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CMA Paper and Consultation on Impact of Algorithms on Competition and Consumer Welfare

February 04, 2021

The UK’s Competition and Markets Authority (CMA) published a paper on 19 January on the impact of algorithms on competition in digital markets and consumer welfare. The CMA followed up its paper with a call for evidence from market participants, academics, and industry experts, and with a request for specific examples of relevant industry practices that may give rise to competition or consumer harm that the CMA may investigate further.

Chapter I of the UK Competition Act 1998 (CA98) prohibits arrangements between businesses that have as their object or effect the restriction, distortion, or prevention of competition in the United Kingdom, unless they can be shown to give rise to benefits to consumers that outweigh any restrictions of competition. Such anticompetitive arrangements can arise directly or indirectly between competitors, and/or between companies at different levels of the supply chain, such as between a supplier and its customers. Chapter II CA98 prohibits the abuse of a dominant position. Dominance is generally defined as a firm’s ability to behave independently of its competitors, customers, suppliers and, ultimately, final consumers. In broad terms, a business may be considered to have market dominance if it has a market share of around 40% or more in a relevant market. While dominance is not an infringement, it is prohibited for a firm to abuse its dominance. Companies found to have breached Chapter I or Chapter II CA98 are liable for fines of up to 10% of their worldwide group turnover, while individuals may incur personal liability which may be civil or criminal in nature.[1]

In 2018, the UK antitrust agency, the CMA, published research into the possible misuse of pricing algorithms to support illegal practices. Following the CMA’s plans to increase the regulatory oversight of competition law in the digital economy, including through the establishment of a dedicated Digital Markets Unit (DMU), the CMA published a new research paper in January 2021 titled Algorithms: How they can reduce competition and harm consumers (Paper) setting out a number of theories of harm on how, in its view, the misuse of algorithms may potentially reduce competition in digital markets and harm consumers, whether deliberately or unintentionally. At the same time, the CMA launched a consultation giving market participants, academics and industry experts the opportunity to inform the CMA’s understanding and future work in digital markets.

THE CMA’S VIEWS ON HOW ALGORITHMS MAY HARM CONSUMERS AND REDUCE COMPETITION

(i) Direct Harm to Consumers

In the Paper, the CMA identifies a number of theories of harm on how algorithmic systems may cause direct harm to consumers. The CMA says that, for example, algorithmic systems can be used to personalise prices in a way that is opaque to consumers, and to manipulate consumer choices. The CMA also sets out how algorithmic systems may result in indirect discrimination against consumers.

In doing so, the CMA goes beyond the scope of competition law and draws from other areas of law and policy to identify how, in its view, algorithms may give rise to potential harm to consumers. For the time being, the CMA does not set out any hard and fast rules. The CMA says that, at present, the empirical evidence of such practices is uncertain, although growing, and sets out a number of possible theories of harm without providing a detailed analysis of whether and, if so, how such conduct may give rise to a breach of competition law and harm consumers.

(ii) Exclusionary Practices by (Dominant) Firms

The CMA also sets out its thoughts on how unilateral exclusionary conduct may give rise to concerns. The CMA discusses the potential use of algorithms to exclude competition, whether consciously or “unwittingly, particularly where a dominant firm takes actions that may potentially deter competitors from challenging its market position. The CMA says this may potentially be achieved by a dominant firm engaging in exclusionary conduct, such as manipulating ranking algorithms for the purpose of excluding competitors. However, in a departure from established competition law, the CMA also suggests that a dominant firm may abuse its dominance unknowingly – for example, by changing an algorithmic system in a gateway service, such as an online shopping platform, in a manner that “unintentionally” harms businesses that rely on it.

(iii) Algorithmic Collusion

The CMA briefly considers potential collusion between competing firms through pricing algorithms. The CMA says that, at its simplest, this may occur where competitors implement an unlawful price-fixing agreement through software to monitor one another’s prices.

The CMA also says that a more complicated case is what it describes as autonomous tacit collusion, where complex and sophisticated pricing algorithms learn independently to tacitly collude, without having been instructed to suppress competition by human operators. The CMA says that this could give rise to a situation in which firms “unwittingly” and “unintentionally” collude on the market – although the CMA recognises that the extent to which such sophisticated pricing algorithms are used across real-world markets is uncertain and that the risk of such unwitting algorithmic collusion in the real world is unclear due to a lack of empirical evidence.

The CMA’s suggestions with regard to so-called autonomous tacit collusion are a material departure from established caselaw and give rise to significant questions on the meaning of collusion. In order to prove the existence of collusion for the purposes of Chapter I (or indeed its equivalent Article 101 of the Treaty on the Functioning of the European Union), including the existence of tacit collusion or hub-and-spoke collusion, the authority must prove to the requisite standard the existence of a “meeting of minds.” That is, among other things, the authority must show that the parties have the necessary state of mind, that they share actual mental consensus, and that they act in the impugned conduct knowingly and with intention. It is assumed that this explains why the CMA says that it is “as yet unclear” whether the law permits competition authorities to object to “autonomous tacit collusion,” as “there may not have been direct contact between two undertakings or a meeting of minds between them to restrict competition.” A departure from the requirement to show a meeting of minds in order to find the existence of anticompetitive collusion would turn competition law on its head.

POTENTIAL FUTURE CMA INVESTIGATIONS OR INTERVENTION

In its Paper, the CMA says that, on the basis of its theoretical analysis, there is a strong case for intervention since market forces are unlikely to effectively disrupt many of the practices it has identified.

The CMA has invested in recruiting data scientists and engineers, technologists, and behavioural scientists as part of a Data, Technology and Analytics (DaTA) team to develop and deploy new analytical and investigative techniques, and to broaden its range of evidence and intelligence. As mentioned above, alongside the publication of its Paper, the CMA launched a consultation that will run until 16 March 2021. The CMA is inviting views and evidence on the potential harms outlined in the Paper as well as seeking information on specific issues with regard to firms active in this space, and which the CMA says it may examine and consider for regulatory intervention.

The CMA also says that potential future action might take various forms. Where the CMA has reasonable grounds for suspecting that a business’s use of algorithms may have infringed consumer or competition law, the CMA may open a formal investigation. Alternatively, or in advance of a formal investigation into the conduct by a specific business, the CMA may launch a broader market study or market investigation.

The CMA also envisages that the new dedicated DMU will commence its operations in April 2021. The DMU will have wide information gathering powers to monitor digital markets more widely, and is expected to have the power to enforce a “code of conduct” and/or to impose procompetitive interventions on firms with so-called “strategic market status” (a new and untested notion). The CMA says that the DMU’s powers may also be used to investigate, suspend, block, or reverse conduct that is enabled or facilitated through “algorithmic practices.

POTENTIAL GLOBAL IMPLICATIONS

The increased scrutiny of the impact of algorithms on consumers and competition is unlikely to be limited to the United Kingdom. Digital markets are coming under ever increased scrutiny, among others by the European Commission, national competition authorities in Europe, and the antitrust agencies in the United States. It is possible that the CMA’s analysis and the outcome of its consultation may have an impact on the views of other antitrust agencies around the globe.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Joanna Christoforou
Frances Murphy
Michael Zymler



[1] Company directors may be disqualified from serving as a director for a period of up to 15 years, while the participation in a hardcore criminal cartel (namely, bid-rigging, price fixing, market or customer sharing, or limitation of output or supply) may also lead to the imposition of a five-year prison sentence, unlimited fines, or both for the individual.