Category: Essential Economics for Business: Ch 07

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Digital Markets: Reform of competition laws

The emergence of the digital economy has brought about increased competition across a wide range of products and services. The digital economy has provided businesses with the opportunity to produce new categories of goods and services with the aid of artificial intelligence. This new digital era has also been beneficial for consumers who now have greater choice and access to often higher-quality products at lower prices.

But while the digital revolution has facilitated greater competition, it also presents some challenges for competition law enforcement. Competition agencies continue to intensify their scrutiny of the digital economy as they try to get to grips with both the opportunities and challenges.

The role of regulation

Many agencies are aware that regulatory overreach could have negative effects on the development of digital markets. Therefore, any competition enforcement in this area needs to be evidenced-based.

A number of agencies have commissioned market studies or appointed experts in the digital field to prepare industry reports. While many of these reports and studies have found that existing competition rules generally continue to provide a solid basis for protecting competition in the digital age, there is growing demand for various changes to regulation. The reports have generally noted that the traditional tools for competition analysis may require some adaptation or refinement to address better the specificities of online markets, such as the multisided nature of platforms, network effects, zero-price markets, ‘big data’ and the increased use of algorithms.

Tech giants and online platforms, in particular, have been a focus of recent intervention by competition authorities. Investigations and intervention have related to a range of practices, including self-preferencing in the ranking of search results, the bundling of apps (and other alleged anti-competitive leveraging strategies), the collection, usage and sharing of data, and the setting of access conditions to mobile ecosystems and app stores.

The duration and complexity of these investigations have been met with concerns that competition authorities are not sufficiently equipped to protect competition in fast-moving digital markets. These concerns have been amplified by the growth in size and importance of online platforms, their significant economies of scale and network effects, and the risk that market power in digital markets can become quickly entrenched.

In addition to the commissioned reports, some agencies have established or appointed specialist digital markets units or officers. The aim of such units is to develop expertise and regulation to deal with fast-paced digital markets. In Europe, The Digital Markets Act (DMA) was adopted by the EU in response to these concerns to establish a uniform ex-ante regulatory regime to make digital markets fairer and more competitive, and to prevent a fragmentation of the EU’s internal market.

A recent case concerns Apple. Because of the Digital Markets Act, Apple has been required to allow app store competitors onto its products. This will come into effect in 2024.

UK policy

In the UK, the government has been concerned that ‘the unprecedented concentration of power amongst a small number of digital firms is holding back innovation and growth’. UK competition rules are thus set to change significantly, with the government setting out the framework for an entirely new ‘pro-competition regime’ for digital markets. As it states in the Executive Summary to its proposals for such a regime (see linked UK official publication below):

The size and presence of ‘big’ digital firms is not inherently bad. Nonetheless, there is growing evidence that the particular features of some digital markets can cause them to ‘tip’ in favour of one or two incumbents… This market power can become entrenched, leading to higher prices, barriers to entry for entrepreneurs, less innovation, and less choice and control for consumers.

It has established a new Digital Markets Unit (DMU) within the Competition and Markets Authority (CMA). It was launched in ‘shadow form’ in April 2021, pending the introduction of the UK’s new digital regulatory regime. Under the proposals, the new regime will focus on companies that the DMU designates as having ‘strategic market status’.

The government is expected to publish its much-awaited Digital Markets, Competition and Consumer Bill, which, according to legal experts, will represent the most significant reform of UK competition and consumer protection laws in years.

It is expected that the Bill will result in important reforms for competition law, but it is also expected to give the DMU powers to enforce a new regulatory regime. This new regime will apply to UK digital firms that have ‘strategic market status’ (SMS). This will be similar to the EU’s Digital Markets Act in how it applies to certain ‘gatekeeper’ digital firms. However, the UK regulations are intended to be more nuanced than the EU regime in terms of how SMS firms are designated and the specific obligations they will have to comply with.

A report by MPs on the influential Business, Energy and Industrial Strategy Committee published in October, urged the Government to publish a draft Digital Markets Bill that would help deter predatory practices by big tech firms ‘without delay’.

On 17th November 2022, the UK Government announced in its Autumn Statement 2022 that it will bring forward the Bill in the third Parliamentary session. There has been no specific date announced yet for the first reading of the Bill, but it will probably be in Spring 2023. Current expectations are that the new DMU regime and reforms to competition and consumer protection laws could be effective as early as October 2023.

Proposals for the Bill were trailed by the Government in the Queen’s Speech. It announced measures that would empower the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) to rein in abusive tech giants by dropping the turnover threshold for immunity from financial penalties from £50 million to £20 million and hiking potential maximum fines to 10% of global annual income. Jeremy Hunt, the Chancellor of the Exchequer, said that the Bill, once enacted, would ‘tackle anti-competitive practice in digital markets’ and provide consumers with higher quality products and greater choice. The strategy includes tailored codes of conduct for certain digital companies and a bespoke merger control regime for designated firms.

The Bill is also expected to include a wide range of reforms to the competition and consumer law regimes in the UK, in particular:

  • wide-ranging changes to the CMA’s Competition Act 1998 and market study/investigation powers, including significant penalties for non-compliance with market investigation orders;
  • significant strengthening of the consumer law enforcement regime by enabling the CMA directly to enforce consumer law through the imposition of fines;
  • changes to UK consumer laws to tackle subscription traps and fake reviews and to enhance protections for savings schemes.

Competition law expert Alan Davis of Pinsent Masons said:

Importantly, the Bill will bring about major reforms to consumer protection law, substantially strengthening the CMA’s enforcement powers to mirror those it already uses in antitrust cases, as well as important changes to merger control and competition rules.

It is anticipated that the Bill will announce the most significant reforms of UK competition and consumer protection laws in years and is expected to have an impact on all business in the UK to varying degrees. It is advised, therefore, that businesses need to review their approach to sales and marketing given the expected new powers of the CMA to impose significant fines in relation to consumer law breaches.

Conclusions

Technological innovation is largely pro-competitive. However, competition rules must be flexible and robust enough to deal with the challenges of the online world. A globally co-ordinated approach to the challenges raised in competition law by the digital age remains important wherever possible. Under the EU’s Digital Markets Act, firms that are designated as gatekeepers, and those defined as having strategic market status under the UK regime, will be required to undertake significant work to ensure compliance with the new rules.

Articles

UK official publications

Questions

  1. For what reasons may digital markets be more competitive than traditional ones?
  2. What types of anti-competitive behaviour are likely in digital markets?
  3. Explain what are meant by ‘network economies’? What are their implications for competition and market power?
  4. Explain what is meant by ‘bundling’? How is this likely to occur in digital markets?
  5. Give some examples where traditional markets are combined with online ones. Does this make it difficult to pursue an effective competition policy?
  6. Give some examples of ways in which firms can mislead or otherwise take advantage of consumers in an e-commerce environment.
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The economic fallout from war

The suffering inflicted on the Ukrainian people by the Russian invasion is immense. But, at a much lower level, the war will also inflict costs on people in countries around the world. There will be significant costs to households in the form of even higher energy and food price inflation and a possible economic slowdown. The reactions of governments and central banks could put a further squeeze on living standards. Stock markets could fall further and investment could decline as firms lose confidence.

Russia is the world’s second largest oil supplier and any disruption to supplies will drive up the price of oil significantly. Ahead of the invasion, oil prices were rising. At the beginning of February, Brent crude was around $90 per barrel. With the invasion, it rose above $100 per barrel.

Russia is also a major producer of natural gas. The EU is particularly dependent on Russia, which supplies 40% of its natural gas. With Germany halting approval of the major new gas pipeline under the Baltic from Russia to Germany, Nord Stream 2, the price of gas has rocketed. On the day of the invasion, European gas prices rose by over 50%.

Nevertheless, with the USA deciding not to extend sanctions to Russia’s energy sector, the price of gas fell back by 32% the next day. It remains to be seen just how much the supplies of oil and gas from Russia will be disrupted over the coming weeks.

Both Russia and Ukraine are major suppliers of wheat and maize, between them responsible for 14% of global wheat production and 30% of global wheat exports. A significant rise in the price of wheat and other grains will exacerbate the current rise in food price inflation.

Russia is also a significant supplier of metals, such as copper, platinum, aluminium and nickel, which are used in a wide variety of products. A rise in their price has begun and will further add to inflationary pressures and supply-chain problems which have followed the pandemic.

The effect of these supply shocks can be illustrated in a simple aggregate demand and supply diagram (see Figure 1), which shows a representative economy that imports energy, grain and other resources. Aggregate demand and short-run aggregate supply are initially given by AD0 and SRAS0. Equilibrium is at point a, with real national income (real GDP) of Y0 and a price index of P0.

The supply shock shifts short-run aggregate supply to SRAS1. Equilibrium moves to point b. The price index rises to P1 and real national income falls to Y1. If it is a ‘one-off’ cost increase, then the price index will settle at the new higher level and GDP at the new lower level provided that real aggregate demand remains the same. Inflation will be temporary. If, however, the SRAS curve continues to shift upwards to the left, then cost-push inflation will continue.

These supply-side shocks make the resulting inflation hard for policymakers to deal with. When the problem lies on the demand side, where the inflation is accompanied by an unsustainable boom, a contractionary fiscal and monetary policy can stabilise the economy and reduce inflation. But the inflationary problem today is not demand-pull inflation; it’s cost-push inflation. Disruptions to supply are both driving up prices and causing an economic slowdown – a situation of ‘stagflation’, or even an inflationary recession.

An expansionary policy, such as increasing bond purchases (quantitative easing) or increasing government spending, may help to avoid recession (at least temporarily), but will only exacerbate inflation. In Figure 2, aggregate demand shifts to AD2. Equilibrium moves to point c. Real GDP returns to Y0 (at least temporarily) but the price level rises further, to P2. (Click here for a PowerPoint of the diagram.)

A contractionary policy, such as raising interest rates or taxes, may help to reduce inflation but will make the slowdown worse and could lead to recession. In the diagram, aggregate demand shifts to AD3. Equilibrium moves to point d. The price level returns to P0 (at least temporarily) but real income falls further, to Y3.

In other words, you cannot tackle both the slowdown/recession and the inflation simultaneously by the use of demand-side policy. One requires an expansionary fiscal and/or monetary policy; the other requires fiscal and/or monetary tightening.

Then there are other likely economic stresses. If NATO countries respond by increasing defence expenditure, this will put further strain on public finances.

Sentiment is a key driver of the economy and prices. Expectations tend to be self-fulfilling. So if the war in Ukraine undermines confidence in stock markets and the real economy and further raises inflationary expectations, this pessimistic mood will tend in itself to drive down share prices, drive up inflation and drive down investment and economic growth.

Articles

Questions

  1. If there is a negative supply shock, what will determine the size of the resulting increase in the price level and the rate of inflation over the next one or two years?
  2. How may expectations affect (a) the size of the increase in the price level; (b) future prices of gas and oil?
  3. Why did stock markets rise on the day after the invasion of Ukraine?
  4. Argue the case for and against relaxing monetary policy and delaying tax rises in the light of the economic consequences of the war in Ukraine.
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The future of shipping and trade

Shipping and supply chains generally have experienced major problems in 2021. The global pandemic disrupted the flow of trade, and the bounce-back in the summer of 2021 saw supply chains stretched as staff shortages and physical capacity limits hit the transport of freight. Ships were held up at ports waiting for unloading and onward transportation. The just-in-time methods of delivery and stock holding were put under considerable strain.

The problems were compounded by the blockage of the Suez canal in March 2021. As the blog, JIT or Illegit stated “When the large container ship, the Ever Given, en route from Malaysia to Felixtowe, was wedged in the Suez canal for six days in March this year, the blockage caused shipping to be backed up. By day six, 367 container ships were waiting to transit the canal. The disruption to supply cost some £730m.”

Another major event in 2021 was the Glasgow COP26 climate conference and the growing willingness of countries to commit to decarbonising their economies. But whereas electricity can be generated from renewable sources, and factories and land transport, such as cars, vans and trains, can run on electricity, it is not so easy to decarbonise shipping, especially for long journeys. They cannot plug in to the grid or draw down from overhead cables. They have to carry their own fuel sources with them.

So, have the pandemic and the Ever Given incident exposed weaknesses in the global supply chain and in shipping in particular? And, if so, in what ways is shipping likely to adapt? And will the pressure to decarbonise lead to a radical rethinking of shipping and long-distance trade?

These are some of the issues considered in the podcast linked below. In it, “Shipping strategist Mark Williams tells Helen Lewis how examining the challenge of decarbonising shipping reveals a future which looks radically different to today, in a world where population, oil extraction and economic growth have all peaked, and trade is transformed”.

Listen to the podcast and have a go at the questions below which are based directly on it.

Podcast

Articles

Questions

  1. Why should we care about the shipping industry?
  2. What lessons can be drawn from the Ever Given incident?
  3. What structural changes are needed to make shipping an industry fit for the long-term demands of the global economy?
  4. Distinguish between just-in-time supply chains and just-in-case supply chains.
  5. What are ‘reshoring’ and ‘nearshoring’? How have they been driven by a growth in trade barriers?
  6. What are the implications of reshoring and nearshoring for (a) globalisation and (b) the UK’s trading position post-Brexit?
  7. What is the contribution of shipping to global greenhouse gas emissions? What other pollutants are emitted from the burning of heavy fuel oil (or ‘bunker fuel’)?
  8. What levers exist to persuade shipping companies to decarbonise their vessels?
  9. What alternative ‘green’ fuels are available to power ships?
  10. What are the difficulties in switching to such fuels?
  11. What economies of scale are there in shipping?
  12. How do the ownership patterns in shipping benefit decision making and change in the industry?
  13. Are ammonia or nuclear power the answer to the decarbonisation of shipping? What are their advantages and disadvantages?
  14. Why are President Xi’s views on the future of shipping so important?
  15. How will the decarbonisation of economies affect the demand for shipping?
  16. What is likely to happen to Chinese demand for iron ore and coking coal over the coming years? What effect will it have on shipping?
  17. How and by how much is the European Emissions Trading System likely to contribute to the decarbonisation of shipping?
  18. What is the Sea Cargo Charter? What difference is it likely to make to the decarbonisation of shipping?
  19. In what ways do cargo ships optimise productivity?
  20. What impact is slowing population growth, or even no population growth, likely to have on shipping?
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Hacking capitalism

The development of open-source software and blockchain technology has enabled people to ‘hack’ capitalism – to present and provide alternatives to traditional modes of production, consumption and exchange. This has enabled more effective markets in second-hand products, new environmentally-friendly technologies and by-products that otherwise would have been negative externalities. Cryptocurrencies are increasingly providing the medium of exchange in such markets.

In a BBC podcast, Hacking Capitalism, Leo Johnson, head of PwC’s Disruption Practice and younger brother of Boris Johnson, argues that various changes to the way capitalism operates can make it much more effective in improving the lives of everyone, including those left behind in the current world. The changes can help address the failings of capitalism, such as climate change, environmental destruction, poverty and inequality, corruption, a reinforcement of economic and political power and the lack of general access to capital. And these changes are already taking place around the world and could lead to a new ‘golden age’ for capitalism.

The changes are built on new attitudes and new technologies. New attitudes include regarding nature and the land as living resources that need respect. This would involve moving away from monocultures and deforestation and, with appropriate technologies (old and new), could lead to greater output, greater equality within agriculture and increased carbon absorption. The podcast gives examples from the developing and developed world of successful moves towards smaller-scale and more diversified agriculture that are much more sustainable. The rise in farmers’ markets provides an important mechanism to drive both demand and supply.

In the current model of capitalism there are many barriers to prevent the poor from benefiting from the system. As the podcast states, there are some 2 billion people across the world with no access to finance, 2.6 billion without access to sanitation, 1.2 billion without access to power – a set of barriers that stops capitalism from unlocking the skills and productivity of the many.

These problems were made worse by the response to the financial crisis of 2007–8, when governments chose to save the existing model of capitalism by propping up financial markets through quantitative easing, which massively inflated asset prices and aggravated the problem of inequality. They missed the opportunity of creating money to invest in alternative technologies and infrastructure.

New technology is the key to developing this new fairer, more sustainable model of capitalism. Such technologies could be developed (and are being in many cases) by co-operative, open-source methods. Many people, through these methods, could contribute to the development of products and their adaptation to meet different needs. The barriers of intellectual property rights are by-passed.

New technologies that allow easy rental or sharing of equipment (such as tractors) by poor farmers can transform lives and massively increase productivity. So too can the development of cryptocurrencies to allow access to finance for small farmers and businesses. This is particularly important in countries where access to traditional finance is restricted and/or where the currency is not stable with high inflation rates.

Blockchain technology can also help to drive second-hand markets by providing greater transparency and thereby cut waste. Manufacturers could take a stake in such markets through a process of certification or transfer.

A final hack is one that can directly tackle the problem of externalities – one of the greatest weaknesses of conventional capitalism. New technologies can support ways of rewarding people for reducing external costs, such as paying indigenous people for protecting the land or forests. Carbon markets have been developed in recent years. Perhaps the best example is the European Emissions Trading Scheme (EMS). But so far they have been developed in isolation. If the revenues generated could go directly to those involved in environmental protection, this would help further to internalise the externalities. The podcasts gives an example of a technology used in the Amazon to identify the environmental benefits of protecting rain forests that can then be used to allow reliable payments to the indigenous people though blockchain currencies.

Podcast

Questions

  1. What are the main reasons why capitalism has led to such great inequality?
  2. What do you understand by ‘hacking’ capitalism?
  3. How is open-source software relevant to the development of technology that can have broad benefits across society?
  4. Does the current model of capitalism encourage a self-centred approach to life?
  5. How might blockchain technology help in the development of a more inclusive and fairer form of capitalism?
  6. How might farmers’ co-operatives encourage rural development?
  7. What are the political obstacles to the developments considered in the podcast?
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Is capitalism changing?

The coronavirus pandemic and the climate emergency have highlighted the weaknesses of free-market capitalism.

Governments around the world have intervened massively to provide economic support to people and businesses affected by the pandemic through grants and furlough schemes. They have also stressed the importance of collective responsibility in abiding by lockdowns, social distancing and receiving vaccinations.

The pandemic has also highlighted the huge inequalities around the world. The rich countries have been able to offer much more support to their people than poor countries and they have had much greater access to vaccines. Inequality has also been growing within many countries as rich people have gained from rising asset prices, while many people find themselves stuck in low-paid jobs, suffering from poor educational opportunities and low economic and social mobility.

The increased use of working from home and online shopping has accelerated the rise of big tech companies, such as Amazon and Google. Their command of the market makes it difficult for small companies to compete – and competition is vital if capitalism is to benefit societies. There have been growing calls for increased regulation of powerful companies and measures to stimulate competition. The problem has been recognised by governments, central banks and international agencies, such as the IMF and the OECD.

At the same time as the world has been grappling with the pandemic, global warming has contributed to extreme heat and wildfires in various parts of the world, such as western North America, the eastern Mediterranean and Siberia, and major flooding in areas such as western Europe and China. Governments again have intervened by providing support to people whose property and livelihoods have been affected. Also there is a growing urgency to tackle global warming, with some movement, albeit often limited, in implementing policies to achieve net zero carbon emissions by some specified point in the future. Expectations are rising for concerted action to be agreed at the international COP26 climate meeting in Glasgow in November this year.

An evolving capitalism

So are we seeing a new variant of capitalism, with a greater recognition of social responsibility and greater government intervention?

Western governments seem more committed to spending on socially desirable projects, such as transport, communications and green energy infrastructure, education, science and health. They are beginning to pursue more active industrial and regional policies. They are also taking measures to tax multinationals (see the blog The G7 agrees on measures to stop corporate tax avoidance). Many governments are publicly recognising the need to tackle inequality and to ‘level up’ society. Active fiscal policy, a central plank of Keynesian economics, has now come back into fashion, with a greater willingness to fund expenditure by borrowing and, over the longer term, to use higher taxes to fund increased government expenditure.

But there is also a growing movement among capitalists themselves to move away from profits being their sole objective. A more inclusive ‘stakeholder capitalism’ is being advocated by many companies, where they take into account the interests of a range of stakeholders, from customers, to workers, to local communities, to society in general and to the environment. For example, the Council for Inclusive Capitalism, which is a joint initiative of the Vatican and several world business and public-sector leaders, seeks to make ‘the world fairer, more inclusive, and sustainable’.

If there is to be a true transformation of capitalism from the low-tax free-market capitalism of neoclassical economists and libertarian policymakers to a more interventionist mixed market capitalism, where capitalists pursue a broader set of objectives, then words have to be matched by action. Talk is easy; long-term plans are easy; taking action now is what matters.

Articles and videos

Questions

  1. How similar is the economic response of Western governments to the pandemic to their response to the financial crisis of 2007–8?
  2. What do you understand by ‘inclusive capitalism’? How can stakeholders hold companies to account?
  3. What indicators are there of market power? Why have these been on the rise?
  4. How can entrepreneurs contribute to ‘closing the inequality gap for a more sustainable and inclusive form of society’?
  5. What can be done to hold governments to account for meeting various social and environmental objectives? How successful is this likely to be?
  6. Can inequality be tackled without redistributing income and wealth from the rich to the poor?