Policy & Regulation

The UK Can Be Start-Up Nation 2.0 if it Regulates Wisely

By D. Daniel Sokol

Regulatory fever for address issues involving digital platforms is sweeping Europe and the UK. Post Brexit, the UK has a choice – adopt a European Digital Markets Act (DMA) style heavy handed regulatory system that chills innovation or create a regulatory system that allows the UK economy to punch far beyond its size to become Start Up Nation 2.0.

The global economy is in a period of significant transition due to an increase in digital transformation across companies. In many cases, the distinction between ‘traditional’ and ‘digital’ companies is rapidly becoming irrelevant and entire industries, such as financial services, have moved to offering digital solutions. Increased reliance on data analytics and an understanding of the power of digital platforms (more than just companies like Apple, Google, Microsoft, Uber, and Netflix) has led to an increasing role for digital platforms for any number of businesses across the economy. 

There is more active enforcement by the Competition and Markets Authority as part of its Digital Markets Strategy including the Digital Markets Unit (DMU) to “deliver a step-change in the regulation and oversight of competition in digital markets and in turn drive dynamic innovation.” Getting regulation right is critically important for the UK post-Brexit. With the right regulatory framework, the UK can foster innovation without being shackled by the excesses of the EU’s DMA. Get it wrong and the UK may harm consumers and innovation from a combination of over-regulation or misguided regulation. Regulation that is overly broad and overly sweeping in terms of how it impacts digital platforms likely may have unintended, negative consequences on competition and innovation, including for start up firms as well as larger firms that acquire start ups. 

I propose six principles for UK regulation that would set it apart from the DMA and help foster UK entrepreneurial growth and innovation.

1. Define the scope of regulation. Regulation needs to be clear enough to identify who will be regulated. This provides for predictability and legal certainty. However, defining regulation in a snapshot of time is but the first step. Markets do not remain the same. Markets change because of new products and services, as well entry of new players. Hence, regulation must recalibrate as markets change.

2. Make the purpose of regulation clear and pinned to objective economic outcomes. It is a legitimate exercise to regulate but regulation requires a goal or goals clearly articulated. Without a goal, it is not possible to weigh the various trade-offs that regulation might entail.

3. Procedural fairness matters. As the UK invented rule of law, Brits are well aware of the importance of procedural fairness – due process and transparency in the legal system. The absence of sufficient procedural fairness in digital regulation increases the costs of business planning. Greater transparency makes it more likely that businesses will be able to better calculate risks of regulation. This in turn benefits regulatory authorities because they can better allocate scarce resources. 

4. Regulation does not mean the end of analysis as to the effects of competition. Regulation still requires an inquiry into the effects of competition in the market. Economic analysis is very important to effective competition analysis.

5. Avoid obvious mistakes of bans and blanket rules (e.g, line of business restrictions or self-preferencing) that do not address economic realities and that might otherwise destroy value. An effective regulatory framework provides clarity and guidance as to behavior that is lawful and balances concerns of access, competition, and equity. However, poorly thought-out regulation may hurt consumers and innovation.

6. Regulation should be guided by what we know empirically. Regulation is not effective when not guided by empiricism. 

These six principles, if followed, suggest a path forward for regulation that can address potential market failures or distortions that mere enforcement may not be able to do. However, the populist impulse of regulation based on ‘big is bad’ leads to bad policies regarding competition. More precise regulatory interventions that address competition problems may be useful if based on reasonable and economically informed principles.

D. Daniel Sokol is the Carolyn Craig Franklin Chair in Law and Business at the USC Gould School of Law and an Affiliate Professor of Business at the Marshall School of Business, where he teaches in the marketing department.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.