The UK's Market Investigation Regime: Lessons for Europe's New Competition Tool?

The Draghi Report proposed that the European Commission introduce a “New Competition Tool” to spur Europe's competitiveness by addressing structural market issues. The Tool would allow the Commission to carry out a Market Study to identify the problem, followed by a Market Investigation to find the solution.

The UK’s market investigation regime (”the Regime”) shares this structure. It fills a gap in the UK prohibition regime, and investigations typically present clear conclusions informed by substantial evidence. However, some question whether it is "worth the candle", viewing it as too burdensome and often leading to ineffective or inconsequential interventions.

At our recent annual UK Competition Policy Forum, we discussed the advantages and disadvantages of the Regime with senior leaders and experts in competition policy and practice. Inspired by that discussion, here we present our observations and potential lessons for an equivalent potential regime in Europe.

Our collective insights do not reflect the views of any particular firm or individual and are not intended as a summary of the discussions, which are held under the Chatham House Rule.

Observation 1: A useful part of a competition authority’s toolkit

Market investigation regimes address important needs, complementing the other tools available to competition authorities.

• The Regime allows the CMA to address structural concerns difficult or impossible to resolve through its other powers. The Chapter I and II prohibitions and merger control cannot effectively tackle issues such as oligopoly, exogenous barriers to entry, information asymmetries, and demand-side barriers (such as limited consumer switching costs). Even when theoretically possible, findings of illegality and damages under traditional enforcement may be too severe or impractical in these situations.
• The Regime has been a useful political safety valve, supporting better policy-making. Initiating market studies has helped address public concern about particular markets. Without that independent and structured regime, pressure to act might have led to politically-motivated government interventions instead.

Observation 2: the effectiveness of individual investigations has been mixed

Some investigations have clearly been beneficial, such as the breakup of BAA and reforms to encourage open banking. Others have been considered less effective or inconsequential.

To understand why, it helps to assess the relative successes and limitations of the Regime by the wide range of potential interventions an investigation can lead to.

• The most intrusive interventions – such as divestments and banning practices – have yielded both notable successes and failures. This reflects their high stakes. They make it possible to tackle substantial structural problems, such as the legacy of former state enterprises. But they risk causing severe damage if poorly designed or targeted.
• The less intrusive interventions have had ambiguous results more often. Efforts to give consumers better information or encourage switching have largely been considered harmless. However, the benefits of these interventions have also been difficult to judge.

Effective use of the Regime has faced three significant challenges

• Defining the “well-functioning” counterfactual that the CMA assesses a market against is inherently difficult. In merger control, an authority usually compares the market as it is, with the market as it would be after the proposed merger. The comparison the Regime requires is harder: the market as it would be if competition functioned “well”. Defining this well-functioning market is hard – a market may be able to function well in more than one way, for example. As a result, the CMA tends not to clearly define the counterfactual. But without a clear framework to identify a counterfactual well-functioning market, assessments risk being superficial, misleading, or ineffective.
• Some problems require behavioural remedies, which can be challenging to apply in some markets. Remedies have been effective where they are specific, well-targeted, one-off interventions that require limited ongoing monitoring and enforcement – for instance, following the PPI and motor insurance investigations – or operate in regulated industries, where a sector regulator can monitor and enforce market conduct, such as in banking and energy.
• The wide range of potential inventions means that an investigation can affect outcomes in a market even before it concludes on whether intervention is necessary. During the process, the threat of an intervention – particularly ineffective and intrusive ones – affects investor confidence and business planning, even if it never emerges.

Observation 3: A potentially burdensome process

The Regime’s process has frequently faced criticism for being overly burdensome, resource-intensive, and lengthy, often lasting several years from start to finish.

• What is perceived as “a burden” varies by market. The CMA has studied markets with very large multinational businesses, such as cloud computing and mobile ecosystems, and also markets where parties have been much smaller – from funeral services to veterinarian practices. The impact of the Regime on parties is never costless, but for smaller businesses the burden is proportionately much larger.
• What is perceived as “disproportionate” is affected by hindsight. A challenge the CMA has faced is that intensive investigations have seemed more justified where serious intervention resulted, whereas some investigations that led to limited intervention appeared disproportionate in retrospect.

Potential lessons for a New Competition Tool in Europe

A New Competition Tool has the potential to spur competitiveness, addressing needs that are difficult to tackle by other means. The Draghi report recommends applying the Tool in four areas: in markets (a) where there is tacit collusion; (b) where the need for consumer protection is more likely to be needed, for instance due to consumers belonging to sensitive categories or having behavioural biases; (c) where economic resilience is weak, and (d) where there is evidence that past enforcement actions – commitments, or remedies – are not delivering competition.[1]

However, if it introduced such a tool, the Commission would need to manage the risk that its regime is perceived as, or in fact is, ineffective and disproportionate. Potential lessons from the UK regime include:

• Prioritise investigations where the available interventions are most likely to address clear and substantial concerns. Exploratory or speculative inquiries are likely to be ineffective and disproportionate. In particular, Europe may have more opportunity than the UK had to use its regime in one area where the Regime was most effective: in sectors dominated by former state-run enterprises.
• Design a process to minimise the potential risk and burden of an investigation as early as possible. A formal triage process should seek to assess the need for intrusive intervention and conclude relatively quickly. Subsequent investigation could then focus on the interventions that remain an explicit possibility, managing uncertainty and resources.
• Engagement with parties must be tailored, not a one-size-fits-all approach. An effective market investigation regime relies on the affected parties being fully engaged with the process, but their administrative capacity to identify and provide the relevant information, and leadership’s capacity to engage with the strategic issues, varies substantially by business and market.
• Be clear and practical about the required counterfactual. Given the complexities of defining a "well-functioning market", a clear economic framework is needed to identify and consider the interactions and trade-offs that affect consumers. In addition, the “well-functioning market” that a European regime could adopt may often be a more integrated single market, even if it is imperfect, rather than several distinct but hypothetically optimal markets. That would address a key concern in the Draghi Report, which notes that fragmentation within the single market inhibits growth, as it limits startups’ ability to scale.
• Be clear about differing risk and requirements for interventions to be successful. Some non-structural remedies have achieved positive results, such as reforms to promote open banking. In markets with supportive regulatory regimes, ongoing oversight offers the possibility that these remedies can be assessed and refined to improve their effectiveness. But they also risk causing perpetual uncertainty, that one-off interventions avoid.
  

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