Two weeks ago, the Institute for Public Policy Research published a paper titled “How should competition policy react to the coronavirus?”, authored by outgoing CMA chair Andrew Tyrie. Although not an official CMA publication, the paper discussed some of the policy issues which the CMA has and will continue to grapple with over the coming months.
Lord Tyrie identifies four factors expected to influence competition law enforcement in the UK over the coming months: further concentration in product and labour markets; stronger digital platforms; increased consumer vulnerability; and decreased trade and investments.
Merger control subject to "increased" scrutiny
For businesses considering merger or acquisition activity, there are no signs the regulator plans to relax any aspect of its merger control reviews as a result of the pandemic. The paper suggests the CMA will sharpen its focus on existing areas of concern, rather than pivoting away from previous positions or granting leeway to businesses under strain. Tyrie acknowledges that increased concentration across the UK in a number of sectors seems inevitable, but predicts the CMA’s concerns with such concentration are likely to grow in response. The paper argues that competition policy can “help to prevent ‘bad’ increases in concentration, and to foster ‘good’ increases.”
In practice, increased scrutiny of “opportunistic” mergers means that the CMA will robustly test and explore counterfactuals to proposed mergers, particularly where the parties are seeking to rely on a failing firm defence. The paper uses the example of a merger where one firm is seeking to leave the market, but the CMA’s assessment of the circumstances leads it to conclude that the firm will be able to overcome a short term demand shock. In such a situation, businesses can expect the CMA to carefully scrutinise and if necessary block mergers in an effort to avoid the aforementioned "bad" increase in concentration.
The paper also emphasises the CMA’s constant vigilance for a “killer acquisition”, opining that the “damage from the coronavirus shock would be much more prolonged if incumbents were allowed to throttle the competitive threat of smaller rivals by purchasing them at fire-sale prices”. The paper cites the infamous example of Facebook’s cleared purchase of Instagram, a decision which has since attracted considerable criticism, and which has arguably prompted the CMA to focus more closely on the importance of potential competition in its assessment of the counterfactuals to the merger (particularly in dynamic and innovative markets).
Advice to government on industrial strategy and avoiding inefficient bailouts
Businesses struggling to manage the effects of the crisis should not expect the unconditional support of the CMA in advocating for government bailouts. As government support begins flowing to particular sectors and activities, the paper advocates an analysis of the structure of the business or sector to ensure a pro-competitive approach. Aid granted to firms which are fundamentally insolvent (as opposed to facing short or medium term liquidity problems) is likely to be harmful from a competition perspective.
In this regard, Tyrie hints at a potential divergence of views between government and the CMA when it comes to monetary and fiscal policy in the UK. The paper emphasises the important role of the CMA in promoting competitive markets “in the face of probable political and structural headwinds”; after all, competition is only one concern which must be balanced against other justifiable public policy grounds for support.
Continued push for regulating digital platforms
The paper argues that the case for subjecting digital platforms to regulatory oversight is strengthened as a result of the pandemic. This argument finds some echoes in the final report on the CMA’s recent market study into online platforms and digital advertising. The report advocated the introduction of a new code of conduct to apply to Facebook and Google, and a new regime to regulate the conduct of digital platforms more broadly. However, the CMA declined to conduct a market investigation itself – rather, it made a series of recommendations to the government to seek to reform the market through legislation.
Tyrie raises concerns that the market power of large digital platforms (such as Apple, Google, Amazon, Facebook and Microsoft) will rise as a result of the pandemic. By contrast, potential competitors to these platforms will be vulnerable to the general economic downturn. The appropriate response to this is not outlined in the paper, but the need for greater regulatory scrutiny is emphasised. It is clear that the CMA will want to be an important part of the conversation with policy makers and politicians when the strength of big tech, and its effects on consumer welfare, are being discussed.
The paper notes, on multiple occasions, the restrictions inherent in the CMA’s legal framework. No specific restrictions are identified, but Tyrie’s frustration with what he regards as the regulator’s cumbersome processes is evident. Tyrie is stepping down as CMA chair in September, three years ahead of the expiry of his tenure, citing the limits of the position and of the regulator. The paper states that the CMA does not have the capacity nor legal framework required to fully address the challenges arising from coronavirus. It is unclear whether this view is truly shared by Tyrie’s colleagues (although the CMA’s chief economist and senior executive team provided input to the paper). However, it is not unreasonable to presume that, in the face of changing market circumstances, the CMA’s policy response will lean towards greater scepticism and caution when assessing proposed mergers, and in providing advice to government.