20 Mar 2011

(by Bruce Lyons) The UK government has announced aand is consulting on a long list of questions. Question 2 is: “The Government seeks your views on the potential creation of a single Competition and Markets Authority (CMA)”. In other words, should there be a merger of the competition role of the Office of Fair Trading (OFT) and the Competition Commission (CC)? This is an important question because institutional design affects decision making. Indeed, the answer is crucial to the success of competition policy in the UK. So what are the odds against the merger going through?

The issues are finely balanced. On the one hand, separate institutions have existed for nearly forty years, during which time the UK has built a reputation as one of the best competition regimes in the world. The OFT and CC have complementary roles. For example, the OFT examines the first phase of a merger investigation but cannot prohibit. If it finds that the merger may be problematic, it refers it to the CC for a thorough investigation, after which the CC does have powers to prohibit (or order remedies) if necessary. Very different decision making structures in the OFT and CC reflect these different roles. This two-agency system has the attractive feature that prior beliefs about competitive effects are not carried forward – the merger is examined afresh and without any tendency to ‘confirmation bias’. Similar advantages of separate institutions operate in other areas such as market inquiries and regulatory appeals.

On the other hand, this type of institutional split is very unusual. For example, the USA has two federal agencies that regulate mergers, the FTC and DOJ, but each examines both phases of a merger (with mergers allocated between institutions on fairly arbitrary but roughly industrial lines). In Brussels, DG Competition regulates mergers with a European dimension in a single institution. The USA and EC are equally as highly regarded as the UK system. An integrated system avoids duplication in understanding competition issues, may benefit from economies of scale or scope, and can be simpler for firms to comprehend. Similar comments apply to other areas of competition policy, which suggests that there may indeed be a case for merger.

If the question is important and the answer is not obvious, what are the odds against the merger taking place? Very long indeed. Look at how the question is framed and the early responses of the main parties.

  • The initial announcement that this consultation would happen was made in the context of a government commitment to reduce the number of non-government agencies across all policy areas – the ‘bonfire of the quangos’.
  • In the preface to the consultation, Secretary of State Vince Cable writes: “I believe one, powerful Competition and Markets Authority would ensure a more dynamic and flexible use of competition tools and resource, would create a single advocate for competition in the UK and internationally, would reduce delay and end duplication for business.”
  • The 117 page consultation document asks 39 questions and discusses many details of CMA governance as well as substantive issues relating to specific areas of competition policy. Question 2 follows just one page of discussion.
  • The merger is “preferred option” based on an impact assessment which claims cost savings net of transition costs averaging just £1.3m pa. This is a tiny figure in relation to the benefits of a good competition regime (e.g. getting one merger decision wrong would typically have an error cost far in excess of this). The consultation document highlights only one view other than the Minister’s: “The CBI [Confederation of British Industry] has called for the Government to consider the case for combining the OFT and the CC into a single competition agency, to streamline the important processes of merger review and market investigation”
  • OFT Chairman Philip Collins appears committed: “We support the proposed merger [of OFT and CC] which will enable better use of limited public resources as well as providing the opportunity to enhance further the overall consistency and predictability of the regime, which we know is important for business.”
  • Only Peter Freeman, Chairman of the CC, has responded a little more cautiously: “This is a great opportunity to build a first class competition authority, but we must be careful not to damage what we already have.”

It is hard to conclude other than that the odds are heavily stacked in favour of the merger going through. Even allowing for considerable political uncertainties, my advice to those of you thinking of betting against the merger is not to do so unless you can get odds of at least 50 to 1.

Of course, this only raises the stakes on the other 38 questions, especially those related to how decisions will be made in the new authority. This is where the focus of the debate should lie over the coming months. A single CMA could improve the UK competition regime if it gets its decision making structure right – but it could also prove a disaster if it does not. I will return to this in the coming weeks.