- The internet has changed society’s business and value networks, including the digital market. Facebook and Google sites account for approximately 30% of the United Kingdom (UK) internet users’ time (CMA, 2020). Many people benefit from instant access to information and extended connection to family and friends at little to no cost, yet digital advertising sustains these services.
- Companies involved in digital advertising, such as Google and Facebook, have extremely entrenched market influence that is strongly correlated with mergers and acquisitions (Borreau & Steel, 2022). For example, in 2017, large technological corporations such as Amazon, Apple, and Facebook spent $31.6 billion on start-up acquisition and from 2001 through 2008, Google alone bought one company per month (The Economist, 2018). The authority does not review most of these mergers since they occurred below the notification requirement.
- Even though there are mixed results on the reverse causality of innovation and competition, the consensus remains that regulators should safeguard the innovation process (Streel & Larouche, 2015). An industry with few competitors and entrenched market dominance could distort market efficiency and have an impact on three major aspects: competition, innovation, and customer welfare. For example, digital markets have network effects where an increase in the number of participants would increase a company’s value, signifying the issue of natural monopoly; lack of transparency to both users and advertisers illustrates an informational asymmetry issue where customers have a lack of control over data and not compensated for the attention and data they unknowingly provide; unequal access to data; and an extensive ecosystem structure that creates entry barriers.
- The dominant players become the ecosystem’s gatekeeper, engaging in several behavioural abuses like self-preferencing, vertical integration in the open display market, charging exorbitant prices like Facebook’s high advertising cost compared to competitors that is then passed on to consumers (CMA, 2020). This affects the growth of innovation from the research and development process and products that players aim to produce which in turn causes consumers to miss innovative products or services (Frederico, Langus & Valetti, 2017; Motta & Tarantino, 2021).
- While the UK has ex-post regulations such as the merger control under the Competition and Market Authority (CMA) jurisdiction, it is pertinent to develop ex-ante regulations due to the fast-changing dynamic and multi-sided impacts in the digital market. This is to minimise the “catch- up problem” between the regulators and the technology firms, by increasing the anticipatory approach and reducing uncertainties and risks. However, there are concerns that too many regulations would stifle innovation. In this regard, we asked whether there would be different innovations that regulators should identify and whether all innovations were made in optimal and beneficial ways?
- This paper aims to answer two main questions, 1) How should innovation be categorised in the digital market? and 2) Using the theory of market stages, how should we tailor ex-ante regulations, considering innovation, competition, and consumer welfare.
- We discovered that defining innovations would allow regulators to assess the threats companies face and potential anti-competitive behaviours. Regulators can use the proposed regulatory frameworks to weigh competition, innovation, and consumer welfare at each market stage. Based on our analysis of uncertainties and risks, regulators should prioritise innovation in the nascent stage, competition in the growth stage, and consumer welfare and innovation in the mature stage.
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