08 Mar 2019
(by Bruce Lyons) I recently posted a commenting on the . I was sympathetic with the aims of eliminating unfair pricing and inefficient decision processes. However, I was highly critical of the CMA’s direction of travel and the worrying side effects of their proposals. I suggested two alternative proposals that would directly address the aims without the harm. In this short blog, I pick up two “facts” used by Lord Tyrie, Chairman of the CMA, to motivate the need for reform. These are particularly important because they relate to exactly the type of statistical evidence relied on by the CMA in its daily competition analysis: concentration and margins.
The CMA writes: “the growth in market power – reflected in rising concentration and profitability across a number of sectors – may well enable large firms to collect excess rents” [p.4]. An attached footnote says: “In the UK, economy-wide profit margins have risen from around 1.2 in 1980 to close to 1.7 today.” [Emphasis added] I note that there is a caveat about “a number of sectors” but the claim reads as a general growth in market power – not one where growth in market power in some sectors is balanced by decline in market power in others. There is no reference to check these assertions, so what does published data show?
Concentration data is no longer routinely published, so I use the latest available national statistics on the HHI. These were published by the Department for Business using ONS data until 2015. They use 4-digit industry definitions (with some 3-digit and some 5-digit). The first graph (below) shows the average trend for manufacturing, which rose from 2006-10 but then fell from 2010-15. This does not justify a panic response to rising concentration, especially as the first half of the period was of rapid European and global integration, followed by the financial crisis.
Source: my own graph using data from
What about non-manufacturing sectors? The following graph displays a wide variety of experiences but no discernible trend in any sector.
Source: my own graph using data from
Economy-wide profit margins
I am not sure what is meant by an economy-wide margin of 1.2 or 1.7. If this was a percentage margin, it would be remarkably small. I presume it is not, as the context of the letter implies that this has become large. It may have something to do with national accounts figures on shares of net output or gross value added, or maybe the ratio of corporate revenues to some measure of their variable costs. Of course, all this is pure speculation in the absence of any explanation or reference in Lord Tyrie’s letter. I can, however, make two general observations that apply to any comparison of margins over the 40 years between 1980 and 2019.
First, as shown in the graph at the end, 1980 was exceptional. It was a year of major recession with price and wage inflation both running at around 20%, Bank of England interest rate at 17%, monetary policy pushing the pound up to a painfully uncompetitive US$2.4 to £1, and the start of a sharp rise in unemployment. It is hardly a great comparator year.
Second, there have been enormous changes in industrial composition, new industries, product quality, automation, the invention of IT, internet, single market, globalisation, etc over the last 40 years. For example, in 1980, the structure of the market for personal communications was a nationalised monopoly of fixed-line telephones. Today, there is no space to list the mobile, text, e-mail, social network, skype and other products in what was then a single product personal communications market. The cost structure of many newer industries typically has much higher fixed costs and lower marginal costs as compared with 1980. For example, many digital markets have effectively zero marginal costs, in which case any positive price is an infinite margin. For these reasons, I suspect that properly measured margins are indeed rising, driven by many factors including traditional capital intensity, technology intensity, quality competition, R&D, investment in technology platforms, and winner-takes-all competition. What we don’t know is if there is a separate influence of changing market power. All we can truly say is that trends in economy-wide margins cannot simply be implied to relate to trends in market power over such a period.
My real concern
My own view that these statistics tell us little or nothing about the growth in market power. They are much more aggregated than would be used in practice to understand competitively relevant markets, and they mask all sorts of trends that really do matter. However, my concern is much broader. Casual assertions masked as facts, particularly facts of a type used to make important competition decisions, are reputationally damaging for the CMA. They will no doubt go viral in the debate about market power, but they do not generate confidence in the CMA’s responsible use of substantial new powers and weaker standards of review.
Lord Tyrie says “The proposals are the product of careful consideration by senior CMA staff, and discussion at Executive and Board level.” [p.6]