The latest guest on Nick Levy’s excellent Antitrust Review podcast is my old colleague, the CMA’s former chief economist Mike Walker.
There are two points I want to highlight from Mike’s comments, one of which I disagree with and the other I very much agree with.
Mike was asked about the UK government’s strategic steer and its call for the CMA to focus on economic growth. In response, Mike said this:
I remain bemused because it’s perfectly reasonable, of course, for government to give a strategic steer. But what is odd about that one is the dichotomy between we want you to focus on growth as opposed to what you’ve been doing in the past. And I just don’t get that.
What drives growth? Okay, growth is driven by productivity and innovation. We know that in the long run, it’s not all about productivity, but it’s almost all about productivity. And we know that innovation is important in driving productivity. And I think we know that competition drives productivity…I cannot believe that intelligent people in government don’t understand what I’ve articulated because it’s all economics 101. So what’s really going on, I think it’s about control, but that’s above my pay grade.”
I don’t want to pick on Mike in particular but (a) he can take it and (b) it reflects an argument I hear quite a lot and I think it’s important to address it.
The argument seems to be that competition is good for growth, so if a government seeks to influence the policy stance of a competition authority, it can’t really be thinking about growth. There must be something nefarious going on.
But I don’t think that’s right.
Competition authorities don’t just face a simple binary choice on whether to favour competition. They make judgment calls on how much competition and how much enforcement is needed. And in making those judgment calls, there are trade-offs.
Mike explains that, in the course of his time at the CMA, he changed his mind on whether there had been underenforcement in mergers. He thinks the toughening of policy over that period was justified:
I certainly think that history will say that the CMA and the Commission and the Biden administration were right to pick up on a bunch of issues that merger control had previously ignored.
I think he is right about that. But the CMA policy changes at that time involved trade-offs, some of which related to policy areas outside the CMA’s remit.
When the government published its new strategic steer to the CMA last year, I wrote that there were two trade-offs of particular concern to ministers:
The first is on corporate investment. The government’s overriding policy objective is to increase economic growth and it believes that increasing corporate investment is critical to this. Since Brexit, there are many international companies whose main (or even sole) experience of the British state is dealing with the CMA, so the CMA began to assume outsize importance as a shop window for the UK, and the government has received repeated complaints about it: where it is asserting jurisdiction, how long it takes and what it is like to deal with (importantly, not just what decision it reaches at the end of a case).
The second trade-off is on foreign policy. When the UK’s independent competition regime was established by my old boss Gordon Brown, the main targets of enforcement were domestic incumbents, and this meant a robust competition policy was consistent with our foreign policy. Our international allies wanted us to open up our markets and we wanted them to open up theirs. But today the main targets of enforcement appear to be big American companies, and this comes just when the transatlantic alliance is under the most strain in eighty years. In that context, it is impossible for the government to ignore the geopolitical implications of the CMA’s enforcement.
Those seem to me to be reasonable concerns, and that is why the strategic steer told the CMA to:
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- focus on cases where it can have the biggest impact for UK consumers;
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- when looking at international deals, take into account what other authorities are doing;
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- where it finds problems, take a proportionate approach to remedying them; and
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- don’t deter investment, either by its substantive decisions or by the signals it sends about what it’s like for businesses to deal with UK regulators.
Again, those seem to be reasonable steers to help ensure policy alignment between a public body and the democratically elected government. Also reasonable are the steps that the CMA has taken on these issues: signalling a more pragmatic approach to global deals; reviewing the mergers remedies guidance, and lots of process changes to make the CMA easier to deal with.
What would be concerning would be if ministers then also sought to sway the CMA privately on individual cases. One of the most prominent cases on which this is sometimes alleged to have happened is Vodafone/Three. I’m not going to comment on the substance of that case, but Mike explains the process that led the CMA to reach its conclusion. I’m going to quote him at length, partly because it’s a valuable and instructive guide to how a senior official wrestled with key issues on an important case, and partly because I’m often asked whether Vodafone/Three represents a ‘playbook’ that can be followed in other deals:
I do think it’s really interesting – the Vodafone/Three case – which to my mind was always a pretty standard efficiencies case. Are the efficiencies going to outweigh any short run consumer harm? If so, then we should allow the merger and do our best to mitigate those short run anti-competitive effects. That doesn’t seem to me to be actually path breaking in terms of how we should think about mergers. The fact that everybody is saying, ‘Oh, that’s really novel, that’s amazing,’ just illustrates how poorly we have all gone at taking efficiencies into account, I think…
When the Voda/Three merger was announced, I said internally, ‘Oh goodness, I can’t believe they’re wasting our time with this. The answer is no.’ And obviously, I changed my mind, and I changed my mind on the basis of the evidence, and that’s how an authority should work. So, I do think there was a change of policy, but it was only a change to actually think about efficiencies properly, which we always should have been doing.
I think that the case is quite specific on the facts. You know, I don’t imagine there’s going to be loads of cases where a competition authority is going to be taking that sort of investment commitment, but there may be some. And let’s think about why that was a case where we should really take those efficiencies seriously. It’s because those are efficiencies that are relevant to the whole economy. You know, the faster rollout of 5G, it’s a general purpose technology that will benefit lots of sectors.
There are genuine, I think, significant positive externalities in that, and there’s some evidence on that. And certainly, during that case, when I was lying awake at 3 o’clock in the morning, worrying about it, and I have a tendency to do that, I was thinking, ‘This is clearly going to have adverse short run effects on prices. But wow, can we walk away from those economy-wide benefits?’
I think the parties put forward a very good explanation of why they would be incentivized to roll out 5G in the way they said they would. I was encouraged by the fact that the leading competitor, BT, hated the merger so much. That’s always a good sign.
Why do we need an investment commitment if we think the firms already have the incentive to do that rollout? Well, we were absolutely convinced by the parties’ submissions that the rollout, as they articulated it, was they had an incentive to do that rather than do nothing, sort of no increase in rollout. We were less convinced that their maximum profitable opportunity was actually the £11 billion as opposed to a bit less. We have a regulator there who can oversee it. Everybody’s seemed happy to say, let’s put this in stone. I’m not sure why we’d walk away from that sort of opportunity.
But I do think it’s a relatively special case. And I think the fact that the investment there potentially has these positive externalities for the whole economy is really important, because you really want to protect those benefits.
Mike is, as ever, compelling on the economics. I hope I can persuade him that I’m right about the politics.
