world in the some of the work that we are doing. Can you quantify how that work will benefit UK plc? I am conscious that that is a big question, but has any work been done on our approach and the benefits to our economy that we might see?

Professor Fletcher:

I have to confess that I am not aware of work that has specifically been done on that. It is worth seeing this as a global thing, and we are trying to play our part in creating a global environment that will foster global innovation. I think that by doing it here, we will set rules that foster much of that innovation and encourage it to come here. There will be people who have made estimates; my hunch is that most of them will be pretty back-of-the-envelope, but I confess that I have not seen them.

Thank you very much. That brings the allotted time for this witness panel to an end. On behalf of the Committee, I thank you all very much for giving us your time.