UK Digital Competition Proposal Flawed, Could Undermine Innovation the Digital Economy

March 13, 2019

WASHINGTON—In response to the release of the UK Treasury report on digital competition produced by Jason Furman, former top economic advisor to President Obama, which recommends establishing a new government unit to set rules and standards for digital markets, stricter requirements for mergers, and more aggressive antitrust enforcement, the Information Technology and Innovation Foundation (ITIF), the world’s leading think tank for science and technology policy, released a statement from its president, Rob Atkinson:

The review is a case study of how flawed assumptions lead to misguided conclusions. The tendency of many digital markets is toward concentration, not due to anticompetitive actions but because of network effects where the value of a firm’s services grows as they get larger. Moreover, the result of this growth is diminishing costs, increased investment in R&D and increasing value from which consumers usually are the main beneficiaries. For example, as a result of there being one major social networking platform (Facebook), one major professional networking platform (LinkedIn), and one major micro-blogging platform (Twitter), consumers do not have to post twice to share information with their personal networks.

However, this review does little to advance a modern understanding of how digital markets work. Notably, it offers no evidence to support its claims that the existing marketplace hurts startups or that consumers are receiving worse data protection than would occur in a less concentrated market. Instead it merely repeats the outdated conventional wisdom that concentration is inherently bad and proposes new methods to limit it in the digital economy, such as requiring large firms to turn over data to small ones.

The review also proposes to change merger rules to provide UK competition authorities more power to stop mergers between digital firms on the grounds that these mergers are damaging competition, innovation, and consumer choice. However, in the digital economy, it is the firms’ focus on innovation that makes them more likely to maximize the value of an emerging technology, which can be developed internally or acquired through a merger.

While the review did not side with the recent calls to “break up big tech,” it does refer to tech companies as engaging in “bullying tactics,” echoing the tone of a recent UK Parliamentary report which had singled out platforms as “digital gangsters.” In addition, the review suggests, again without evidence, that consumer access to free services is not enough, and that instead consumers “could be extracting greater value in return,” and should be “paid for their data.” This would only lead to the transformation of what are now free services into paid services.

The review rightly recognizes that the digital economy is highly beneficial to consumers, but the proposals offered would limit large firms from promoting innovation and maximizing consumer welfare, which are critical drivers of the nation’s competitiveness and growth.