ACCC publishes the Final Report of its Digital Advertising Services Inquiry and calls for more regulation.

The Australian Competition and Consumer Commission (ACCC) has released the Final Report of its inquiry into markets for the supply of advertisement tech (ad tech) services and ad agency services.

Ad tech services facilitate complex automated transactions for the selling and buying of digital display advertising on websites or ads, resulting in the ads displayed to customers. Unlike its Interim Report, the Final Report focuses on Google, which it states, is the only ad tech provider with the scale and reach to create competition or market efficiency concerns in the sector.

The ACCC will provide further details of how the Final Report’s recommendations could be given effect in its broader report due in September 2022.

Why does the ACCC say there is a competition problem?

The ad tech industry has a number of institutional features which might lead to a lack of competition in the industry. All these features are familiar problems to those who work in industries with platform markets, but they are exacerbated in this industry due to a further feature – that of vertical integration.

A platform market is characterised by the existence of indirect network effects connecting two or more sides through a platform internalising these feedback effects. We see these institutional features in many markets, including, for example, those in payment systems, which at the turn of the century were the subject of extensive regulation following a long investigation by the ACCC and the Reserve Bank of Australia.

The investigation into the ad tech industry has occurred because the ACCC says that the industry “has high barriers to entry and expansion such as those stemming from network effects, economies of scale and advantages of scope” and that the industry is “dominated by one or two vertically integrated firms.” (p.15)

To what does the ACCC attribute these features of the industry? The following table sets out the main structural features of concern to the ACCC.

Why does the ACCC say that new remedies are required?

The Final Report contains a comprehensive and interesting analysis of each of these institutional features. It argues that they are problems that cannot be resolved by the usual court-based remedies, due to the type and scale of concerns arising in the ad tech industry and that the focus on very specific breaches and backward-looking nature of court remedies will not cure the systemic competition concerns that it identifies.

This is, of course, a familiar theme of regulators who have not taken steps (starting with something short of court action) early enough to prevent the arrival of some of these institutional features. No explanation is given why some of those very specific breaches were not called out earlier, nor why such action would not be a step at least to curing what is portrayed as a cancerous industry structure. Commonly, as is the case here, the regulator calls for more regulatory powers and suggests that it (the ACCC) should be the holder of those powers.

What are the remedies suggested?

In addition to the ACCC’s calls for Google to impose self-regulatory measures (testing the efficacy of which is always the first step in designing a good regulatory scheme), the ACCC proposes the following remedies.

A trend that has emerged is regulators collaborating through the International Competition Network (ICN) to proclaim standards and rules. We saw this approach recently taken by the ACCC and other international regulators in relation to mergers. Here too, the ACCC intends for these measures to align with the efforts of its international counterparts including the European Union, United States, Japan and Germany who are workshopping similar regulatory responses.

Further discussion of possible remedies will be published in a report due in September 2022.

Important considerations for any proposed regulations

It is a significant step, but not unknown for some markets, to proclaim that the enforcement of competition rules governing market-based conduct is not working. Great care must be taken that such a diagnosis is correct and that the cure will not make things worse. Once the realm of market-based rules is abandoned for prescriptive regulation, it is difficult to return.

In deciding what measures the ACCC should endorse it is not sufficient to point to international parallels. It is imperative (and required by the Governments own self-imposed obligations) to assess any regulatory proposals by reference to the Principles of Best Practice Regulation, managed by the Office of Best Practice Regulation (OBPR) – an important enough body to sit directly within the Department of Prime Minister and Cabinet.

In addition to domestic law, international treaties, such as the Comprehensive and Progressive Trans-Pacific Partnership (Chapter 25), also impose that obligation. The Principles of Best Practice Regulation require a careful analysis of the particular market problem, an investigation of alternative means of resolving it, and a form of cost-benefit analysis of the problems, including finding the least-restrictive alternatives available using the principle of proportionality. We need evidence-based analysis. As the OBPR states on its website, ‘Strong evidence-based impact analysis is a powerful tool when applied intentionally and consistently.’

It might be that the recommendations in the Final Report have already been subjected to this form of analysis (but there is none shown) and the Final Report reads as if the ACCC has reached a conclusion already on the appropriate remedies. Each of the proposals include possible significant costs on industry participants. It is not always clear that the proposal will not cause further harm to market-based institutions.

To take one example, the repeated calls for ‘transparency’, such as through the creation of industry standards, demonstrates a common misconception in market analysis, namely, that more information is publicly available the better it is for competition. But that is not universally true. We are not looking for aggregation and transparency of all information, but the decentralisation of information in a properly designed market. Perfect competition does not come by everyone knowing everything that everyone is doing. The equilibrium we are looking for occurs through the price system itself, as Hayek famously pointed out in 1945 in his seminal article ‘The Use of Knowledge in Society’.

Extreme care must be taken to ensure that regulatory solutions are not simply a means by which competitors are able to settle comfortably in a zone where they do not need to compete, letting the regulator manage the market. Sometime competitors call for such ‘solutions’ themselves. The irony is that, in such cases, the regulator is facilitating collusion that would not be allowed by private means.

There are many issues to be resolved in this area, notwithstanding that the Final Report makes ad tech appear as an industry that needs to be heavily regulated. Do not give up on the market too easily and think how the market itself can be utilised to solve problems. Perhaps there does need to be reform, but maybe it needs to start with the regulator first.