01 Apr 2011

(by Bruce Lyons) Last week, I suggested it was almost certain that the(CC) to form a single Competition and Markets Authority (CMA). What would make this a success? Along with my colleague, Steve Davies, I have been thinking about the key issues that such an authority would address if it was to investigate its own merger. This leads to a sharper focus on why the design of competition institutions matters.

First, we need a set of criteria by which to judge the proposed merger. The equivalent of the ‘substantial lessening of competition’ test is:

  • Would the merger likely result in a less competitive economy with adverse effects on consumers?

We need to be sure that a single authority will do its key job at least no worse than separate institutions. Hopefully, the CMA can be designed to do even better but first do no harm. If the answer is marginal, we can consider the efficiency defence:

  • Would the business community receive a better service?
  • Would there be cost savings to the taxpayer?

Second, we should consider only merger-specific effects. We should not be distracted by changes that could be implemented equally effectively by separate institutions.

Finally, we can examine the economic effects of the merger:

  1. Coordination. The merger is essentially vertical as first phase cases flow from the OFT to the CC for deeper investigation. Also, the CC imposes remedies and the OFT monitors them. Vertical effects in mergers are usually benign particularly when, as in this case, there is no issue of excluding a rival. Improved capacity utilisation and case choice can be expected post-merger, as long as the institution is well designed.
  2. Decision making. This is arguably the biggest issue. The OFT has a model of decision making based on the European Commission (DG Comp). Case teams investigate and this is followed by an executive decision. In contrast, the CC arose out of the Royal Commission model of decision making. This has a panel of non-executive experts brought together to advise the staff case team and then decide each case. In terms of corporate culture, the style of decision making could hardly be more different. Many commercial mergers fail because it is impossible to weld two incompatible cultures together. A successful CMA will require a new and rational decision making structure that is seen as such by all parties.
  3. Cost savings. Cost savings for the taxpayer include a single premises and more effective use of staff. The consultation’s estimate suggests these amount to a tiny 0.18% of the benefits of active competition policy. It would be only a fifth of that if we include the value of deterrence! It is much harder to estimate business savings, but even a marginal impact of the merger on coordination or decision making would almost certainly dominate the contribution of cost savings.
  4. Externalities on other institutions. The OFT and CC currently each have a range of roles beyond mergers and markets. For example, the OFT is responsible for antitrust (concurrently with sector regulators) and consumer protection. The CC can receive market references from sector regulators and hears regulatory appeals. The Competition Appeals Tribunal hears appeals from both (though ‘merits’ appeals from the OFT and judicial review for the CC). A complex system has evolved over 63 years and there will be knock-on effects for these and other institutions. Such externalities need addressing if even a successful OFT/CC merger is not to create losses elsewhere.

An extended version of this blog will be available in the, May 2011 (previously titled CCP Newsletter).