With the coronavirus pandemic having reached almost every country in the world, the impact on the global economy has been catastrophic. Governments have struggled balancing the spread of the virus and keeping the economy afloat. This has left businesses counting the costs of various control measures and numerous lockdowns. The crisis has particularly affected small and medium-sized enterprises (SMEs), causing massive job losses and longer-term economic scars. Among these is an increase in the market power held by dominant firms as they emerge even stronger while smaller rivals fall away.
It is feared that with the full effects of the pandemic not yet realised, there may well be a wave of bankruptcies that will hit SMEs harder than larger firms, particularly in the most affected industries. Larger firms are most likely to be more profitable in general and more likely to have access to finance. Firm-level analysis using Orbis data, which includes listed and private firms, suggests that the pandemic-driven wave of bankruptcies will lead to increases in industry concentration and market power.
What is market power?
A firm holds a dominant position if its power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers. The key role of competition authorities around the world is to protect the public interest, particularly against firms abusing their dominant positions.
The UK’s competition authority, the Competition and Markets Authority (CMA) states:
Market power arises where an undertaking does not face effective competitive pressure. …Market power is not absolute but is a matter of degree; the degree of power will depend on the circumstances of each case. Market power can be thought of as the ability profitably to sustain prices above competitive levels or restrict output or quality below competitive levels. An undertaking with market power might also have the ability and incentive to harm the process of competition in other ways; for example, by weakening existing competition, raising entry barriers, or slowing innovation.
It can be hard to distinguish between a rapidly growing business and growing concentration of market power. In a pandemic, these distinctions can become even more difficult to discern, since there really is a deep need for a rapid deployment of capital, often in distressed situations. It is also not always evident whether the attempt to grow is driven by the need for more productive capacity, or by the desire to engage in financial engineering or to acquire market power.
It may be the case that, as consumers, we simply have no choice but to depend on various monopolies in a crisis, hoping that they operate in the public interest or that the competition authorities will ensure that they do so. With Covid-19 for example, economies will have entered the pandemic with their existing institutions, and therefore the only way to operate may be through channels controlled by concentrated power. Market dominance can occur for what seem to be good, or least necessary, reasons.
Why is market power a problem?
Why is it necessarily a problem if a successful company grows bigger than its competitors through hard work, smart strategies, and better technology adoption? It is important to recognise that increases in market power do not always mean an abuse of that market power. Just because a company may dominate the market, it does not mean there is a guaranteed negative impact on the consumer or industry. There are many advantages to a monopoly firm and, therefore, it can be argued that the existence of a market monopoly in itself should not be a cause of concern for the regulator. Unless there is evidence of past misconduct of dominance, which is abusive for the market and its stakeholders, some would argue that there is no justification for any involvement by regulators at all.
However, research by the International Monetary Fund concluded that excessive market power in the hands of a few firms can be a drag on medium-term growth, stifling innovation and holding back investment. Given the severity of the economic impact of the pandemic, such an outcome could undermine the recovery efforts by governments. It could also prevent new and emerging firms entering the market at a time when dynamism is desperately needed.
The ONS defines business dynamism as follows:
Business dynamism relates to measures of birth, growth and decline of businesses and its impact on employment. A steady rate of business creation and closure is necessary for an economy to grow in the long-run because it allows new ideas to flourish.
A lack of business dynamism could lead to a stagnation in productivity and wage growth. It also affects employment through changes in job creation and destruction. In this context, the UK’s most recent unemployment rate was 5%. This is the highest figure for five years and is predicted to rise to 6.5% by the end of 2021. Across multiple industries, there is now a trend of falling business dynamism with small businesses failing to break out of their local markets and start-up companies whose prices are undercut by a big rival. This creates missed opportunities in terms of growth, job creation, and rising incomes.
There has been a rise in mergers and acquisitions, especially amongst dominant firms, which is contributing to these trends. Again, it is important to recognise that mergers and acquisitions are not in themselves a problem; they can yield cost savings and produce better products. However, they can also weaken incentives for innovation and strengthen a firm’s ability to charge higher prices. Analysis shows that mergers and acquisitions by dominant firms contribute to an industry-wide decline in business dynamism.
Changes in market power due to the pandemic
The IMF identifies key indicators for market power, such as the percentage mark-up of prices over marginal cost, and the concentration of revenues among the four biggest players in a sector. New research shows that these key indicators of market power are on the rise. It is estimated that due to the pandemic, this increase in market dominance could now increase in advanced economies by at least as much as it did in the fifteen years to the end of 2015.
Global price mark-ups have risen by more than 30%, on average, across listed firms in advanced economies since 1980. And in the past 20 years, mark-up increases in the digital sector have been twice as steep as economy-wide increases. Increases in market power across multiple industries caused by the pandemic would exacerbate a trend that goes back over four decades.
It could be argued that firms enjoying this increase in market share and strong profits is just the reward for their growth. Such success if often a result of innovation, efficiency, and improved services. However, there are growing signs in many industries that market power is becoming entrenched amid an absence of strong competitors for dominant firms. It is estimated that companies with the highest mark-ups in a given year, have an almost 85 percent chance of remaining a high mark-up firm the following year. According to experts, some of these businesses have created entry barriers – regulatory or technology driven – which are incredibly high.
Professor Jayant R. Varma, a member of the MPC of the Reserve Bank of India (RBI), observed that in several sectors characterised by an oligopolistic core and a competitive periphery, the oligopolistic core has weathered the pandemic and it is the competitive periphery that has been debilitated. Rising profits and profit margins, improving capacity utilisation and lack of new capacity additions create ripe conditions for the oligopolistic core to start exercising pricing power.
The drivers and macroeconomic implications of such rises in market power are likely to differ across economies and individual industries. Even in those industries that benefited from the crisis, such as the digital sector, dominant players are among the biggest winners. The technology industry has been under the microscope in recent years, and increasingly the big tech firms are under scrutiny from regulators around the world. The market disruptors that displaced incumbents two decades ago have become increasingly dominant players that do not face the same competitive pressures from today’s would-be disruptors. The pandemic is adding to powerful underlying forces such as network effects and economies of scale and scope.
A new regulator that aims to curb this increasing dominance of the tech giants has been established in the UK. The Digital Markets Unit (DMU) will be based inside the Competition and Markets Authority. The DMU will first look to create new codes of conduct for companies such as Facebook and Google and their relationship with content providers and advertisers. Business Secretary Kwasi Kwarteng said the regime will be ‘unashamedly pro-competition’.
Policy Responses
The additions in regulation in the UK fall in line with the guidance from the IMF. It recommends that adjustments to competition-policy frameworks need to be made in order to minimise the adverse effects of market dominance. Such adjustments must, however, be tailored to national circumstances, both in general and to address the specific challenges raised by the surge of the digital economy.
It recommends the following five actions:
- Competition authorities should be increasingly vigilant when enforcing merger control. The criteria for competition authorities to review a deal should cover all relevant cases – including acquisitions of small players that may grow to compete with dominant firms.
- Second, competition authorities should more actively enforce prohibitions on the abuse of dominant positions and make greater use of market investigations to uncover harmful behaviour without any reported breach of the law.
- Greater efforts are needed to ensure competition in input markets, including labour markets.
- Competition authorities should be empowered to keep pace with the digital economy, where the rise of big data and artificial intelligence is multiplying incumbent firms’ advantage. Facilitating data portability and interoperability of systems can make it easier for new firms to compete with established players.
- Investments may be needed to further boost sector-specific expertise amid rapid technological change.
Conclusion
The crisis has had a significant impact on all businesses, with many shutting their doors for good. However, there has been a greater negative impact on SMEs. Even in industries that have flourished from the pandemic, it is the dominant firms that have emerged the biggest winners. There is concern that the increasing market power will remain embedded in many economies, stifling future competition and economic growth. While the negative effects of increased market power have been moderate so far, the findings suggest that competition authorities should be increasingly vigilant to ensure that these effects do not become more harmful in the future.
Reviews of competition policy frameworks have already begun in some major economies. Young, high-growth firms that innovate and create high-quality jobs deserve a level playing field and a fair chance to succeed. Support directed to SMEs is important, as many small firms have been unable to benefit from government programmes designed to help firms access financing during the pandemic. Policymakers should act now to prevent a further, sharp rise in market power that could hold back the post-pandemic recovery.
Articles
Podcast
Official documents
Questions
- What are the arguments for and against the assistance of a monopoly?
- What barriers to entry may exist that prevent small firms from entering an industry?
- What policies can be implemented to limit market power?
- Define and explain market dynamism.
Each year the BBC hosts the Reith Lectures – a series of talks given by an eminent person in their field. This year’s lecturer is Mark Carney, former Governor of the Bank of England. His series of four weekly lectures began on 2 December 2020. Their topic is ‘How we get what we value’. As the BBC site states, the lectures:
chart how we have come to esteem financial value over human value and how we have gone from market economies to market societies. He argues that this has contributed to a trio of crises: of credit, Covid and climate. And the former Bank of England governor will outline how we can turn this around.
In lectures 2, 3 and 4, he looks at three crises and how they have shaped and are shaping what we value. The crises are the financial crisis of 2007–9, the coronavirus pandemic and the climate crisis. They have challenged how we value money, health and the environment respectively and, more broadly, have prompted people to question what is valuable for individuals and society, both today and into the future.
The questions posed by Carney are how can we establish what is valuable to individuals and society, how well are such values met by economies and how can mechanisms be improved to ensure that we make the best use of resources in meeting those values.
Value and the market
In the first lecture he probes the concept of value. He explores how economists and philosophers have tried to value the goods, services and human interactions that we desire.
First there is ‘objective value’ propounded by classical economists, such as Adam smith, David Ricardo and Karl Marx. Here the value of goods and services depends on the amount of resources used to make them and fundamentally on the amount of labour. In other words, value is a supply-side concept.
This he contrasts with ‘subjective value’. Here the value of goods and services depends on how well they satisfy wants – how much utility they give the consumer. For these neoclassical economists, value is in the eye of the beholder; it is a demand-side concept.
The two are reconciled in the market, with market prices reflecting the balance of demand and supply. Market prices provided a solution to the famous diamonds/water paradox (see Box 4.2 in Economics (10th edition) or Case Study 4.3 in Essentials of Economics (8th edition) – the paradox of ‘why water, which is essential for life, is virtually free, but diamonds, which have limited utility beyond their beauty, are so expensive.’ The answer is to do with scarcity and marginal utility. Because diamonds are rare, the marginal utility is high, even though the total utility is low. 
And because water is abundant, even though its total utility is high, for most people its marginal utility is low. In other words, the value at the margin depends on the balance of demand and supply. Diamonds are much scarcer than water.
But is the market balance the right balance? Are the values implied by the market the same as those of society? ‘Why do financial markets rate Amazon as one of the world’s most valuable companies, but the value of the vast region of the Amazon appears on no ledger until it’s stripped of its foliage and converted into farmland?’ – another paradox highlighted by Carney.
It has long been recognised that markets fail in a number of ways. They are not perfect, with large firms able to make supernormal profits by charging more and producing less, and consumers often being ill-informed and behaving impulsively or being swayed by clever marketing. And many valuable things that we experience, such as human interaction and the beauty of nature, are not bought and sold and thus do not appear in measures of GDP – one of the main ways of valuing a country.
What is more, many of things that are produced in the market have side-effects which are not reflected in prices. These externalities, whether good or bad, can be substantial: for example, the global warming caused by CO2 emissions from industry, transport and electricity production from fossil fuels.
And markets reflect people’s biases towards the present and hence lead to too little investment for the future, whether in healthcare, the environment or physical and social infrastructure. Markets reflect the scant regard many give to the damage we might be doing to the lives of future generations.
What is particularly corrosive, according to Carney, is the
drift from moral to market sentiments. …Increasingly, the value of something, some act or someone is equated with its monetary value, a monetary value that is determined by the market. The logic of buying and selling no longer applies only to material goods, but increasingly it governs the whole of life from the allocation of healthcare, education, public safety and environmental protection. …Market value is taken to represent intrinsic value, and if a good or activity is not in the market, it is not valued.
The drift from moral to market sentiments accelerated in the Thatcher/Regan era, when governments were portrayed as inefficient allocators, which stifled competition, innovation and the movement of capital. Deregulation and privatisation were the order of the day. This, according to Carney, ‘unleashed a new dynamism’ and ‘with the fall of communism at the end of the 1980s, the spread of the market grew unchecked.’
But this drift failed to recognise market failures. It has taken three crises, the financial crisis, Covid and the climate crisis to bring these failures to the top of the public agenda. They are examined in the other three lectures.
The Reith Lectures
Questions
- Distinguish between objective and subjective value.
- If your income rises, will you necessarily be happier? Explain.
- How is the concept of diminishing marginal utility of income relevant to explaining why ‘A Christmas bonus of £1000 means less to Mark Zuckerberg then £500 does to someone on a minimum wage.’
- Does the use of social cost–benefit analysis enable us to use adjusted prices as a measure of value?
- Listen to lectures 2, 3 and 4 and provide a 500-word summary of each.
- Assess the arguments Mark Carney uses in one of these three lectures.
In recent years, US tech companies have faced increased scrutiny in Washington over their size and power. Despite the big tech firms in America being economically robust, seemingly more so than any other sector, they are also more politically vulnerable. This potential vulnerability is present regardless of the recent election result.
Both the Democrat and Republican parties are thinking critically about monopoly power and antitrust issues, where ‘antitrust’ refers to the outlawing or control of oligopolistic collusion. Despite the varied reasons across different parts of the political spectrum, the increased scrutiny over big tech companies is bipartisan.
Rising monopoly power
Monopoly power occurs when a firm has a dominant position in the market. A pure monopoly is when one firm has a 100% share of the market. A firm might be considered to have monopoly power with more than a 25% market share.
If there is a rise in market concentration, it tends to hurt blue-collar workers, such as those employed in factories, more than everyone else. Research, from the University of Chicago, studied what happens to particular classes of workers when companies increasingly dominate a market and have more power to raise prices. The study found that those workers that make things tend to be left worse off, while the workers who sell, market or design things gain. When companies have more pricing power, they make fewer products and sell each one for a higher profit margin. In that case, it’s far more valuable to a company to be an employee working in so-called expansionary positions, such as marketing, than in production jobs, such as working on a factory line — because there’s less production to be done and more salesmanship.
Monopoly power under Trump Vs Biden
In February, President Trump and his economic team saw no need to rewrite the federal government’s antitrust rules, drawing a battle line with the Democrats on an issue that has increasingly drawn the attention of economists, legal scholars and other academics. In their annual Economic Report of the President, Mr. Trump and his advisers effectively dismissed research that found large American companies increasingly dominate industries like telecommunications and tech, stifling competition and hurting consumers. At the time the Trump administration contended that studies demonstrating a rise in market concentration were flawed and that the rise of large companies may not be a bad thing for consumers.
On page 201, the report reads:
Concentration may be driven by economies of scale and scope that can lower costs for consumers. Also, successful firms tend to grow, and it is important that antitrust enforcement and competition policy not be used to punish firms for their competitive success.
The Trump administration approved some high-profile corporate mergers, such as the merger of Sprint and T-Mobile, while also trying to block others, such as AT&T’s purchase of Time Warner. Mr. Trump’s advisers stated that agencies already had the tools they needed to evaluate mergers and antitrust cases. It lamented that some Americans have come to hold the mistaken, simplistic view that ‘Big Is Bad.’
However, it is likely that such big firms, including the tech giants, would take a hit under the new presidency. President-Elect Joe Biden has pledged to undo the tax cuts introduced by Trump and has vowed to increase corporation tax from 21% to 28%. As part of these tax changes, he has suggested the introduction of a minimum 15% tax for all companies with a revenue of over $100 million. This has now been given the nickname of the ‘Amazon Tax’ and it is clear how it would impact on the big the firms such as Amazon.
This is the opposite of what was probable if Trump were to have been re-elected. It was expected that the US would continue along the path of deregulation and lower taxes for corporates and high-income households, which would have been welcomed by the stock market. However, analysts suggest that the tax changes under Biden would negatively affect the US tech sector, with some analysts maintaining that the banking sector would also be hit.
Antitrust enforcement is often associated with the political left, but the current situation is not so clear-cut. In the past, Silicon Valley has largely avoided any clashes with Washington, even when European regulators have levied fines against the tech giants. European regulators have fined Google a total of $9bn for anticompetitive practices. In 2018 Donald Trump attacked the EU decisions. “I told you so! The European Union just slapped a Five Billion Dollar fine on one of our great companies, Google,” Trump tweeted. “They truly have taken advantage of the US, but not for long!”
However, since then the mood has changed, with Trump and other conservatives joining liberals, including senators Elizabeth Warren and Bernie Sanders, in attacking the dominance of tech firms, including Amazon, Google, Facebook and others. While Democrats have largely stuck to criticising the scale of big tech’s dominance, Republicans, including Trump, have accused the major tech companies of censoring conservative speech.
An antitrust subcommittee of the Democrat-controlled House Judiciary Committee released a 449-page report excoriating the Big Four tech companies, Amazon, Facebook, Apple and Google-owner, Alphabet, for what it calls systematic and continuing abuses of their monopoly power. Recommendations from the report include ways to limit their power, force them out of certain areas of business and even a break-up of some of them.
Democratic lawmakers working on the probe claim that these firms have too much power, and that power must be reined in. But not all Republicans involved agreed with the recommendations. One Republican congressman, Jim Jordan, dismissed the report as “partisan” and said it advanced “radical proposals that would refashion antitrust law in the vision of the far left.” However, others have said they support many of the report’s conclusions about the firms’ anti-competitive tactics, but that remedies proposed by Democrats go too far.
The US tech giants
Amazon is a leading example of the economic strength held by the tech giants. Amazon has produced 12-month revenues of $321bn to October 2020, which in an increase from 2019 and 2018 revenues of $280bn and $233bn respectively. However, Amazon, along with the other big players Apple, Facebook, Google parent Alphabet, and Microsoft, are facing increased government scrutiny.
The US Department of Justice has filed a lawsuit against Google for entrenching itself as the dominant search engine through anti-competitive practices. Google’s complex algorithms, software, and custom-built servers helped make it into one of the world’s richest and most-powerful corporations. It currently dominates the online search market in the USA, accounting for around 80% of search queries. The lawsuit accuses the tech company of abusing its position to maintain an illegal monopoly over search and search advertising. Facebook also faces an antitrust lawsuit from the Federal Trade Commission. It is arguable that the US tech giants are so powerful that they may accomplish the seemingly impossible and unite the two parties, at least on one policy – breaking them up.
If it is correct that the tech giants’ behaviour ultimately damages innovation and exacerbates inequality, it is arguable that such problems have only grown worse with the coronavirus pandemic. Many smaller businesses have succumbed to the economic damage: many have been closed during lockdowns or suffered a decline in sales; many have gone out of business.
The changing patterns in teleworking and retail have accelerated in ways that have made Americans more reliant on technologies produced by a few firms. Shares in the Big Four, along with Microsoft, Netflix, and Tesla, added $291 billion in market value in just one day last week. It could therefore be claimed that the dangers of Big Tech domination are more profound now than they were even a few months ago.
Google’s lawsuit
On 20 October, the Department of Justice — along with eleven state Attorneys General — filed a civil antitrust lawsuit in the U.S. District Court for the District of Columbia to stop Google from unlawfully maintaining monopolies through anticompetitive and exclusionary practices in the search and search advertising markets and to remedy the competitive harms.
This is the most significant legal challenge to a major tech company in decades and comes as US authorities are increasingly critical of the business practices of the major tech companies. The suit alleges that Google is no longer a start-up company with an innovative way to search the emerging internet. Instead Google is being described as a “monopoly gatekeeper for the internet” that has used “pernicious” anticompetitive tactics to maintain and extend its monopolies.
The allegation that Google is unfairly acting as a gatekeeper to the internet is based on the argument that through a series of business agreements, Google has effectively locked out any competition. One of the specific arrangements being challenged is the issue of Google being preloaded on mobile devices. On mobile phones running its Android operating system, Google is preinstalled and cannot be deleted. The company pays billions each year to “secure default status for its general search engine and, in many cases, to specifically prohibit Google’s counterparties from dealing with Google’s competitors,” the suit states. It is argued that this alone forecloses competition for internet search as it denies its rivals to compete effectively and prevent potential innovation.
However, Google has defended its position, calling the lawsuit “deeply flawed”. It has argued that consumers themselves choose to use Google; they do not use it because they are forced to or because they can’t find an alternative search platform. Google also argues that this lawsuit will not be beneficial for consumers. It claims that this will artificially prop up lower-quality search alternatives, increase phone prices, and make it harder for people to get the search services they want to use.
Conclusion
Despite wanting to stop Google from “unlawfully maintaining monopolies in the markets for” search services, advertising, and general search text, the lack of consensus and divergence among the Democrats and Republicans on the antitrust issues remains a major issue to move things forward.
The Democrats want to see the power held by these companies reined in, while the Republicans would rather see targeted antitrust enforcement over onerous and burdensome regulation that kills industry innovation. It is clear that the US government will have to balance its reforms and ideas while making sure not to put the largest companies in the USA at a competitive disadvantage versus their competitors globally.
Articles
- US tech giants accused of ‘monopoly power’
BBC News (6/10/20)
- Tech, healthcare & the ‘fear index’: An investor’s guide to US election night 2020
Investment Trust Insider, Alex Steger, Alex Rosenberg, John Coumarianos, Nicole Piper, Jake Martin and Ian Wenik (2/11/20)
- Justice Department Sues Monopolist Google For Violating Antitrust Laws
The United States Department of Justice (20/10/20)
- Trump Administration Sees No Threat to Economy From Monopolies
The New York Times, Jim Tankersley (20/2/20)
- Trump vs Biden: Winners and losers under America’s next leader
Shares, Yoosof Farah (29/10/20)
- America’s Monopoly Problem Goes Way Beyond the Tech Giants
The Atlantic, David Dayen (28/7/20)
- US justice department sues Google over accusation of illegal monopoly
The Guardian, Dominic Rushe and Kari Paul (20/10/20)
Questions
- With the aid of a diagram, explain how pricing decisions are made in a monopoly.
- What factors influence the degree of monopoly power a company has within an industry?
- What are the advantages of a monopoly?
- Why would a government want to prevent a monopoly? Discuss the policies a government could implement to do this.
Like most other sectors of the economy, private schools have been significantly affected by the coronavirus pandemic. As with all schools, they have been restricted to providing their pupils with online instruction. In addition, some parents are likely to have seen their ability to pay the high fees private schools charge restricted. As a result of both of these factors, private schools have been forced to look into providing discounts or refunds on their fees. However, the UK competition authority have received evidence that these schools may have been communicating with each other over how they will set these fee reductions. The authority is concerned that this will allow the schools to restrict the discounts and keep their fees higher.
In other markets (see here and here) the competition authorities have been prepared to relax certain elements of competition law in light of the coronavirus situation. However, price fixing is the severest breach of competition law and the Competition and Markets Authority (CMA) has been clear that this continues to be the case in the current climate. A CMA spokesperson said:
Where cooperation amongst businesses or other organisations is necessary to protect consumers in the coronavirus outbreak, the CMA will not take enforcement action. But we will not tolerate organisations agreeing prices or exchanging commercially sensitive information on future pricing or business strategies with their competitors, where this is not necessary to meet the needs of the current situation.
Therefore, the CMA has written to the Independent Schools Council and other bodies representing the private school sector. This letter made clear that communicating over the fee reductions would be very likely to breach competition law and could result in fines being imposed.
This warning is important since the sector has a history of illegal communication between schools. In 2006 the Office of Fair Trading (OFT) (one of the predecessors to the CMA) imposed fines when it discovered that 50 of them, including Eton and Harrow, had for a number of years shared information on the fees they intended to charge. The OFT discovered that this had taken place following evidence obtained by a student who hacked into their school’s computer system. Here the student found information on the intended fees of competitor schools and leaked this information to the press. It is clear that the CMA will keep a close eye on private schools as they react to the ongoing pandemic.
Articles
Questions
- What are the key features of the private school sector? Is this a market where you would expect competition to be intense?
- Why is price fixing the severest breach of competition law?
- Assuming communication between the private schools is eradicated, how would you expect the sector to be affected by the coronavirus pandemic?
Late last year I wrote a blog post describing how the UK Competition & Markets Authority (CMA) was looking into Amazon’s investment in online food delivery company Deliveroo. Through this investment Amazon would become a minority shareholder in Deliveroo and be able to participate in the management of the company.
At this time the CMA had completed its initial investigation and decided that it had concerns about the impact the investment would have on competition. Since Amazon and Deliveroo did not then offer any proposal to address these concerns, the CMA referred the case for a full-blown investigation. They were not expected to make a decision until June. However, earlier this month the CMA announced that they would provisionally clear the investment.
This decision is a result of the impact coronavirus pandemic has had on the UK economy. The lockdown in the UK has seen many of the restaurants Deliveroo previously delivered from temporarily shutting down. In response, Deliveroo has significantly expanded the online grocery store delivery part of its business. Despite this, it appears that overall the pandemic has significantly reduced their revenues. This will clearly have a significant impact on gig economy workers who, more generally, are particularly affected by the current circumstances (see the earlier post on this site).
As a result of the pandemic, Deliveroo informed the CMA that they would go out of business without the investment from Amazon. This is very much in line with wider evidence of the impact the pandemic is already having on businesses. The CMA accepted that without additional funding Deliveroo would exit the market and that under the current circumstances it would be very difficult for them to secure an alternative source of funding. Furthermore, they regarded Deliveroo exiting the market as the worst outcome for competition, with Stuart McIntosh, Chair of the inquiry group, stating that:
This could mean that some customers are cut off from online food delivery altogether, with others facing higher prices or a reduction in service quality. Faced with that stark outcome, we feel the best course of action is to provisionally clear Amazon’s investment in Deliveroo.
The unprecedented circumstances created by the coronavirus pandemic provide a clear justification for the approach the CMA has taken. However, in the long-run there may be adverse consequences for competition. For example, the reduction in competition in online grocery store delivery that the CMA originally feared may materialise. In addition, it will be interesting to see whether the effect the pandemic has on Deliveroo’s business makes it more likely that Amazon will look to fully acquire them.
Articles
Questions
- Distinguishing between the short and long run, how do you think the market would change if Deliveroo were to exit?
- Why do you think it would be difficult for Deliveroo to find alternative sources of funding at the current time?
- What trade-offs would the CMA have had to consider when deciding to clear Amazon’s investment?
The pandemic a year on