In the last few years there have been growing concerns (see here for example) that markets in the US are becoming increasingly dominated by a small number of firms. It is feared that the result of this will be a reduction in competition. Consistent with this, evidence suggests that the profits these firms make have increased. Last month The Economist and the Resolution Foundation published evidence suggesting a similar picture may be emerging in Britain.
The Economist divided the British economy into 600 sub-sectors and found that in 58% of these the share of total revenue accruing to the 4 biggest firms had increased since 2008. The Resolution Foundation found a similar picture, especially in manufacturing industries where from 2004-16 the top five firms’ share of total revenue increased by over 10%.
Economic theory would suggest that as markets become more concentrated prices are likely to rise and The Economist cites research showing that mark-ups charged by firms in Britain have indeed risen. In addition to consumers facing higher prices, there is also concern that the lack of competition both in the US and the Britain is leading to lower wages being paid to workers. On the other hand, unlike in the US, the evidence from Britain does not so far suggest there has also been an increase in corporate profits. Instead, it appears that the more successful firms’ profits have increased at the expense of their rivals.
This evidence on profits is line with a number of arguments that suggest we should perhaps be less concerned when markets are dominated by a small number of firms. Large firms may benefit from economies of scale and being sufficiently large may be necessary for firms to innovate in new products and processes. Furthermore, high market shares may result from the competitive process as a reward for a firm developing a unique product or being more efficient than its rivals.
The Economist cites the supermarket industry as an example where concentrated is high, but competition is intense. Interestingly, this is a market where the British competition authorities have previously been concerned about the level of competition and spent considerable amounts of time investigating.
Despite these two opposing viewpoints, overall, The Economist argues strongly that we should be concerned about the situation in Britain. Not only are prices too high and wages too low, but growth in productivity is slow, even for the leading firms. Furthermore, they make clear that the situation may worsen following Brexit. It is argued that:
leaving the EU’s single market and customs union would reduce trade, easing competitive pressure from abroad.
This is consistent with evidence that joining the EC in the mid 1970s increased foreign competition in the UK and helped to end the low productivity growth that had plagued the economy since the 1930s.
Furthermore, it is suggested that:
to attract investment the government might look more favourably on proposed mergers—and loosening regulations would be easier outside the EU’s competition regime.
Therefore, it is clear that in the future there will be a vital role for the UK’s competition authority to remain independent of political objectives and aim to promote competition. In particular, they must prevent mergers that raise concentration and harm competition and intervene if they believe firms are abusing their dominant positions. Of course, following Brexit the case load of the competition authority in the UK will increase dramatically as they have to take on cases previously dealt with by the European Commission. One estimate is that it will need to look at around 40% more merger cases. It will certainly be interesting to see how competition in markets in Britain evolves over the next few years and the role competition policy plays in regulating this process.
The car industry has featured heavily in the news in recent weeks with the announcement of plans to ban the sale of new petrol and diesel cars in the UK from 2040. Around the same time, news broke that the European Commission had commenced an investigation into potential collusive behaviour between German car makers.
Since the investigation is ongoing, it is not yet clear exactly what the firms are accused of. However, allegations first published in German magazine Der Spiegel claim that since at least the mid 1990s Volkswagen (and subsidiaries Porsche and Audi), Daimler (owner of Mercedes-Benz) and BMW met several times a year. Furthermore, it is alleged the meetings aimed to give the firms an advantage over overseas rivals by:
co-ordinating the development of their vehicles, costs, suppliers and markets for many years, at least since the Nineties, to the present day.
In particular, Der Spiegel claims that the cartel limited the size of the tanks that manufacturers install in cars to hold chemicals that reduce diesel emissions. Smaller tanks then left more room for the car’s sound system.
Limiting the size of these tanks should be seen in the context of the 2015 emissions scandal where it became clear that Volkswagen had programmed its cars to limit the use of these chemicals and cheated in emissions tests. This meant that 11 million cars worldwide produced excess emissions. Whilst other manufacturers have suggested that the cars they produced may also produce excess emissions, Volkswagen has so far been the only firm to admit to breaking the rules so explicitly. However, if the allegations in Der Spiegel turn out to be true, there will be clear evidence that the harm caused was widespread and that illegal communication between firms played a key role in facilitating this. If found guilty, substantial fines will be imposed by the European Commission and several of the firms have already announced plans to put in place measures to reduce emissions.
It is not clear how the competition authorities discovered the cartel. However, it has been suggested that incriminating documents were uncovered during a raid of Volkswagen’s offices as part of an investigation into a separate steel cartel. It seems that Volkswagen and Daimler are now cooperating with the investigation, presumably hoping to reduce the penalties they could face. It has also been reported that Daimler’s role in the investigation will have serious implications for future cooperation with BMW, including a project to develop charging sites for electric cars. It will be extremely interesting to see what the investigation uncovers and what the future ramifications for the car industry are.
European officials probe claims of huge German car cartel CNN Money, Mark Thompson (23/7/17)
Automotive corruption: German manufacturer collusion could spell bankruptcy Shout out UK, Christopher Sharp (4/8/17)
Germany’s auto industry is built on collusion Bloomberg, Leonid Bershidsky (31/7/17)
BMW reassured top staff about cartel allegations: sources Reuters, Edward Taylor (4/8/17)
- What are the consequences of the coordination between German car makers likely to have been for consumers? What about for rival car manufacturers?
- Are there circumstances in which coordination between car makers might be beneficial for society?
- How do you think the German car industry will be affected by these allegations going forward?
Price fixing agreements between firms are one of the most serious breaches of competition law. Therefore, if detected, the firms involved face substantial fines (see here for an example), plus there is also the potential for jail sentences and director disqualification for participants. However, due to their secretive nature and the need for hard evidence of communication between firms, it is difficult for competition authorities to detect cartel activity.
In order to assist detection, competition authorities offer leniency programmes that guarantee full immunity from fines to the first participant to come forward and blow the whistle on the cartel. This has become a key way in which competition authorities detect cartels. Recently, competition authorities have introduced a number of new tools to try to enhance cartel detection.
First, the European Commission launched an online tool to make it easier for cartels to be reported to them. This tool allows anonymous two-way communication in the form of text messages between a whistle blower and the Commission. The Commissioner in charge of competition policy, Margrethe Vestager, stated that:
If people are concerned by business practices that they think are wrong, they can help put things right. Inside knowledge can be a powerful tool to help the Commission uncover cartels and other anti-competitive practices. With our new tool it is possible to provide information, while maintaining anonymity. Information can contribute to the success of our investigations quickly and more efficiently to the benefit of consumers and the EU’s economy as a whole.
Second, the UK Competition and Markets Authority (CMA) has launched an online and social media campaign to raise awareness of what is illegal under competition law and to encourage illegal activity to be reported to them. The CMA stated that:
Cartels are both harmful and illegal, and the consequences of breaking the law are extremely serious. That is why we are launching this campaign – to help people understand what cartel activity looks like and how to report it so we can take action.
This campaign is on the back of the CMA’s own research which found that less that 25% of the businesses they surveyed believed that they knew competition law well. Furthermore, the CMA is now offering a reward of up to £100,000 and guaranteed anonymity to individuals who provide them with information.
It will be fascinating to see the extent to which these new tools are used and whether they aid the competition authorities in detecting and prosecuting cartel behaviour.
CMA launches crackdown on cartels as illegal activity rises The Telegraph, Bradley Gerrard (20/03/17)
European Commission launches new anonymous whistleblower tool, but who would use it? Competition Policy Blog, Andreas Stephan (21/03/17)
CMA launches campaign to crackdown on cartels Insider Media Limited, Karishma Patel (21/03/17)
- Why do you think leniency programmes are a key way in which competition authorities detect cartels?
- Who do you think is most likely to blow the whistle on a cartel (see the article above by A.Stephan)?
- Why is it worrying that so few businesses appear to know competition law well?
- Which of the two tools do you think is most likely to enhance cartel detection? Explain why.
This time last year bookmakers Ladbrokes and Coral announced their intention to merge. This was closely followed by a merger between Betfair and Paddy Power. This wave of consolidation appears to have been partly motivated by the rise of online gambling, stricter regulation and increased taxation.
The UK Competition and Markets Authority (CMA) commenced an initial investigation into the Ladbrokes-Coral merger in late 2015 and, at the request of the merging parties, agreed to fast track the case to a detailed phase 2 investigation.
Despite the growth in the online market, the CMA’s investigation recognised the continued importance of high-street betting shops:
Although online betting has grown substantially in recent years, the evidence we’ve seen confirms that a significant proportion of customers still choose to bet in shops – and many will continue to do so after the merger.
The CMA identified almost 650 local markets where it believed there would be a substantial lessening of competition. It concluded that this could have both local and national effects:
Discounts and offers of free bets to individual customers are 2 of the ways betting shops respond to local competition which could be threatened by the merger. Such a widespread reduction in competition at the local level could also worsen those elements that are set centrally, such as odds and betting limits.
Therefore, earlier this week the CMA announced that before it is prepared to clear the merger, the parties must sell around 350 stores in order to preserve competition in the problem markets (many of these overlap so the number of store sales required is less than the number of problem markets). This divestment represents around 10% of the total number of stores currently owned by the two merging parties. It appears that rivals Betfred and Boylesports, plus a number of private equity investors, are already interested in purchasing the stores.
This may also not be the last consolidation in the industry with the struggling leading bookmaker William Hill apparently attracting merger interest from rival 888 in combination with a casino and bingo hall operator.
BHA warns CMA over Coral-Ladbrokes merger Racing Post, Bill Barber (7/7/16)
Ladbrokes-Gala Coral must sell 350-400 shops to clear merger BBC, (26/7/16)
William Hill is lukewarm on ambitious three-way merger deal The Telegraph, Ben Martin (25/7/16)
- Why might the merging parties in this case have been so keen to fast track the case to phase 2?
- What are the key factors in defining the market in this case? How do you think these would have affected the decision?
- Are there arguments that wider social issues in addition to the effect on competition should be taken into account when considering mergers in this market?
- Which of the potential purchasers of the divested stores do you think might be best for competition?
- How do you think this market will evolve in the future?
Record fines have been imposed by the European Commission for the operation of a cartel. Truck makers, Volvo/Renault, Daimler, Iveco and DAF have been fined a total of €2.93bn. The fines were considerably higher than the previous record fine of €1.7bn on banks for rigging the LIBOR rate.
Along with MAN, they were found to have colluded for 14 years over pricing. They also colluded in passing on to customers the costs of compliance with stricter emissions rules. Together these five manufacturers account for some 90% of medium and heavy lorries produced in Europe.
The companies have admitted their involvement in the cartel. If they had not, the fines might have been higher. MAN escaped a fine of €1.2bn as it had revealed the existence of the cartel to the Commission.
A sixth company, Scania, is still in dispute with the Commission over its involvement. Thus the final total of fines could be higher when Scania’s case is settled.
In addition, any person or firm adversely affected by the cartel can seek damages from any of the companies in the national courts of member states. They do not have to prove that there was a cartel.
The Commission hopes that the size of the fine will act as a disincentive for other firms to form a cartel. ‘We have, today, put down a marker by imposing record fines for a serious infringement,’ said Margrethe Vestager, the EU’s competition commissioner.
Also, by being able to exempt a cartel member (MAN in this case) from a fine if it ‘blows the whistle’ to the authorities, it will help to break existing cartels.
There are some other major possible cartels and cases of abuse of market power currently being considered by the Commission. These include Google and whether unfair tax breaks were given to Apple and Amazon by Ireland and Luxembourg respectively.
Price-Fixing Truck Makers Get Record E.U. Fine: $3.2 Billion New York Times, James Kanter (19/7/16)
Truckmakers Get Record $3.23 Billion EU Fine for Cartel Bloomberg, Aoife White (19/6/16)
EU fines truckmakers a record €2.93bn for running 14-year cartel Financial Times, Peter Campbell, Duncan Robinson and Alex Barker (19/7/16)
Truckmakers fined by Brussels for price collusion The Guardian, Sean Farrell (19/7/16)
Europa Press Release
Antitrust: Commission fines truck producers € 2.93 billion for participating in a cartel European Commission (19/7/16)
Competition DG European Commission
- How have the various stakeholders in the truck manufacturing industry been affected by the operation of the cartel?
- What incentive effects are there, (a) for existing cartel members and (b) for firms thinking of forming a cartel, in the fining system used by the European Commission?
- Unlike the USA, the EU cannot jail managers for oligopolistic collusion. Compare the relative effectiveness of large fines and jail sentences in deterring cartels.
- What determines the profit-maximising price(s) for a cartel?
- Apart from the threat of action by the competition authorities, what determines the likely success of a cartel in being able to fix prices?
- Choose two other cases of possible cartels or the abuse of market power being examined by the European Commission. What is the nature of the suspected abuse?