Competition policy and coronavirus – the ‘new normal’ raises concerns for consumers and the time for change is now

Posted: 28/07/2020

On 21 July 2020, the Institute of Public Policy Research (IPPR) published a paper written by the outgoing chairman of the Competition and Markets Authority (CMA), Andrew Tyrie (see here). The paper has been prepared with the assistance of the CMA’s chief economist and members of the senior executive team. The paper explores the question of how competition policy should react to the outbreak of the 2019 coronavirus disease.

Lord Tyrie's paper examines the short term and lasting consequences of the coronavirus pandemic for markets and competition. A summary of the paper is considered below:

The immediate response

The paper explains that competition authorities, on the whole and by statutory design, are not institutions built for a rapid/crisis response. Coronavirus, and the measures to suppress its spread, have led to market disruption and consumer detriment that require a far faster and more flexible approach than the CMA was designed to achieve.

In March 2020, the CMA established the Covid-19 taskforce to provide a response to the immediate effects of the crisis on consumers and competition. The paper notes that the taskforce is a fundamentally different way of working for the CMA, prompted by necessity during such times of crisis. It highlights three particular features of the approach:

• The CMA has invited businesses and consumers to report unfair practices they are seeing and experiencing. Over 80,000 complaints have been received so far. Initially these predominantly concerned alleged price gouging on items like medicine, hand sanitiser and food. More recently, complaints focused on refunds and cancellation fees.
• The taskforce is publishing regular analyses of the complaints and how it is responding to them.
• The taskforce has acted in new ways because normal enforcement timescales do not address the detriment quickly enough. The taskforce has issued an unprecedented number of warning letters, launched wide-ranging consumer enforcement investigations and issued guidance on consumer law aimed at businesses.

Beyond the immediate crisis: the role of competition policy in the economic recovery

In relation to supply policy, the CMA has two clearly defined roles in assisting the recovery:

• It needs to promote the role of competitive markets in securing a dynamic and resilient economy.
• It must promote and sustain trust and confidence in markets, by protecting consumers from rip-offs and other unfair practices.

Both these roles will require the CMA to use its existing statutory powers and, where these are insufficient, to provide advice to government on how policy or legislation could address weak competition and prejudice to consumers.

The rest of the paper addresses the economic impact, competition and markets and the role of the CMA in the following contexts:

The economic outlook

The post-crisis equilibrium is highly uncertain but it is clear that the economic cost of the crisis will be huge. The public finances will be severely hit with the cost of coronavirus policy interventions estimated by the OBR to already be £142 billion. International trade is expected to fall due to global supply chains becoming less commercially sustainable and the failure of supply chains during the crisis will create a political imperative for resilience and self-sufficiency. Online retail sales will rise, placing more pressure on bricks and mortar shops. Debt levels in the government and corporate sector will remain high and remote working is having a knock on effect on office space and shopping patterns.

The economic shock caused by coronavirus is highly asymmetric. It is damaging some sectors, such as hospitality and transport, while leaving others untouched. However, sectors such as online retail, video conferencing and streaming services are benefiting.

The paper states that the following implications for the CMA’s work flow from these economic outlooks:

Increasing concentration

Before the crisis, concentration was already increasing in a number of sectors. In response to this the CMA began work on the state of competition across the economy. Concentration is now likely to increase because of the imminent recession. The process of re-allocation of productive assets to more efficient businesses can help recovery. The paper believes it would be more concerning if a rise in concentration is driven by anti-competitive mergers or viable firms leave the market in response to a short-term demand shock. Competition policy can help control concentration through strong merger control, advice to government and oversight of market and consumer outcomes.

Strong merger control

The crisis may prompt an increasing number of mergers in which the parties argue that one of them is a failing firm, which would otherwise leave the market and as such cause no loss of competition. In anticipation of such cases, the CMA is monitoring sectors that may be affected so it can respond quickly.

The crisis may well lead to a rise in so-called ‘killer acquisitions’, whereby a large incumbent firm nullifies potential future competition from small start-ups by acquiring them (for instance Facebook acquiring Instagram). The damage to competitive markets from coronavirus could be much more prolonged if incumbents are allowed to remove the competitive threat of smaller rivals by purchasing them at fire-sale prices.

Advice on inefficient bailouts

Most public sector support to industry in the UK has been economy wide. However, there are calls for the government to bail out specific firms and sectors. A pro-competitive approach to bailouts requires a distinction to be made between firms and sectors that are facing liquidity problems, and those that are fundamentally insolvent. This requires careful scrutiny particularly in respect of how it will fare in the post crisis equilibrium where demand may be permanently lower or consumer preferences change, but this is extremely difficult. It is also necessary to minimise the danger that comes when the state insures against risk by stepping in to provide financial assistance as this can cause economic fragility and weaken competition. Any specific financial assistance provided to companies should be conditional on a transition to a more resilient business and financial structures.

Stronger digital platforms

Big tech firms have been able to weather the crisis because they benefit from lockdown restrictions and have large cash reserves. Many of their competitors and potential competitors are going under and will either leave the market or be bought up by big tech. This will lead to further dominance of the large tech firms and a decline in competition in the short term.

Competition may also decline in the long term as the trend to more online shopping strengthens the position of retail platforms such as Amazon. An increase in online retail may benefit Google and Facebook, owing to their strength in the digital advertising market. The outcome of this is likely to reinforce the pre-existing consensus that digital platforms need pro-competitive regulation. The CMA has a taskforce working to advise the government on such a framework.

Coronavirus may well lead to reduced competition; increased product market competition; increased gatekeeper power over suppliers; and a stronger position in digital advertising. The CMA’s role in this context should be to make dispassionate assessments of the extent of dominance and any effects this may have for consumer welfare.

Increasing vulnerability

Coronavirus has led to a rise in the number of vulnerable consumers. The crisis opens up new means and opportunities for unfair practices, anticompetitive conduct, price gouging, misleading claims (for instance about PPE) or failure to refund cancelled bookings. The vulnerability of those without internet access will likely increase. The CMA has been developing its strategy to address these new types of vulnerability. It can help address the new vulnerabilities caused by coronavirus with enforcement of competition and consumer law.

Much of the CMA’s consumer enforcement has been directed against online harms. This will continue to develop alongside action against firms that fail to respect customers’ legal rights. The CMA can also address this issue by providing advice to the government and other public authorities. The CMA has been advising government on emergency legislation to enable price gouging to be tackled faster and more effectively.

Reduced trade

Problems faced during the crisis in securing vital supplies, such as ventilators and PPE, will strengthen the political case for greater economic self-reliance and repatriating supply chains. Restrictions on movement and economic activity will raise barriers to doing trade abroad. As governments lift restrictions on economic activity and movement at different rates and treat countries differently, new non-tariff barriers to trade may emerge. The principles underpinning free trade will be further undermined. Competition authorities are concerned that if trade barriers rise and trade flows fall, domestic firms will face less competitive pressure, market power will be more widespread, consumers will lose out and productivity will fall.

The challenge for competition policy will be to replace, as far as possible, lost international competitive pressure with domestic competitive pressure. Market-wide remedies to strengthen competition and protect consumers from market power may become more common. Closer examination of regulatory impediments to domestic competition, such as barriers to entry, may also be necessary.

Industrial strategy

In the UK, selective state intervention has largely been avoided, in favour of strong competition policy to form the core of industrial strategy for the last 40 years. Retaining and bolstering competition policy over the coming years will require political commitment. Further, public distrust of market competition is widespread and growing. The crisis has resulted in massive state intervention to save the economy and government-sanctioned cooperation between firms to protect supply chains and assist the crisis response.

In the alternative, the UK could adopt policies that promote, through subsidies, special treatment, relaxation of regulation and selective assistance, particular sectors or firms identified by the government as strategically or economically important. This approach has the same strategic objective as trade protectionism in the US.

Ultimately, it is up to ministers in the UK to determine whether such an approach is consistent with the public interest and the government’s objectives. The CMA will help to clarify the economic trade-offs involved in protecting domestic industry from competition.

Conclusion

In summary, the key points from the paper are as follows:

• Coronavirus is likely to make the economy less competitive and consumers more vulnerable.
• The CMA has already acted on short-term threats such as price gouging and breaches of consumer law.
• Markets are likely to become more concentrated and it will be up to the CMA to respond to this appropriately.
• Government intervention in the economy will be more significant.
• The dominance of digital platforms will have to be addressed with regulation.
• External competitive pressure on domestic industry is likely to decline and industrial policy could become more interventionist/protectionist and less infused with the usual pro-competitive instincts.
• The CMA will continue to advise the government on a pro-competitive approach.

The article has been co-written with trainee solicitor James Mitchell.

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