The UK has badly missed the mark on how to regulate Big Tech

Britain's competition regulator, the Competition and Markets Authority (CMA), has not had a good 2020.

The Government ignored its recommendations made last year for a new regulator for the audit industry , and has not acted on the agency's calls for stronger consumer protection powers.

Its warnings to businesses against raising prices during Covid were criticised by economists for potentially leading to shortages of things like food and PPE . And the CMA's chairman, ex-MP Andrew Tyrie, was ousted last month in a coup by board members unhappy with Tyrie's political, attention-seeking style.

This week it released the final report in its study of the digital advertising market . In it, the CMA concluded that the digital advertising market was uncompetitively dominated by Google and Facebook – Facebook via its social media apps, and Google via the popularity of Youtube, Google Search, and the company's network of advertising on third party websites.

The report is underwhelming. After a year of work, the CMA has failed to identify any real-world consumer harms arising in the market, and instead spends 12 pages out of 440 speculating about how consumers "might" be worse off, without providing any evidence that this is the case.

Instead of economic analysis, the report largely relies on the gut feel of its authors. It asserts that prices in certain segments are too high without any suggestion of what prices "should" be. Google and Facebook's advertising businesses are assumed to be in separate markets, which, perversely, would imply that the two companies could merge without harming competition.

The report dismisses the vast reductions in the prices that digital advertising companies like Google and Facebook have charged over the past decade, nor does it mention the benefits that targeted ads have given to small and medium businesses who can now compete with larger corporate advertisers.

When the report does try some economic analysis, it is crude. Comparing the 'cost of capital' – what companies must pay to raise funds for investment – with profitability may be appropriate for things like the electricity or water networks, where returns are predictable in advance.

But to do so in digital markets completely misunderstands the economics of these markets, where businesses spend tens of billions a year on research and development (which itself may be a sign that these companies face strong competition) and where the launch of any new product is a gamble.

Flops like Facebook's digital currency Libra, or Google's stream of failed social networks, and the difficulty all the big tech companies have had with competing with Zoom show how unpredictable digital markets can be, even for tech giants.

Video sharing app TikTok's rapid growth is dismissed by the CMA, even though TikTok – which young people now watch more of than YouTube – has come from virtually nothing in the space of a few years to become one of the key players in social media. If this market was dominated by incumbents, as the CMA assumes, this would not be possible.

Worst of all, the analysis never gets to grips with the incentives that tech companies have to invest in products that don't make them much money directly. Google invests in Android precisely because it can make money from it by being the default search engine. That may be bad for other search engines, but without it Google would have much less reason to invest in Android, and competition in the smartphone market between iPhones and Android devices would dry up.

Facebook's targeted advertising may seem intrusive, but it also helps them to avoid showing users irrelevant adverts. If it was forced to stop targeting ads, as the CMA has suggested, Facebook would have much less incentive to invest in the things about its products that users want in the first place.

The CMA constantly focuses on individual trees, and misses the forest. All this adds up to a report that, at over 1,500 pages long, is as broad as an ocean but as shallow as a puddle.

This does not stop the CMA from proposing a new system of regulation for big tech companies, and a new regulator, sitting within the CMA, to enforce it. This regulation would subject the likes of Google and Facebook to the sort of regulation that is usually imposed on energy companies and supermarkets, and would inevitably slow down innovation and dampen investment in digital markets.

Worse, the CMA is proposing to give itself essentially dictatorial powers to break up digital businesses whenever it likes. In extreme circumstances, the agency can already break up companies in markets it deems to be uncompetitive. It did this in 2009, forcing the owners of Heathrow to sell off Gatwick, Stansted and Edinburgh Airports, and the result has been increased competition and lower airfares.

But to do this the CMA must go through a long, careful process that protects businesses from arbitrary breakups. The CMA is now proposing to throw out these protections. This is not compatible with the principles of private property or the rule of law, and would cut against Britain's post-Brexit ambitions to be a haven for international investment.

The report feels like it has been written to justify a predetermined set of recommendations that are themselves likely to do harm. Far from the evidence-based policymaking that the CMA should be working towards, this looks like an exercise in policy-based evidence-making.

Sam Bowman is the director of competition policy at the International Center for Law and Economics and a senior fellow at the Adam Smith Institute