In June 2014, the Gas and Electricity Markets Authority (which governs the energy regulator, Ofgem) referred Great Britain’s retail and wholesale gas and electricity markets to the Competition and Markets Authority (CMA). The market is dominated by the ‘big six‘ energy companies (British Gas, EDF, E.ON, npower, Scottish Power and SSE) and Ofgem suspected that this oligopoly was distorting competition and leading to higher prices.
The CMA presented its report on 10 March 2016. It confirmed its preliminary findings of July and December 2015 “that there are features of the markets for the supply of energy in Great Britain that result in an adverse effect on competition”. It concludes that “the average customer could save over £300 by switching to a cheaper deal” and that “customers could have been paying about £1.7 billion a year more than they would in a competitive market”.
It made various recommendations to address the problem. These include “requiring the largest suppliers to provide fuller information on their financial performance” and strengthening the role of Ofgem.
Also the CMA wants to encourage more people to switch to cheaper suppliers. At present, some 70% of the customers of the big six are on default standard variable tariffs, which are more expensive than other tariffs available. To address this problem, the CMA proposes the setting up of “an Ofgem-controlled database which will allow rival suppliers to contact domestic and microbusiness customers who have been stuck on their supplier’s default tariff for 3 years or more with better deals.”
Another area of concern for the CMA is the 4 million people (16% of customers) forced to have pre-payment meters. These tend to be customers with poor credit records, who also tend to be on low incomes. Such customers are paying more for their gas and electricity and yet have little opportunity to switch to cheaper alternatives. 
For these customers the CMA proposed imposing transitional price controls from no later than April 2017 until 2020. These would cut typical bills by some £80 to £90 per year. In the meantime, the CMA would seek to remove “restrictions on the ability of new suppliers to compete for prepayment customers and reduce barriers such as debt issues that make it difficult for such customers to switch”.
Despite trying to address the problem of lack of competition, consumer inertia and barriers to entry, the CMA has been criticised for not going further. It has also been criticised for the method it has chosen to help consumers switch to cheaper alternative suppliers and tariffs. The articles below look at these criticisms.
Podcast
Competition and Markets Authority Energy Report BBC You and Yours (10/3/16)
Articles
Millions could see cut in energy bills BBC News (10/3/16)
Shake-up of energy market could save customers millions, watchdog says The Telegraph, Jillian Ambrose (10/3/16)
UK watchdog divided over energy market reforms Financial Times, Kiran Stacey (10/3/16)
How the CMA energy inquiry affects you Which? (10/3/16)
UK watchdog accused of bowing to pressure from ‘big six’ energy suppliers The Guardian, Terry Macalister (10/3/16)
CMA documents
CMA sets out energy market changes CMA press release (10/3/16)
Energy Market Investigation: Summary of provisional remedies Competition and Markets Authority (10/3/16)
Questions
- Find out the market share of the ‘big six’ and whether this has changed over the past few years.
- What, if any, are the barriers to entry in the gas and electricity retail markets?
- Why are the big six able to charge customers some £300 per household more than would be the case if they were on the cheapest deal?
- What criticisms have been made of the CMA’s proposals?
- Discuss alternative proposals to those of the CMA for dealing with the problem of excessive prices of gas and electricity.
- Should Ofgem or another independent not-for-profit body be allowed to run its own price comparison and switching service? Would this be better than the CMA’s proposal for allowing competitors access to people’s energy usage after 3 years of being with the same company on its standard tariff and allowing them to contact these people?
Global merger and acquisition deals with a combined value of £2.7 trillion ($4.06 trillion) have taken place so far this year (1 Jan to 3 Nov). This is a 38% increase on the same period in 2014 ($2.94 trillion) and even surpasses the previous record high for the same period in 2007 ($3.93 trillion) (see the chart from the Dealogic article linked below).
Measured by dollar value, October was the fifth biggest month in Mergers and Acquisitions (M&As) history with the announcement of $514bn of actual or proposed deals. These included:
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the proposed £71 billion deal to acquire SABMiller (the world’s second largest brewer) by AB InBev (the world’s largest brewer); |
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the $67bn takeover of network storage provider EMC by Dell (the world’s third largest computer supplier); |
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the proposed deal to acquire Allergan (producer of Botox) by Pfizer (the producer of Viagra). |
Although the dollar value of M&As was extremely large in October the actual number of deals, 2177, was significantly lower than the average of 3521 over the previous 9 months.
Are these large M&As in the interests of the consumer? One advantage is that the newly combined firms may have lower average costs. Reports in the press, following the announcement of most M&As, often discuss the potential for reductions in duplicate resources and rationalisation. After the successful completion of a takeover two previously separate departments, such as finance, law or HRM, may be combined into one office. If the newly integrated department is (i) smaller than the previous two departments added together and (ii) can operate just as effectively, then average costs will fall. This is simply an example of an economy of scale.
Average costs will also decrease if x-inefficiency within the acquired business can be reduced or eliminated. X-inefficiency exists when an organisation incurs higher costs than are necessary to produce any given output. In other words it is not producing in the cheapest possible way. In a number of takeovers in the brewing industry, AB InBev has gained a fearsome reputation for minimising costs and removing any waste or slack in acquired organisations. In an interview with the Financial Times, its chief executive, Carlos Brito, stated that:
“In any company, there’s 20 per cent that lead, 70 per cent that follow and 10 per cent that do nothing. So the 10 per cent, of course, you need to get rid of.”
If any reduction in costs results in lower prices without any lessening in the quality of the good or service, then of course the customer will benefit. However, when two relatively large organisations combine, it may result in a newly merged business with considerable market power. With a fall in the price elasticity of demand for its goods and services, this bigger company may be able to increase its prices and make greater revenues.
An important responsibility of a taxpayer-funded competition authority is to make judgements about whether or not large M&As are in the public interest. For example, the Competition and Markets Authority in the UK investigates deals if the target company has a UK turnover that exceeds £70 million, or if the newly combined business has a market share that is equal to or exceeds 25 per cent. If the CMA concludes that an M&A would lead to a substantial lessening of competition in the market, then it could prohibit the deal from taking place. This has only happened on 9 occasions in the last 12 years. If competition concerns are identified, it is far more likely that CMA will allow the deal to go ahead but with certain conditions attached. This has happened 29 times in the last 12 years and the conditions are referred to as remedies.
The CMA has recently published a report (Understanding past merger remedies) that attempts to evaluate the relative success of the various remedies it has used in 13 M&A cases.
Articles
Are big mergers bad for consumers? BBC News, Daniel Thomas (30/10/15)
Mergers and acquisitions madness may be about to stop The Guardian (11/10/15)
M&A deal activity on pace for record year The Wall Street Journal, Dana Mattioli and Dan Strumpf (10/08/15) [Note: if you can’t see the full article, try clearing cookies (Ctrl+Shift+Delete)]
Global M&A Volume Surpasses $4tr in 2015 YTD Dealogic, Anthony Read (04/11/15)
M&A Volumes Weaken in October despite Megadeals Financial Times, James Fontanella-Khan and Arash Massoudi (01/11/15)
The merger of Dell and EMC is further proof that the IT industry is remaking itself The Economist (12/10/15)
Questions
- Using a cost curve diagram, explain the difference between economies of scale and x-efficiency.
- Explain why a takeover or merger might reduce the price elasticity of demand for the goods or services produced by the newly combined firm.
- Explain how the CMA determines the size of the appropriate market when calculating a firm’s market share.
- Draw a diagram to illustrate the simultaneous impact of greater market power and lower average costs that might result from a horizontal merger. Consider the impact on consumer, producer and total surplus.
- What is the difference between a structural and a behavioural remedy?
The proposed $100 billion takeover of SABMiller by AB InBev is the third largest in history. It provides a good example of how the UK Panel on Takeovers and Mergers operates.
Economics textbooks often discuss competition authorities such as the Competition and Markets Authority but they rarely mention the UK Panel on Takeovers and Mergers (The Panel).The Panel is an independent body that was established in 1968. It has up to 35 members who all have professional expertise on the subject of takeovers i.e. they are usually employees of or have been seconded from (i) law and accountancy firms (ii) corporate brokers (iii) investment banks.
The Panel’s main responsibility is to implement the City Code on Takeovers and Mergers. This code sets out a number of ground-rules that companies must follow if they are involved in a merger or takeover. These rules became statutory in 2006 following the Companies Act of that year. The following objectives underpin the code:
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To ensure that the shareholders of the target company in a proposed takeover are treated fairly and are given the opportunity to make an informed decision about the relative merits of the takeover. |
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To ensure that the whole takeover/merger process operates in a structured and systematic manner. |
The Panel does not make any judgements on the commercial case for the takeover or merger. This is left to the management and shareholders of the companies involved. It also does not get involved with competition issues such as whether the newly established firm would have significant market power. These decisions in the UK are left to the Competition and Markets Authority. If the merger has a European element/dimension to it then it is investigated by the European Commission.
The rules that made up the code remained largely unchanged from 1968 until some important changes were made in September 2011. This followed the controversial takeover of Cadbury by the US food company Kraft. Kraft had first announced its intention to make an offer to acquire Cadbury in September 2009 but a deal was not agreed by the management of Cadbury until January 2010. Concerns were expressed at the time that this long and protracted takeover had made it very difficult for Cadbury to run its business effectively because of the uncertainty it created. It was also argued that the rules gave the acquiring company a significant tactical advantage in the takeover process and made it too easy for them to succeed.
One important change is that a targeted company must publicly announce the name of any companies that have made an approach about a possible deal. This announcement then activates a 28 day bid deadline period known as ‘pusu’ which stands for ‘put up’ (the money: i.e. make a formal bid) or ‘shut up’ (and walk away). This means that if the potential acquirer has not made a formal bid by the end of this 28-day period it is prohibited from making a bid for another 6 months. A request can be made to the Takeover Panel for an extension to this initial 28-day period, but this can only be done with the agreement of the target company.
Therefore SABMiller was obliged to announce on 15th September 2015 that
“Anheuser-Busch InBev SA/NV (AB InBev) has informed SABMiller that it intends to make a proposal to acquire SABMiller. No proposal has yet been received and the Board of SABMiller has no further details about the terms of any such proposal.”
The timing of this announcement made 14th October the official deadline by which AB InBev had to make a formal offer. After rejecting five bids, an offer of £44 a share by AB InBev was agreed in principle by the SABMiller management team on 13th October. 
Given the size and complexity of the deal (i.e. AB InBev is financing the deal by borrowing over $70 billion from 21 different banks), an initial two-week extension until 28th October was granted by the Takeover Panel. This could only have been granted with the agreement of SABMiller. Another one-week extension was agreed and then, on 4th November, SABMiller management made the following announcement.
“In order to allow SABMiller and AB InBev to finalise their discussions and satisfy the pre-conditions to the announcement of a formal transaction, the board of SABMiller has requested that the Panel on Takeovers and Mergers further extends the relevant deadline until 5pm November 11, 2015.”
One major issue has been the potential impact of the takeover on the level of competition in the US market. AB InBev and SABMiller already have market shares of 46% and 27% respectively. SABMiller’s strong presence in this market is a result of its joint venture, MillerCoors, with Molson Coors. One reason behind the last request for an extension is to grant enough time for a deal to be finalised for the sale of SABMiller’s 58% stake in MillerCoors to Molson Coors. Without this sale the US competition authorities would not approve the takeover.
Most observers believe that it will take a year for the deal to be completed and it will be interesting to chart its progress over the next 12 months.
Postscript: AB InBev announced on 11th November that it had made a formal offer of £71 billion to acquire SABMiller and SABMiller’s share in MillerCoors had been sold to Molson Coors for $12 billion.
SABMiller to seek another Takeover Panel extension for AB InBev takeover The Telegraph, Ben Martin (04/11/15)
AB InBev and SABMiller allay concerns about 68bn MegaBrew deal The Telegraph, Ben Martin (28/10/15)
AB InBev, SABMiller extend takeover deadline to Nov.4 Reuters, Philip Blenkinsop (28/10/15)
SABMiller agrees AB Inbev takeover deal of £68bn The Guardian, Sean Farrell (13/10/15)
SABMiller is AB Inbev’s toughest takeover yet. It may not be its last The Economist (14/10/15)
Brewery Battle: AB Inbev and the Craft Beer Challenge BBC News, Peter Shadbolt (13/10/15)
Beer Giants AB Inbev and SABMiller Agree Takeover Terms BBC News (13/10/15)
Questions
- The proposed takeover of SABMiller by AB InBev would be the third largest in history. What are the two biggest deals?
- The European Commission investigates ‘large’ mergers that have an ‘EU dimension’. On what basis does the European Commission judge if a merger is large or has an EU dimension?
- On what basis are mergers judged by the Competition and Markets Authority in the UK?
- What is a ‘virtual bid’ period? How did the ‘pusu’ bid deadline operate before the changes were introduced in 2011?
- Pfizer’s bid for Astrazeneca did not succeed in May 2014. Some people blamed the collapse of the deal on the 28-day ‘pusu’ deadline and rule 2.5 (i) of the code. What is rule 2.5 (i) and how did it contribute towards the failure of this deal?
In a blog post on 1 May this year, What’s really on offer?, we looked at the ‘super-complaint‘ by Which? to the Competition and Markets Authority (CMA) about supermarket special offers. The complaint referred to bogus price reductions, ‘cheaper’ multi-buys which weren’t cheaper, smaller pack sizes and confusing special offers. Under the rules of super-complaints, the CMA had 90 days from the receipt of the complaint on 21 April 2015 to publish a response. It has now done so.
Here is an extract from its press release:
In its investigation the CMA found examples of pricing and promotional practices that have the potential to confuse or mislead consumers and which could be in breach of consumer law. Where there is evidence of breaches of consumer law this could lead to enforcement action.
However, it has concluded that these problems are not occurring in large numbers across the whole sector and that generally retailers are taking compliance seriously to avoid such problems occurring. The CMA also found that more could be done to reduce the complexity in unit pricing to make it a more useful comparison tool for consumers. …Nisha Arora, CMA Senior Director, Consumer, said:
‘We have found that, whilst supermarkets want to comply with the law and shoppers enjoy a wide range of choices, with an estimated 40% of grocery spending being on items on promotion, there are still areas of poor practice that could confuse or mislead shoppers. So we are recommending further action to improve compliance and ensure that shoppers have clear, accurate information.
Although the CMA believes that misleading pricing is not as widespread as consumer groups have claimed, 
in some cases the supermarkets could be fined. The CMA also says that it will work with the supermarkets to eliminate misleading information in promotions.
In addition it recommends that the Department for Business, Innovation and Skills (BIS) publishes guidelines for supermarkets on displaying unit prices in a consistent way. It also recommends that legislation should be simplified on how items should be unit-priced.
The following articles look at the implications of the CMS’ findings.
Articles
Some UK supermarket promotions are misleading, watchdog says Financial Times, Andrea Felsted (16/7/15)
Shoppers beware: Grocers ‘confusing’ consumers with special offers, unit pricing, says government investigation International Business Times, Graham Lanktree (16/7/15)
Supermarket pricing: CMA finds ‘misleading tactics BBC News, Brian Milligan (16/7/15)
How special are special offers? BBC News, Kamal Ahmed (16/7/15)
CMA publications
Response to super-complaint: link to elements of report CMA (16/7/15)
Questions
- Give some examples of the types of promotion used by supermarkets?
- In what ways might such promotions be misleading?
- How is competition from Aldi and Lidl affecting pricing and promotions in the ‘big four’ supermarkets (Tesco, Sainsbury’s, Asda and Morrisons)?
- What cost and other advantages do Aldi and Lidl have over the big four? How might the big four reduce costs?
- Are misleading promotions systemic across the industry?
- How can behavioural economics help to explain consumers’ response to promotions in supermarkets?
- What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?
For years, the UK consumer organisation, Which?, has exposed misleading supermarket pricing practices. These include bogus price reductions, ‘cheaper’ multi-buys, smaller pack sizes and confusing special offers. Claiming that these practices are still continuing, Which? has made a super-complaint (available to designated consumer bodies) to the competition regulator, the Competition and Markets Authority (CMA).
Commenting on this action, Which? executive director, Richard Lloyd said:
“Despite Which? repeatedly exposing misleading and confusing pricing tactics, and calling for voluntary change by the retailers, these dodgy offers remain on numerous supermarket shelves. Shoppers think they’re getting a bargain but in reality it’s impossible for any consumer to know if they’re genuinely getting a fair deal.
We’re saying enough is enough and using one of the most powerful legal weapons in our armoury to act on behalf of consumers by launching a super-complaint to the regulator. We want an end to misleading pricing tactics and for all retailers to use fair pricing that people can trust.”
The CMA will consider the issues raised under the super-complaint to establish whether any of them are significantly harming the interests of consumers. It will publish a response within 90 days from the receipt of the complaint on 21 April 2015. The possible outcomes include:
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recommending the quality and accessibility of information for consumers is improved |
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encouraging businesses in the market to self-regulate |
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making recommendations to government to change the legislation or public policy |
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taking competition or consumer enforcement action |
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instigating a market investigation or market study |
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a clean bill of health |
Some 40% of groceries are sold on promotion. Supermarkets are well aware that consumers love to get a bargain and use promotions to persuade consumers to buy things they might not otherwise have done.
What is more, consumer rationality is bounded by the information and time available. People are often in a hurry when shopping; prices change frequently; people are often buying numerous low-value items; and they don’t know what competitors are charging. People may thus accept an offer as genuine and not spend time investigating whether it is so. Supermarkets know this and use all sorts of tactics to try to persuade people that they are indeed getting a bargain.
Videos
Supermarkets Face Super-Complaint On Pricing Sky News (21/4/15)
UK supermarkets face possible probe over pricing practices Reuters, Neil Maidment (21/4/15)
Which? launches ‘super-complaint’ against supermarkets BBC News, Stephanie McGovern (21/4/15)
Articles
UK supermarkets dupe shoppers out of hundreds of millions, says Which? The Guardian, Rebecca Smithers (21/4/15)
Supermarkets face inquiry into ‘rip-offs’ The Telegraph, Dan Hyde (21/4/15)
15 supermarket rip-offs that led to an inquiry The Telegraph, Dan Hyde (21/4/15)
What does Which?’s supermarket pricing complaint mean for you? The Guardian (21/4/15)
Supermarkets hit back over Which? report on pricing Financial Times (21/4/15)
Press release
Which? ‘super-complains’ about misleading supermarket pricing practices Which? (21/4/15)
CMA case page
Groceries pricing super-complaint Competition and Markets Authority (21/4/15)
Questions
- Give examples of supermarket offers that are misleading.
- Why are supermarkets able to ‘get away with’ misleading offers?
- How can behavioural economics help to explain consumer behaviour in supermarkets?
- Identify some other super-complaints have been made to the CMA or its predecessor, the Office of Fair Trading. What were the outcomes from the resulting investigations.
- What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?
It made various recommendations to address the problem. These include “requiring the largest suppliers to provide fuller information on their financial performance” and strengthening the role of Ofgem.
For these customers the CMA proposed imposing transitional price controls from no later than April 2017 until 2020. These would cut typical bills by some £80 to £90 per year. In the meantime, the CMA would seek to remove “restrictions on the ability of new suppliers to compete for prepayment customers and reduce barriers such as debt issues that make it difficult for such customers to switch”.
