A powerful new authority to oversee the commercial activities of Google and Facebook has been recommended by Australia’s competition regulator in a landmark report on how to ensure the multinational digital behemoths behave fairly.

The proposed new body would have the power to require information on how the two companies adapt their algorithms – the machine-driven formulas that rank content and determine what users will see first – as well as investigate whether Google and Facebook are favouring their own businesses ahead of other companies.

The Australian Competition and Consumer Commission has also asked for feedback on whether an ombudsman could be established to deal with complaints about digital platforms from consumers, advertisers, media companies and other business users of digital platforms.

But the ACCC has stopped short of recommending a break-up of Google and Facebook’s businesses.

It has also rejected a recommendation pushed by media mogul Rupert Murdoch and some of Australia’s media companies that Google and Facebook should be hit with a “carriage fee” for content produced by traditional media and disseminated on their social media and search platforms.

Instead it has floated a number of possible tax incentives for media companies who conduct certain types of public interest journalism.

It has also floated the idea of requiring digital platforms to indicate whether news has come from a company that has signed up to codes of conduct, and to make participation mandatory for all digital platforms.

Releasing its preliminary report the ACCC chairman, Rod Sims, said digital platforms had transformed the way consumers accessed news and information and how they interacted with each other.

He said the ACCC recognised that journalism is a public good .

“News and journalism play a critical role in our society; by exposing corruption and holding people to account,” he said.

He said the operation of digital platforms had made it much easier for other to take the work of others and republish it, undermining the value of media companies’ investment in public interest journalism.

“But digital platforms are also unavoidable business partners for many Australian businesses,” he said. “The operation of these platforms’ key algorithms, in determining the order in which content appears, is not at all clear.”

The preliminary recommendation for a new digital platform regulator will now be the subject of intense lobbying and further submissions, with a final report due in June 2019.

It will also be studied by international regulators who are grappling with similar trends: Google and Facebook luring up to 80% of digital advertising dollars, while traditional media outlets struggle to survive.

The new regulator would have the authority to inquire into all aspects of the digital platforms’ business and subsidiaries and would have jurisdiction over any platform that earns $100m in revenue in Australia.

Several of the traditional media companies had raised serious concerns that as Google and Facebook were effectively freeloading on their efforts to cover the news and that, as they expanded into other markets, they were favouring their own businesses.

The ACCC concluded both companies now had substantial market power in several markets and that this power was “unlikely to erode in the short to medium term.”

It said the dominance of these platforms raised serious questions about the survival of public interest journalism, as well as raising serious concerns about the privacy of consumers who use the digital platforms.

It found 94% of online searches were performed on Google and that it had substantial market power in the supply of online search advertising. Google was also a substantial source of referral traffic for news media businesses and that, for many media companies, having links to their website displayed on Google was “a necessity.”

It found Facebook also had substantial power in the market for social media services, through Facebook and Instagram, which it owns, as well as commanding 46% of the digital display advertising revenue, while no other website had more than 5%.

It also found that, like Google, Facebook played a powerful role in news media referrals through its news feeds to users, and that for most media companies a relationship with Facebook was unavoidable.

“Australian law does not prohibit a firm from possessing a substantial degree of market power. Nor does it prohibit it from ‘out-competing’ its rivals by using superior skills and efficiency to win customers at the expense of firms that are less skilful or less efficient, “ the ACCC said.

“However, a firm with substantial market power could damage this competitive process by preventing or deterring rivals, or potential rivals, from competing on their merits. That is, a firm with substantial market power could maintain or advance its position by restricting or undermining its rivals’ ability to compete, rather than by offering a more attractive product.”

The inquiry rejected the arguments of Google and Facebook about the need for secrecy around the algorithms.

“While the ACCC appreciates the significance of minimising the opportunity for businesses to ‘game’ the key algorithms, it is not clear that the appropriate balance has been struck between avoiding this risk and ensuring advertisers are appropriately informed.”

There had been calls from some media companies to force a break-up of the tech businesses, but the ACCC has not recommended this.

“Anti-competitive discrimination by digital platforms in favour of a related business has been found to exist in overseas cases,” it said, pointing to a 2017 finding by the European Commission that Google had systematically given prominent placement to its own comparison shopping service (Google Shopping) and to have demoted rival comparison shopping services in its search results.

It was also highly critical of both platforms on the lack of transparency about the effectiveness of advertising on digital platforms and said that advertisers’ inability to verify whether advertisements were served to their intended audience meant that it lessened competition, particularly as other media, such as TV and print, were required to provide audited advertising services.

The ACCC has also heeded the submissions of the television networks that they are subject to much higher levels of regulation, including requirements to produce Australian content, and restrictions on certain types of advertising.

It recommended the government conduct a separate review to design a “platform-neutral” approach to rules around news and journalistic content, whether from publishers, broadcasters, other media businesses or digital platforms.

It has also suggested this would include a national classification scheme applying across all media including the internet, and having a single agency to enforce the rules.

Timeline Facebook user data timeline Show The Observer reveals that Cambridge Analytica, an electoral consultancy that helped get Donald Trump elected, and briefly worked with the Leave campaign in the Brexit referendum, had harvested profile information of more than 50 million Facebook users. The data, exfiltrated by a Cambridge University academic's company called Global Science Research, was used to build "psychometric" models of voters, to narrowly target adverts at them based on their personalities. Zuckerberg testifies to Congress over the scandal, telling US representatives "it was my mistake, and I'm sorry", after the social network launches its first tranche of policy changes in response to the news, banning third party data brokers from targeting users on its site. The DCMS committee's inquiry on Fake News raises concerns over the targeting of voters in the Brexit referendum, and hears evidence from Facebook's CTO, Mike Schroepfer – the most senior Facebook employee to speak to Parliament. Cambridge Analytica declares bankruptcy, as MPs begin trying to force Zuckerberg to speak to Parliament about the scandal. Facebook suspends 200 apps as part of its investigation into data misuse. Cambridge Analytica's ex-head, Alexander Nix, finally speaks to parliament, and blames the "global liberal media" for destroying his company. The ICO, the UK's data regulator begins an inquiry into whether online political advertising needs to be reformed. The ICO issues its interim report, slamming a number of political actors including Vote Leave, Leave.EU and the Labour Party for misusing personal data in political campaigning. Facebook is fined £500,000, the maximum possible, for failing to protect user data. A "grand committee", of MPs from nine countries, forms, led by the UK's DCMS committee. It demands to hear from Mark Zuckerberg, but Facebook only sends its European Policy chief Richard Allan. The committee obtains internal emails from Facebook, initially handed over to a developer suing it in California, that it says show the company planning to sell out users.

The ACCC agreed with the claims by traditional media that Google and Facebook needed to get faster at taking down material that breached copyright.

On privacy, the ACCC has recommended changes to the Privacy Act to ensure consumers were making informed decisions over their personal information being harvested by social media sites. These include strengthening consent requirements, and enabling consumers to erase data when they have withdrawn their consent. It wants much tougher penalties for breaches.

While the ACCC acknowledged issues relating to authenticity and quality of news are potentially magnified online, it said “there is not currently strong evidence of filter bubbles arising from digital platform use in Australia.”

Sims rejected the idea that the ACCC was engaging in industry protection of the traditional media or trying to inappropriately intervene in freedom of the press.

“Its important to make sure regulation remains relevant in the digital age,” he said. The alternative [to a regulator] is to say there are large platforms, they have a lot of data, a lot of influence and we don’t care,” he said.

Nine, which now encompasses the Sydney Morning Herald and the Age, said: “We are pleased the ACCC has taken this issue raised by Nine and other media organisations very seriously … The report suggests some promising and real solutions that are encouraging. We will now review the report in detail.”

The executive chairman of News Corp Michael Miller said the company was encouraged by the ACCC’s concerns about market power.

“The report highlights the impact the digital platforms have as unavoidable business partners and gateways between news media businesses and both consumers and advertisers,” Miller said.

“As global campaigners against the dominance and lack of transparency of the digital platforms, we are encouraged by the ACCC preliminary recommendation that Google and Facebook’s strong market position justifies a greater level of regulatory oversight.

“We will review the detailed report and contribute to the next stage of the ACCC process.”

• Watch Rod Sims media conference