Today the CMA launched its advice to Government on how to establish a new digital regulator. There are many interesting things to read in what is a clear and well written set of advice by the CMA. It deserves a careful read.

On my first go through today, I alighted on one immediate and interesting question that the advice has thrown into the mix. For a firm to be subject to this new regulatory regime, the Digital Markets Unit (DMU) would need designate it as having Strategic Market Status (SMS) – by the way, trigger warning, don’t read the advice if you have a phobia of new three letter acronyms (TLAs). A key component of the SMS finding is to show that the firm has “substantial, entrenched market power in at least one digital activity” (will we end up calling this “EMP”, or even worse, “SEMP”). 

Compare that to the existing concepts of “dominance” (in Chapter 2 enforcement) or “significant market power” in telecoms regulation.

You might say that substantial market power = dominance = significant market power, and I don’t think that would be too controversial. So it seems to me that the new idea being thrown into the mix here is “entrenched“. The idea that Google and Facebook had entrenched market power was also a feature of the CMA’s digital advertising market study – but that study used the word in its natural sense, it wasn’t proposing a legal definition as such.

Of course, one can easily go to Google for a definition 😉

The Advice also provides the beginnings of a definition, that we can (if the Advice is accepted) expect to see the DMU expand on in future guidance: 

“there are significant concerns about instances in which market power has become entrenched – that it is not merely transitory and likely to be competed away in the short term. Once a firm’s position becomes entrenched, the likelihood of a rival emerging and taking a substantial share of the market is low. In such circumstances, it is likely that prices will be persistently higher, while quality, investment and innovation will be persistently lower than would otherwise be the case, to the long-term detriment of consumers.”

The Advice makes the familiar point that market power plays a positive role in competition: the prospect of obtaining it incentivises firms to invest and innovate. The familiar refrain from competition law is that dominance itself is not illegal – only the abuse of that dominance by (a la Hoffman la Roche) not competing on the merits.

But of course, the message to digital firms contained in the Advice is no longer “dominance is ok as long as it isn’t abused“. Now the message is “dominance is ok as long as its not entrenched” – if it is, then we will look for pro-competition interventions (PCIs, of course!) to help unentrench it (not a word). So the new approach that the CMA proposes for the digital economy looks something like this:

All of this raises one fundamental question: what is the economic test (and it has to be an economic test) for when substantial market power is entrenched.

I look forward to helping figure that out.