Author: Jon Guest

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Microsoft’s proposed takeover of Activision Blizzard: CMA’s final ruling.

Effects on competition in the console and cloud gaming markets

Many people in the games industry expected the Competition and Markets Authority (CMA) to approve Microsoft’s proposed takeover of the games business, Activision Blizzard. However, in its final report published on 26 April, the CMA stated that the takeover would result in a substantial lessening of competition (SLC) in the supply of cloud gaming services in the UK. It rejected a behavioural remedy proposed by Microsoft and concluded that the merger should be prohibited.

When analysing the potential impact of this merger, the CMA focused on the following three issues:

  1. How important is the availability of Activision Blizzard’s games for the competitiveness of Microsoft’s rivals in the console and cloud gaming market? If, following the merger, Microsoft used its control over Activision Blizzard to restrict the availability of the games, would this significantly harm the competitiveness of their rivals?
  2. If restricting the availability of the games did harm its rivals, would it be profitable for Microsoft to do so? Do the benefits outweigh the costs? The major benefit for Microsoft is the additional sales this generates as consumers switch to its products to gain access to Activision’s games. The major cost is the forgone sales of the games to their rivals in the console and cloud gaming market.
  3. If it is profitable for Microsoft to limit the availability of the games, would this policy lead to a substantial lessening of competition (SLC) in the console and cloud gaming market? To answer this question the CMA compared the level of competition that would be most likely to occur if the merger were to proceed with the level if the deal were prohibited? In other words, it needed to identify the counterfactual.

In response to the first issue, the CMA judged that restricting access to Activision Blizzard’s games post-merger would significantly harm the competitiveness of Microsoft’s rivals in both the console and cloud gaming markets. However, its judgment on the second issue differed between the two markets. Why was this? One key issue was the difference in the relative market power of Microsoft in cloud vs console gaming.

One common indicator used to analyse the market position of a business relative to its rivals is market share. Using data on revenues generated from the sales of hardware, associated games and subscription services, console gaming market shares in the UK for 2021 were as follows:

  • Sony (PlayStation): 40% – 50%
  • Microsoft (xBox): 30% – 40%
  • Nintendo (Switch): 10% – 20%

Given the important market position of the PlayStation, limiting the ability of its users to purchase Activision games would result in Microsoft forgoing significant sales and revenue. Detailed analysis of the data by the CMA, indicated that the costs outweighed the benefits and so Microsoft did not have a commercial incentive to limit the availability of the games in this market. Therefore, the CMA concluded that the merger would not result in a SLC in the console gaming market. This finding was discussed in more detail in a blog on this website in March 2023.

The CMA judged that Microsoft had a much stronger position in the market for cloud gaming.

Cloud gaming services

Cloud gaming offers consumers a new way of playing graphically complex games. In this sector of the market, the games run on remote servers/data centres and then stream over the internet to the user’s device. The great advantage with this approach is that it enables consumers to play games on less powerful hardware devices such as smartphones, tablets, smart televisions, and standard PCs. Although the market is currently quite small it, has grown significantly over the past couple of years. Some people argue that it has the potential to make a dramatic change to the gaming market in the same way that businesses such as Netflix and Spotify have transformed the film, TV, and music industries.

It is more difficult to judge the relative market position of firms in a new and dynamic market, where things can change very quickly. The use of market share data is less informative but can still offer some insights. To estimate market shares in cloud gaming, the CMA used data on the number of monthly active users (MAUs). The figures for paid services in the UK for 2022 were as follows:

  • xCloud (Microsoft): 70% – 80%
  • PlayStation Cloud Gaming (Sony): 20% – 30%
  • Boosteroid: 0 – 5%
  • Nvidia GFN: 0 – 5%

Data suggest that Microsoft has a much stronger position in this market than in console gaming. There is also evidence that its market position is becoming more dominant. The same market shares for xCloud and PlayStation Gaming in 2021 were 40% – 50% and 50% – 60% respectively.

Given some of the limitations of using market-share data in a new and dynamic market, the CMA analysed other information about the sector to assess Microsoft’s market position. The investigation identified three key factors that could give Microsoft a significant cost advantage over its rivals: cloud infrastructure, the Windows operating system and access to a wide variety of games.

  1. Infrastructure: Microsoft’s ownership of Azure, a major cloud computing platform, could give it a significant cost advantage over its rivals in the future. A rival firm would need to develop it own cloud infrastructure or purchase these services from a third-party supplier.
  2. The Windows operating system: Given that far more games are developed for Windows as opposed to other operating systems, using Windows on a cloud infrastructure system gives a supplier access to large number of games. As it already owns Windows, Microsoft will be able to supply the operating system to its own cloud gaming service at little additional cost whereas its rivals will have to pay a license fee.
  3. Access to a wide range of games: Microsoft already owns twenty-four development studios that produce some very successful games such as Minecraft and Halo. It also has commercial relationships with other third-party developers who produce games for the Xbox console. This gives Microsoft another advantage over many of its rivals.

Given this evidence on Microsoft’s strong market position, the CMA concluded that the benefits to the company of restricting the availability of the games in the cloud gaming market outweighed the costs.

If Microsoft has commercial incentives to restrict the availability of Activision’s games, would this strategy lead to a SLC in the market for cloud gaming? To answer this question, the CMA had to identify the counterfactual: i.e. the most likely outcome in the market if the merger did not proceed. Following detailed analysis of the evidence, the competition authority concluded that Activision was likely to make its games available to different cloud gaming services if the deal did not take place.

Given Microsoft’s (a) strong market position and (b) limited number of relatively small competitors in cloud gaming, the CMA concluded that Microsoft’s commercial incentive to restrict the availability games would lead to a SLC compared to the counterfactual.

Martin Coleman, the chair of the independent panel of experts who conducted the CMA’s investigation, stated that:

Microsoft already enjoys a powerful position and head start over other competitors in cloud gaming and this deal would strengthen that advantage giving it the ability to undermine new and innovative competitors.

In response to these competition concerns, Microsoft offered to supply Activision games to certain cloud gaming services for a 10-year period. However, the CMA concluded that this behavioural remedy was not enough to address the competition issues raised by the merger and recommended that the deal be prohibited.

Microsoft’s immediate response was to appeal the decision to the Competition Appeal Tribunal.

The Federal Trade Commission is currently investigating the impact of the deal in the USA while the European Commission has just completed its investigation in the European Union. On 15 May, the EC announced that Microsoft’s behavioural remedy did fully address the competition concerns identified during its investigation. Therefore, the merger was approved on condition that Microsoft fully implemented the actions outlined in the remedy.

It will be interesting to read the recommendations of the FTC when the final results of its investigation are published later this year.

Articles

CMA and EC press releases

Questions

  1. Discuss the barriers to entry that exist in both the console and cloud gaming markets.
  2. Outline some of the issues when trying to calculate market shares in cloud gaming.
  3. What is meaning of the term ‘input foreclosure’? How is this relevant to the Microsoft/Activision case?
  4. What is the difference between a behavioural and a structural remedy? In what circumstances is a behavioural remedy most likely to be effective?
  5. Discuss some of the potential limitations with the behavioural remedy proposed by Microsoft.
  6. Explain why Microsoft’s position in the downstream market for cloud gaming is likely to influence incentives it faces to restrict the availability of Activision’s games post-merger.
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Microsoft’s proposed acquisition of Activision

Why did a competition authority change its mind on one aspect of this merger?

In January 2022, Microsoft announced its plan to acquire Activision Blizzard for $68.7 billion. Activision Blizzard is one of the largest games publishers in the world and famous for titles such as Call of Duty and World of Warcraft. Sales revenue from Call of Duty: Modern Warfare II was over $10 billion within ten days of its release in 2022. Given Microsoft’s ownership of the Xbox, one of the three devices that dominate the market for gaming consoles, the deal was always likely to raise competition concerns.

Potential competition issues

Following Phase 1 and 2 merger investigations by the Competition and Markets Authority (CMA) a number of competition issues were raised. One particular concern was in the market for gaming consoles and the potential impact of the merger on the future availability of Call of Duty (CoD). Some of the key findings of the initial research undertaken by the CMA were that:

  • Sony’s PlayStation was a much closer rival for the Xbox than the Nintendo Switch, which tends to offer more family-orientated games.
  • PlayStation users spend significant amounts of gametime playing CoD.
  • Game availability is a key factor that influences console purchase decisions.
  • Twenty-four percent of PlayStation users who play CoD stated that they would not purchase future versions of the console if CoD was unavailable on the platform.

These findings suggest that there are commercial incentives for Microsoft to limit the availability of CoD on the PlayStation. For example, the newly merged business could make future versions of the game exclusive to the Xbox – total exclusivity. Alternatively, it could adopt a policy of partial exclusivity. For example, it could only make versions of CoD available on the PlayStation that exclude some of its more popular features.

There are costs to Microsoft of implementing a policy of total or partial exclusivity. For example, 76% per cent of PlayStation users who play CoD stated that they would not switch consoles if future versions of the game were made unavailable. By making CoD exclusive to Xbox users, Microsoft would lose revenue from forgoing potential sales of the game to this group of users. The firm may also suffer reputational damage if there was a social media backlash against an exclusivity decision.

However, these costs of implementing a policy of exclusivity could be outweighed by the potential benefits. These include:

  • The additional sales of consoles as some users switch from the PlayStation to the Xbox to gain access to CoD.
  • the sale of CoD and other games to these additional Xbox users.

To quantify these costs and benefits, the CMA used a financial model that includes information on the amounts of money users typically spend on the Xbox platform and CoD over a five-year period. This ‘lifetime value of customers’ model found that it would be profitable for Microsoft to implement a policy of exclusivity post-merger.

The CMA also noted that in the majority of cases where Microsoft had previously acquired gaming studios, the subsequent release of games had been made exclusive to the Xbox.

CMA findings

Following its analysis of the case, the CMA published its provisional findings on the 8th February 2023. One key finding was that the merger would harm consumers, as it would lead to a substantial lessening of competition in the supply of console gaming services. The CMA argued that the acquisition should proceed only if Activision Blizzard sold off the parts of its business responsible for producing CoD. This is a structural remedy.

Microsoft rejected these findings and argued that the financial modelling used by the CMA was based on inaccurate data. In its formal written response to the competition authority the company argued that:

  • The potential gains from a policy of exclusivity had been calculated over a five-year period whereas the costs (i.e. the forgone sales of CoD) had only been calculated over a one-year period. More accurate analysis should compare both the potential gains and losses over a five-year period.
  • When more recent data are used to calculate the amounts of money users typically spend on the Xbox platform and CoD over a five-year period, the figure is lower than in the original work by the CMA.

Revised CMA findings

Having adjusted its analysis to take account of these criticisms, the CMA published an update to its Provisional Findings on 24th March 2023. In this update the competition authority stated that:

The analysis now shows that it would not be commercially beneficial to Microsoft to make CoD exclusive to Xbox following the deal, but that Microsoft will instead still have the incentive to continue to make the game available on PlayStation.

Therefore, just six weeks after publishing its Provisional Findings the CMA changed its conclusion and stated that the merger would not result in a substantial lessening of competition in the market for the supply of console gaming services in the UK.

In response to these changes an ex-CMA lawyer stated that:

This is extremely unusual. Restating your provisional findings is something ‘you would rather die than do’.
It is important to remember that the investigation by the CMA also raised concerns about the impact of the acquisition on competition in the cloud gaming market. These concerns remain unaffected by these updated findings and a final report will be published by the CMA at the end of April.

Competition authorities from 16 different countries/regions are also investigating the deal, including the Federal Trade Commission in the USA and the European Commission. It will be interesting to see if these authorities agree on the potential impact of the merger on competition.

Articles

CMA documentation

Questions

  1. Under what circumstances could a merger result in a substantial lessening of competition?
  2. Summarise the thresholds that have to be met by a potential merger before it is investigated by the Competition and Markets Authority.
  3. Explain the direct and indirect network effects that exist in the console gaming market. To what extent do they create barriers to entry?
  4. Outline some different ways that Microsoft could introduce a policy of partial exclusivity for the Call of Duty franchise of games.
  5. What would be the impact of a policy of exclusivity on the cross price elasticity of demand between Xbox and PlayStation consoles?
  6. Outline the difference between behavioural and structural remedies for merger.
  7. Discuss why the acquisition of Activision by Microsoft might reduce competition in the cloud gaming market.
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The continuing controversy over the sale of tickets for live music events

Tickets for Beyonce’s 2023 UK Renaissance tour went on general sale via Ticketmaster’s website at 10am on Tuesday 7 February. Throughout the day, social media were full of messages from fans complaining about technical issues, long online queues and rising prices. This is not the first time this has happened. Similar complaints were made in 2022 when tickets went on sale for tours by Bruce Springsteen, Harry Styles and Taylor Swift.

With the general sale of tickets for Beyonce’s tour, many fans complained they were waiting in online queues of over 500 000 people. Others reported their frustration with continually receiving ‘403 error’ messages.

Market dominance

In November 2022, Ticketmaster’s website in the USA constantly crashed during the pre-sale of tickets for Taylor Swift’s tour. This led to the general sale of tickets being cancelled.

In response to the public anger that followed this decision, the Senate’s antitrust subcommittee organised a hearing with the title – ‘That’s The Ticket: Promoting Competition and Protecting Competition and Protecting Consumers in Live Entertainment.’

Senator Amy Klobuchar, the Chair of this committee, stated that

The issues within America’s ticketing industry were made painfully obvious when Ticketmaster’s website failed hundreds of thousands of fans hoping to purchase tickets for Taylor Swift’s new tour, but these problems are not new. For too long, consumers have faced long waits and website failures, and Ticketmaster’s dominant market position means the company faces inadequate pressure to innovate and improve.

Ticketmaster merged with Live Nation in 2010 to become the largest business in the primary ticket market for live music events. Some people have accused the firm of abusing its dominant market position by failing to invest enough money in its website, so leading to poor customer service.

Dynamic pricing

Fans have also been complaining about the system of dynamic pricing that Ticketmaster now uses for big live events. What exactly is dynamic pricing?

Firms with market power often adjust their prices in response to changing market conditions. For example, if a business experiences significant increases in demand for its products in one quarter/year it may respond by raising prices in the following quarter/year.

With dynamic pricing, these price changes take place over much shorter time periods: i.e. within minutes. For example, in one media report, a Harry Styles fan placed £155 tickets in their basket for a concert at Wembley stadium. When the same fan then tried to purchase the tickets, Ticketmaster’s website sent a message stating that they were no longer available. However, in reality they were still available but for £386 – the price had instantly jumped because of high demand. Continually monitoring market conditions and responding to changes so quickly requires the use of specialist software and sophisticated algorithms.

Arguments for dynamic pricing

With ticket sales taking place months/years in advance of most live events, it is difficult for artists/promotors to predict future levels of demand. Given this uncertainty and the importance for the artist of playing in front of a full venue, event organisers may err on the side of caution when pricing tickets.

If the demand for tickets proves to be much stronger than initially forecast, then resellers in the secondary market can take advantage of the situation and make significant amounts of money. Dynamic pricing enables sellers in the primary market, such as Ticketmaster, to adjust to market conditions and so limits the opportunities of resale for a profit.

Ticketmaster argues that without dynamic pricing, artists will miss out on large amounts of revenue that will go to re-sellers instead. A spokesperson for the company stated that

Over the past few years, artists have lost money to resellers who have no investment in the event going well. As such event organisers have looked to market-based pricing to recapture that lost revenue.

Critics have claimed that Ticketmaster’s use of dynamic pricing is simply an example of price gouging.

No doubt the controversy over the sale of tickets for live music events will continue in the future.

Articles

Questions

  1. Explain the difference between the primary and secondary market for ticket sales for live events.
  2. Draw a demand and supply diagram to illustrate the primary market for tickets. Using this diagram explain how below market clearing prices in the primary market enable re-sellers to make money in the secondary market.
  3. What are the limitations of using demand and supply diagrams to analyse the primary market for tickets?
  4. Who has the greater market power – Ticketmaster or artists such as Taylor Swift and Beyonce?
  5. Try to provide a precise definition of the term ‘price gouging’.
  6. What other sectors commonly use dynamic pricing?
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The economics of fake reviews

Imagine a situation where you are thinking of buying a good and so you go to an e-commerce marketplace such as Amazon, eBay, Etsy or Onbuy. How confident are you about the quality of the different brands/makes that are listed for sale on these digital platforms? How do you choose which product to buy? Is the decision strongly influenced by customer reviews and rating?

When a customer is choosing what to buy it raises an interesting question: to what extent can the true quality of the different goods/services be observed at the time of purchase? Although perfect observability is highly unlikely, the level of consumer information about a product’s true quality will vary between different types of transaction.

For example, when consumers can physically inspect and test/try a product in a shop, it can help them to make more accurate judgements about its quality and condition. This poses a problem for online sellers of high-quality versions of a good. Without the ability to inspect the item physically, consumers may be unsure about its characteristics. They may worry that the online description provided by the seller deliberately misrepresents the true quality of the item.

Consumers may have other concerns about the general reliability of online sellers. For example, in comparison to buying the product from a physical store, consumers may worry that:

  • They will have to wait longer to receive the good. In many cases, when consumers purchase a product from a high-street store, they can walk away with the item and start using it straight away. When purchasing on line, they may end up waiting weeks or even longer before the product is finally delivered.
  • It will be more difficult to return the product and get a refund.
  • They are more likely to come across fraudulent sellers who have set-up a fake website.

This greater level of uncertainty about the true characteristics of the product and the general reliability of the seller will have a negative impact on consumers’ willingness to pay for all goods. This impact is likely to be particularly strong for high-quality versions of a product. If consumers’ willingness to pay falls below the reservation price of many sellers of high-quality goods, then the market could suffer from adverse selection and market failure.

Are there any within-market arrangements that could help deal with this issue? One possibility is for sellers to signal the quality of their products by posting consumer ratings and reviews. If consumers see that a product has many positive ratings, then this will increase their confidence in the quality of the product and so increase their willingness to pay. This could then reduce both levels of asymmetric information and the chances of adverse selection occurring in the market,

There is survey evidence that many people do read consumer reviews when choosing products on line and are heavily influenced by the ratings.

The problem of fake reviews

However, when consumers look at these reviews can they be sure that they reflect consumers’ honest opinions and/or actual experience of using the good or service? Firms may have an incentive to manipulate and post fake reviews. For example, they could:

  • Deliberately fail to display negative reviews on their website while claiming that all reviews are published.
  • Use internet bots to post thousands of automated reviews.
  • Take positive reviews from competitors’ websites and post them on their own website.
  • Pay some customers and/or employees to write and post 5-star reviews on their own website.
  • Pay some customers and/or employees to write and post 1-star reviews on their competitors’ websites.
  • Set up a website that they claim is independent and use it to provide positive endorsements of their own products.

If the benefits of this type of behaviour outweigh the costs, then we would expect to see fake reviews posted on websites. If their use becomes widespread, then the value of posting genuine reviews will fall. The market may then settle into what economists call a ‘pooling equilibrium’.

What evidence do we have on the posting of fake reviews? Given their nature, it is difficult to collect reliable data and there are large variations in the reported figures. One recent study found evidence of fake reviews being purchased and posted for approximately 1500 products on Amazon.

Can consumers screen reviews and identify those that are more likely to be fake? The following are some tell-tale signs.

  • Products that receive a large number of very positive reviews over a short period (i.e. a few days). There are then long periods before the product receives another large number of positive reviews.
  • A high percentage of 5-star reviews. Two, three and four start reviews are more likely to be genuine.
  • Reviews that specifically mention a rival firm’s products.
  • Reviewers who have given very high ratings to large number of different products over a short period of time.
  • Reviews that include photos/videos.

Competition authorities around the world have been investigating the issue and the Competition and Markets Authority has announced plans to introduce new laws that make the purchasing and posting of fake reviews illegal.

Articles

Questions

  1. Outline different types of asymmetric information and explain the difference between adverse selection and moral hazard.
  2. Using a diagram, explain the impact of uncertainty over the quality of a good on consumers’ willingness to pay.
  3. Will consumers always face greater uncertainty over quality when purchasing goods on line rather than visiting the high street? Discuss your answer making reference to some specific examples.
  4. Using diagrams, explain how a market for high-quality versions of a good might collapse if there is asymmetric information. Using price elasticity of supply, explain the circumstances when the market is more likely to collapse.
  5. Discuss some of the benefits and costs for a firm of purchasing and posting fake reviews.
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Carbon pricing in the UK

Many economists argue that the most effective policy for dealing with climate change is carbon pricing. This reduces greenhouse gas (GHG) emissions in a way that minimises the costs to the economy.

For the policy to work effectively it is important that the price per tonne of CO2 equivalent (CO2e) does not vary with the activity that causes the emissions. In other words, whether you drive a car, heat your house using gas or travel by air, the GHGs you create need to be priced at a unified rate.

Governments can introduce carbon pricing in two different ways – cap-and-trade schemes and carbon taxes.

With a cap-and-trade policy, emission allowances are either issued or sold to the organisations covered by the scheme. They must accumulate enough of these allowances to match the actual level of emissions they produce or pay a large fine. After the initial allocation, allowances can be bought and sold in a secondary market and prices can be quite volatile.

With a carbon tax, the government directly sets the price of GHGs through the tax rate but has less control over the quantity of emissions.

Policy in the UK

The UK Emissions Trading Scheme – an example of a cap-and-trade scheme – clearly places a price on GHG emissions. As this price is determined by market forces it can vary on a daily basis. The scheme applies to electricity generation and other energy-intensive industries that account for approximately 30 per cent of all emissions.

Although the UK does not have a specific carbon tax, it does have a number of different taxes that have an impact on the environment. Some of these have stated environmental objectives (e.g. the Climate Change Levy) while the main rationale for others is to raise revenue (fuel duty).

The tax rates are typically set on the output or consumption of the good rather than on emissions. For example, the Climate Change Levy applies to businesses’ use of electricity, gas and coal rather than the emissions the energy generates. Fuel duty depends on the amount of petrol consumed rather than the emissions the burning of that fuel generates. Clearly, emissions will tend to rise in proportion to the consumption/production of the good, but the relationship will not be precise.

The structure of VAT also influences emissions. The standard rate of VAT in the UK is 20 per cent. However, a lower level is applied to some goods/services that produce significant emissions. For example, the rate on household consumption of gas is 5 per cent while commercial passenger flights are zero rated. These lower tax rates are an implicit subsidy for the people who consume these goods/services. It makes them cheaper relative to the price of other goods.

Impact of the policies

Researchers from the Institute for Fiscal Studies have recently tried to analyse the impact of this complex range of policies on the price of carbon. The results indicate wide variations depending on the activity that causes the emissions.

One of the most significant differences is between gas and electricity. For example, non-energy-intensive businesses pay a price of £229.10 per tonne of CO2e from electricity generation but only £30.50 per tonne from burning gas. The response to the incentives this creates is unsurprising. One of the biggest contributing factors to the fall in territorial emissions in the UK has come from the decarbonisation of electricity supply: i.e. the switch away from coal-fired generation.

The impact of government policy on UK households creates quite perverse incentives. Because of the lower rates of VAT, families receive an implicit subsidy of £24 per tonne CO2e when they use gas to heat their homes. When they use electricity, the source of energy that generates less emissions, they face a positive price of £137 per tonne of CO2e. Once again, the response to these incentives is unsurprising. Household emissions only fell by a relatively small amount between 1990 and 2018 because of the continued use of gas for heating and cooking.

Unsurprisingly many commentators have referred to carbon pricing in the UK as a confusing mess and have called for a unified rate across all activities to minimise the costs to the economy. Another important issue is the level at which a new unified rate is set. Some research by the Department for Business, Energy and Industrial Strategy suggests that the figure would have to be set between £122 and £36 per tonne of CO2e in order for the UK to reach its target of net zero emissions by 2050.

A higher unified rate would also create another problem – the distributional impact. Poorer households spend a much greater share of their income on electricity, heating and food and so would be disproportionately affected by the policy. For the policy to be politically acceptable, the government will need to find an effective way to compensate these groups.

Articles

Report

Questions

  1. Outline the difference between territorial and consumption emissions.
  2. Using the concepts of rivalry and excludability, explain why GHGs and the climate change they cause are an example of market failure.
  3. Discuss the main differences between cap-and trade schemes and carbon emission taxes.
  4. Explain why a unified carbon price would minimise the costs to the economy of reducing the level of GHG emissions.
  5. Discuss some of the potential limitations of introducing carbon pricing and explain why some countries are considering the implementation of a Carbon Border Adjustment mechanism.