Written submission by the Competition and Markets Authority (PEG0315)

Overview

1.                  The CMA is an independent non-Ministerial government department and is the UK’s lead competition and consumer authority. Its mission is to make markets work well in the interests of consumers, businesses and the economy.

2.                  The recession, recovery and adaptation of the economy to COVID-19 are likely to have significant consequences for markets. These effects, and how they are managed, will matter for consumers, for the post-pandemic recovery, and in particular for long-term productivity and economic resilience.

 

3.                  The recession and the economic adjustment to the pandemic create a number of risks to competition, including:

4.                  As well as a potential weakening in competitive forces, the recovery from and adjustment to COVID-19 could lead to higher levels of household debt, lower incomes and rises in unemployment. This could leave more consumers at higher risk of getting poor deals, or falling victim to exploitation. This is problematic in itself. But by damaging public confidence in market competition generally, and consumer confidence in specific markets, it also has the potential to weaken the competitive process, which requires not only suppliers to compete vigorously, but also confident and engaged consumers, who make choices that reflect their needs.

5.                  There are a number of things that Government can do – and avoid doing – to reduce the risks of weaker competition and mitigate consumer vulnerability. In responding to the Committee’s questions below, we outline some of the factors that should inform a pro-competitive, pro-consumer recovery package, and explain why these matter to the strength and sustainability of the recovery.

What core/guiding principles should the Government adopt/prioritise in its recovery package, and why?

6.                  Policy measures to support the economic recovery should, wherever possible, preserve and promote well-functioning, competitive markets. This includes maintaining incentives for firms to compete vigorously, and ensuring that consumers are protected from unfair practices and contracts.

7.                  The competitive process benefits consumers. It provides incentives for firms to keep prices down and to keep quality and service standards up: in short, to win business by making the best offer they can. In turn, this serves the wider economy, contributing to economic growth and productivity.[4] The firms that serve their customers most effectively, and are most efficient in terms of how they run their business, can be rewarded through winning market share from their competitors.

8.                  From this general point follow a number of principles that are relevant to any recovery package:

Should the Government prioritise certain sectors within its recovery package, and if so, what criteria should it use when making such decisions? What conditions, if any, should it attach to future support?

9.                  In general, horizontal (i.e. cross-economy) support is likely to be more pro-competitive than support based on the location or sector in which a firm operates. However, given the asymmetric effects of the pandemic on different industries, there may be good reasons to provide targeted support to particular sectors. In designing such support, there is merit in assessing and mitigating potential distortionary effects. In particular:

 

10.             These distortive effects are especially likely to arise when government support:[7]

11.             The CMA recognises that wider policy objectives may be at stake in any recovery package, which may on occasion conflict with the promotion of competition. These include, for instance, the levelling up of all parts of the UK; the promotion of more resilient supply chains for certain essential goods; the protection of jobs; or the development of sectors deemed to be strategically important. As with all measures that could affect competition, the CMA recommends that the consequences for competition and consumers of any targeted financial support are carefully assessed, with a view to designing interventions that distort competition no more than is necessary to achieve the policy objective at hand.[8] The CMA has published guidance on how to approach such assessments.[9]

12.             In addition, it is important that, in considering whether and how to provide firm-specific support, the views of incumbent businesses are not given undue weight. While incumbents can be a useful source of information, they have incentives to strategically provide evidence that benefits them, particularly where they stand to lose out from policies that create more competitive conditions, or conversely to gain from policies that bolster their market power. Their views need to be set against the impact on consumers and potential competitors, whose views may be more dispersed and less well-represented.

Is the Industrial Strategy still a relevant and appropriate vehicle through which to deliver post pandemic growth?

13.             The CMA considers that an industrial strategy can complement competition policy where it entails carefully targeted government interventions that tackle market failures.[10] A pro-competitive industrial strategy could provide an important foundation for the delivery of increased productivity and growth.

14.             The points made above – especially those on firm-specific support, and on the importance of openness to trade and investment – are all relevant to the development of a pro-competitive Industrial Strategy. Of particular relevance in this context are industrial policies that protect certain firms from normal competitive forces in order to create so-called “national champions”. Such protection can be afforded through various means, including subsidies, regulatory policy, trade policy, government procurement, or the relaxation of merger control and/or competition law.[11] The available empirical evidence indicates that policies to promote “national champions” are unlikely to be growth- or productivity-enhancing in the long run.[12]

What lessons should the Government learn from the pandemic about actions required to improve the UK’s resilience to future external shocks (including – but not limited to – health, financial, domestic and global supply chains and climate crises)?

15.             It is important for both resilience and competition that investors in companies bear the losses associated with external shocks, with owners (i.e. shareholders) first in line.

16.             In the present context, the last decade has seen a shift to more highly-leveraged capital structures, which have produced strong returns for shareholders and higher executive remuneration, but have left many companies more vulnerable to the shock that has now occurred. As set out above, where the Government deems it necessary to provide specific financial assistance to such firms, this should be conditional on a transition to more resilient business models and capital structures, even if that means shareholder and creditor losses, and lower valuations.

 

October 2020


[1] Internet sales as a proportion of total retail sales rose from 19% in February 2020 to 31% in June.

[2] The effects of weak competition in online advertising markets are examined in the Final Report of the CMA’s Online platforms and digital advertising market study (July 2020)

[3] See, for instance, Economics Observatory (2020) What happens to trade during global downturns? and World Bank, Global Economic Prospects, June 2020

[4] For a summary of the evidence, see, for instance, CMA (2015) Productivity and competition; Productivity Insights Network (2019), Product market concentration and productivity in the UK

[5] The CMA has published regular analyses of the complaints received and its response to them. The latest can be found here.

[6] See, for instance, Besley et al (2020), Antitrust policies and profitability in non-tradable sectors, which finds that for tradable goods, exposure to import competition serves as a disciplining mechanism for firms, leading to lower profit margins.

[7] See, for instance, OFT (2009) Government in Markets, and OFT (2007) Guidance on how to assess the competition effects of subsidies

[8] Distinguishing between support provided to help firms weather the short-term consequences of the pandemic, and support that is linked to longer-term industrial strategy or other objectives, will be particularly important in this context.

[9] CMA (2017), Competition Impact Assessment: guidelines for policymakers

[10] The CMA responded to the Government’s Industrial Strategy Green Paper in 2017.

[11] It was in the context of calls for a relaxation of EU merger control to permit the merger of Siemes AG with Alstom SA that the CMA, alongside competition authorities in Belgium, Spain and the Netherlands, expressed concern about the widespread and significant loss of competition in the railway sector that would have been brought about by such a transaction. [Joint letter to Margarethe Vestager on Case COMP M.8677]

[12] See, for instance, OECD (2009) Competition policy, industrial policy and national champions