A Single UK Competition Authority? Stephen Davies* Bruce Lyons* *Professor of Economics

Transcription

1 A Single UK Competition Authority? Stephen Davies* Bruce Lyons* *Professor of Economics

2 A report on the proposed merger of the Office of Fair Trading & Competition Commission 1. The reference Who and what initiated this inquiry? 2. Jurisdiction Our competence to comment 3. The industry and the companies How do the OFT and CC compare with other agencies? 4. The markets What do the OFT and CC do? Who are their customers? 5. The merger How should we approach the merger analysis? 6. The counterfactual Could efficiencies/improvements be achieved without the merger? 7. Competitive effects of the merger Is it likely that the quality of decision making will be improved? 8. Provisional findings What are the key issues that need clarifying before forming a final judgment?

3 1. The reference why we are talking about this Comprehensive spending review (CSR) & bonfire of quangos. So likely cost savings are an issue Are there other motivations too? Could quality of the product also be improved? An instance where less public expenditure might yield enhanced quality? Expect formal consultation to start around Easter(?) and the Ministerial response in Autumn(?); possible legislation thereafter We don t know if prohibition (of the merger) is still a possibility, or if the debate is now just about optimal design ( remedies )

4 1. Other motivations? Reform in the air anyway? Recent Reviews Even before CSR, there had been a number of reviews: NAO (March 2010) Regulators should enforce more in order to increase case law More Market Investigation references to CC KPMG Peer Review of UK Competition Regime for DTI (2007) Improve speed of decision making Make regime appear less complex to users More decisions on significant non-merger cases

5 1. Other motivations recent reviews continued House of Lords Select Cttee on Sector Regulators (Oct 2007) Retain and extend concurrency CC should conduct regular investigations of regulated markets with a view to scaling back regulation DTI Concurrency Review (May 2006) Be more proactive, including market investigation references Political parties manifestos etc Example (Vince Cable) public interest test

6 2. Jurisdiction a disclaimer Our research in ESRC Centre for Competition Policy Part-time roles at OFT and CC Steve Davies has been academic adviser to OFT since 2001 Bruce Lyons reporting Member of CC Our comments are as independent academics None of our views should be attributed to OFT or CC

7 3. The industry the UK competition agencies: cost and benefits Costs Benefits to consumers** mn mn OFT* CC Combined Source: OFT s Positive Impact Estimates for 2009/10 (audited by SWD) * Net of OFT s other activities: money laundering, consumer direct etc, ** Annual averages No allowance for deterrence effects. Conservative estimate of deterrence rate might be 5:1 (Deloitte 2007) Context: last year s PSBR = 160bn Abolishing OFT/CC would: (i) reduce PSBR by 0.05% i.e. one-twentieth of one per cent. (ii) lead to losses in consumer benefits of say 4 billion p.a.

8 3. The industry international comparisons Highly regarded internationally GCR scored CC at top 5 stars and OFT 4.5 stars KPMG Review : UK 3 rd behind US and Germany (narrowing previous gaps in 2001 & 2004) On mergers, UK 2 nd, only behind US OFT rated world leader in Davies survey (2010) of impact evaluation Distinctive & innovative features of UK cf other competition agencies Separation Decision making Concurrency with regulators Consumer protection, regulatory appeals, market investigations

9 4. The markets what the OFT and CC do and for whom Products : mergers, antitrust, market inquiries/studies, consumer protection, appeals Inc. credit licensing, estate agents, money laundering Consumers Final consumers. Mission : to make markets work well for consumers (final consumers should benefit from enhanced competition) Business community: CAT (i) the investigated firms (ii) firms in general. Role of CAs to help firms fulfil their responsibility to be good competitors encourage good mergers, and steer firms away from anti-competitive behaviour. Other regulators

10 5. The merger: how to approach the analysis? Analogies with conventional distinctions between horizontal, vertical, conglomerate? This appears to be largely vertical - promising, given the general pros and cons of vertical v horizontal mergers OFT and CC have different types of responsibility proactive versus reactive. OFT roles of advocacy and establishing deterrence. How would this change post-merger? Externalities OFT dictates nature and magnitude of CC s caseload, CC decides the remedies which OFT must then monitor. So scope for internalisation? Effects on 3 rd parties, e.g. the other agencies and consumer protection But Potentially some loss in friendly competition between the two?

11 6. The counterfactual is merger necessary? What cost savings are there to be had? Rationalisation of back-of-office costs: HR, procurement etc. Single premises Reduction in coordination costs, but already regular meetings, mobile staff More effective use of staff, given fluctuations in work-loads (esp.cc)..but how often does restructuring really deliver the promised savings? Questions on costs which must be seriously considered Fixed or marginal? Saved fixed costs merely reduce PSBR Merger-specific? (Although even if not strictly merger-specific, might be easier to effect in a bout of corporate re-structuring) Moving deckchairs around while PSBR sinks?

12 6. Potential improvements in price or quality Probably best to conceptualise mainly in terms of quality: Improved product quality: (i) Quality of decisions Should be clear, consistent, well thought through Synergy? OFT s accumulated experience in the CA, CC in Market Investigations? (ii) Reduced user costs Improved coordination between phases 1&2 Removal of duplication Key question: is a merger really necessary to achieve these prospective improvements, or would reorganisation within/across OFT and CC be sufficient?

13 7. Merger-specific effects the argument so far Very modest cost savings possible Some externalities between OFT and CC that might be internalised Opportunity to reform decision-making structure But potential loss of checks and balances Need to consider each area of activity ( market ) more closely

14 7. What skills and legitimacy are necessary for decision making? Competition test versus public interest test Who determines the public interest? Public interest test would compromise independence Effects based decision skills require a blend of law & economics Levels of decision Case selection phase 1 filter phase 2 decision Current decision makers CC: panel of independent part-time commissioners Phase 2 mergers & markets; regulatory appeals OFT: mainly executive but opaque, especially for antitrust Antitrust (CA98) = cartels, abuse of dominance, etc Phase 1 mergers & markets; consumer protection

15 7. SWOT analysis of each competition policy area ( relevant market ) Strengths of current regime As relevant for OFT/CC merger Weaknesses of current regime As relevant for OFT/CC merger Opportunities created by OFT/CC merger Threats created by OFT/CC merger Consider: merger control; markets; antitrust; appeals; consumer protection. But first, general issue of decision makers

16 7.0 Decisions makers Strengths Arguably finely tuned to specific policy instruments Commissioners with range of expertise and direct access to firms Weaknesses OFT: opaque decision making CC: too many commissioners; too involved in investigation? Opportunities Consistent, transparent, rationally-structured decision making Reduced panel of commissioners uninvolved in everyday case development to decide on all phase 2 cases (including antitrust) Threats Persistence of historical system in merged body (cultural clash) or Wholesale change to executive or prosecutorial system

17 7.1 Merger control Strengths Clear separation of 2-phase system (OFT CC) Appropriate decision makers in each phase Weaknesses New team has to catch up in phase 2 Commissioners too involved in phase 2 investigation? Remedies imposed by CC for OFT to implement; review procedure Opportunities Smooth transition between phases; service to firms; remedies Further separation of investigation and decision making Threats Confirmation bias if same team in phase 2 Bias exacerbated if move to executive decision making in phase 2

18 7.2 Markets regime Strengths Gather institutional knowledge on how markets work Uniquely powerful system to regulate non-dominated markets Weaknesses Too few cases or meddling in apparently competitive markets? Confusing 2-phase system (market studies / investigations ) Unlimited phase 1; consumer protection studies Opportunities Smoother flow of cases Similarity of some economic issues with Art.102/Ch.2 Threats Arbitrary upgrading or downgrading of market regime Increased vulnerability to mission creep beyond competition issues?

19 7.3 Antitrust Strengths Experience bedding down following Competition Act 1998 Weaknesses Little success in prosecution of cartels or abuse of dominance Concurrent powers of regulators with little experience of antitrust, preference for regulatory powers, and possible capture Opportunities Disciplined and more explicit decision making by a panel End of concurrency would pool experience across sectors Threats Persistence of historical system (cultural clash) Constraints due to illegal/criminal nature of antitrust offences? ECHR compliance fair trial

20 7.4 Appeals Strengths CAT (specialist court) can do both judicial review and appeal on merits CC expertise (law, economics, finance, business) for regulatory appeals Also advice to CAT on certain points Weaknesses Judicial review is meant to be quick and light touch But refers back decisions to OFT & CC (long-winded) Opportunities Clearer lines of appeal? Review of CAT (e.g. private action for damages?) Threats Unanticipated knock-on effects on appeals system Loss of wide CC expertise if appeal roles lost

21 7.5 Consumer protection Strengths OFT is a powerful advocate of international standing Behavioural economics consumer remedies for competition problems Weaknesses Consumer side has been less intellectually glamorous Opportunities (if consumer protection moved elsewhere) Build strong consumer protection body consolidating with other agencies Threats (if consumer protection moved elsewhere) Merged competition authority leaves a weak rump

22 8. Provisional findings: criteria In strict order of priority Would the merger likely result in a more competitive economy to benefit consumers? Would the business community receive a better service? Would the there be cost savings in the competition authorities?

23 8. Provisional findings: prospective merger of the OFT and CC UK already has a first class competition regime Albeit with room for improvement Merger has potential to enhance quality if well designed Smoother flow of cases, shared expertise, remedies Faster and less complex system for firms Improved decision making structure But it could undermine a broadly successful regime Few potential cost savings; transition costs Externalities on other institutions Loss of multiple agencies: ideas; independence; advocacy Danger of piecemeal compromise: cultural clash; loss of access Refer to Phase 2 for serious scrutiny