Tag: CMA

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The CMA fuels concerns over high petrol and diesel prices

The UK Competition and Markets Authority (CMA) has been investigating road fuel pricing in the UK. In July 2022, it launched a study into the development of the road-fuel market over recent years. The final report of this study was published in July 2023 and covered the refining, wholesale and retail elements of the market.

In the retail part of the market, the CMA noted some potential causes for concern: retailer fuel margins had increased; there were geographical variations in pricing; filling stations with fewer competitors tended to charge higher prices; retail prices tended to rise rapidly when oil prices increased but fell slowly when oil prices fell (known as ‘rocket and feather’ pricing patterns); motorway service stations charged considerably higher prices than supermarkets or other filling stations.

In response to these findings, the CMA has been publishing an interim report every four months. These reports give average pump prices and margins. They also give relative average pump prices between different types of retailer, and between each of the supermarkets.

The latest interim report was published on 26 July 2024. It reiterated the finding of the 2023 report that the fuel market has become less competitive since 2019. What is more, it continues to be so. In particular, the range of retail prices and the level of retail margins remain high compared to historic levels. The interim report estimates that ‘the increase in retailers’ fuel margins compared to 2019 resulted in increased fuel costs for drivers in 2023 of over £1.6bn’.

Price leadership

Road fuel retailing is an oligopoly, with the major companies being the big supermarkets, the retail arms of oil companies (such as Shell, BP, Esso and Texaco, operating their own filling stations) and a few large specialist companies, such as the Motor Fuel Group (MFG), the EG Group and Rontec, whose filling stations sell one or other of the main brands. But although it is an oligopoly producing a homogeneous product, it is not a cartel (unlike OPEC). Nevertheless, there has been a high degree of tacit collusion in the market with price competition limited to certain rules of behaviour in particular locations. A familiar one is setting prices ending in .9 of a penny (e.g. 142.9p), with the acceptance by competitors that Applegreen will set it ending at .8 of a penny and Asda at .7 of a penny.

One of the main forms of tacit collusion in areas where there are several filling stations is that of price leadership. Asda, and in some areas Morrisons, have been price leaders, setting the lowest price for that area, with other filling stations setting the price at or slightly above that level (e.g. 0.2p, 1.2p or 2.2p higher). Indeed, other major retailers, such as Tesco, Sainsbury’s, Esso and Shell took a relatively passive approach to pricing, unwilling to undercut Asda and accept lower profit margins.

Things changed after 2019. Asda chose to increase its profit margins. In 2022 it did this by reducing prices more slowly than would previously have been the case as wholesale prices fell. In other words, it used price feathering. Other big retailers might have been expected to use the opportunity to undercut Asda. Instead, they decided to increase their own margins by following a similar pricing path. The result was a 6 pence per litre increase in the average supermarket fuel margin from 2019 to 2022.

More recently, Asda has increased its margins more than other major retailers, making it no longer the price leader. The effect has been to put less pressure on other retailers to trim their now higher profit margins.

Remedies

The 2023 CMA report made two specific recommendations to deal with this rise in profit margins.

The first was that the CMA should be given a statutory monitoring function over the fuel market to ‘hold the industry to account’. In May this year, legislation was passed to this effect. This requires the CMA to monitor the industry and report anti-competitive practice to the government.

The second was to introduce a new statutory ‘open data real-time fuel finder scheme’. This would give motorists access to live, station-by-station fuel prices.

Several major retailers already contribute to a voluntary price data sharing scheme. However, this covers only around 40% of UK forecourts. According to the CMA, it ‘falls well short of the comprehensive, real-time, station-by station data needed to empower motorists and drive competition’. The CMA has thus called on the new Labour government to introduce legislation to make its recommended system compulsory. This, it is hoped, would make the retail fuel market much more competitive by improving consumer information about prices at alternative filling stations in their area.

Articles

CMA reports

Questions

  1. What forms can tacit collusion take?
  2. Why are fuel prices at motorway service stations so much higher than in towns? What is the relevance of the price elasticity of demand to the answer?
  3. What are the main findings of the CMA’s July 2024 Interim Report
  4. What is meant by rocket and feather pricing?
  5. What recommendations does the CMA make for increasing competition in the retail road fuel market?
  6. Find out how competitive retail fuel pricing is in two other developed countries. Why are they more or less competitive than the UK?
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Vetting vets

The Competition and Markets Authority (CMA) is proposing to launch a formal Market Investigation into anti-competitive practices in the UK’s £2bn veterinary industry (for pets rather than farm animals or horses). This follows a preliminary investigation which received 56 000 responses from pet owners and vet professionals. These responses reported huge rises in bills for treatment and medicines and corresponding rises in the cost of pet insurance.

At the same time there has been a large increase in concentration in the industry. In 2013, independent vet practices accounted for 89% of the market; today, they account for only around 40%. Over the past 10 years, some 1500 of the UK’s 5000 vet practices had been acquired by six of the largest corporate groups. In many parts of the country, competition is weak; in others, it is non-existent, with just one of these large companies having a monopoly of veterinary services.

This market power has given rise to a number of issues. The CMA identifies the following:

  • Of those practices checked, over 80% had no pricing information online, even for the most basic services. This makes is hard for pet owners to make decisions on treatment.
  • Pet owners potentially overpay for medicines, many of which can be bought online or over the counter in pharmacies at much lower prices, with the pet owners merely needing to know the correct dosage. When medicines require a prescription, often it is not made clear to the owners that they can take a prescription elsewhere, and owners end up paying high prices to buy medicines directly from the vet practice.
  • Even when there are several vet practices in a local area, they are often owned by the same company and hence there is no price competition. The corporate group often retains the original independent name when it acquires the practice and thus is is not clear to pet owners that ownership has changed. They may think there is local competition when there is not.
  • Often the corporate group provides the out-of-hours service, which tends to charge very high prices for emergency services. If there is initially an independent out-of-hours service provider, it may be driven out of business by the corporate owner of day-time services only referring pet owners to its own out-of-hours service.
  • The corporate owners may similarly provide other services, such as specialist referral centres, diagnostic labs, animal hospitals and crematoria. By referring pets only to those services owned by itself, this crowds out independents and provides a barrier to the entry of new independents into these parts of the industry.
  • Large corporate groups have the incentive to act in ways which may further reduce competition and choice and drive up their profits. They may, for example, invest in advanced equipment, allowing them to provide more sophisticated but high-cost treatment. Simpler, lower-cost treatments may not be offered to pet owners.
  • The higher prices in the industry have led to large rises in the cost of pet insurance. These higher insurance costs are made worse by vets steering owners with pet insurance to choosing more expensive treatments for their pets than those without insurance. The Association of British Insurers notes that there has been a large rise in claims attributable to an increasing provision of higher-cost treatments.
  • The industry suffers from acute staff shortages, which cuts down on the availability of services and allows practices to push up prices.
  • Regulation by the Royal College of Veterinary Surgeons (RCVS) is weak in the area of competition and pricing.

The CMA’s formal investigation will examine the structure of the veterinary industry and the behaviour of the firms in the industry. As the CMA states:

In a well-functioning market, we would expect a range of suppliers to be able to inform consumers of their services and, in turn, consumers would act on the information they receive.

Market failures in the veterinary industry

The CMA’s concerns suggest that the market is not sufficiently competitive, with vet companies holding significant market power. This leads to higher prices for a range of vet services. However, the CMA’s analysis suggests that market failures in the industry extend beyond the simple question of market power and lack of competition.

A crucial market failure is asymmetry of information. The veterinary companies have much better information than pet owners. This is a classic principal–agent problem. The agent, in this case the vet (or vet company), has much better information than the principal, in this case the pet owner. This information can be used to the interests of the vet company, with pet owners being persuaded to purchase more extensive and expensive treatments than they might otherwise choose if they were better informed.

The principal–agent problem also arises in the context of the dependant nature of pets. They are the ones receiving the treatment and, in this context, are the principals. Their owners are the ones acquiring the treatment for them and hence are the pets’ agents. The question is whether the owners will always do the best thing for their pets. This raises philosophical questions of animal rights and whether owners should be required to protect the interests of their pets.

Another information issue is the short-term perspective of many pet owners. They may purchase a young and healthy pet and assume that it will remain so. However, as the pet gets older, it is likely to face increasing health issues, with correspondingly increasing vet bills. But many owners do not consider such future bills when they purchase the pet. They suffer from what behavioural economists call ‘irrational exuberance’. Such exuberance may also occur when the owner of a sick pet is offered expensive treatment. They may over-optimistically assume that the treatment will be totally successful and that their pet will not need further treatment.

Vets cite another information asymmetry. This concerns the costs they face in providing treatment. Many owners are unaware of these costs – costs that include rent, business rates, heating and lighting, staff costs, equipment costs, consumables (such as syringes, dressings, surgical gowns, antiseptic and gloves), VAT, and so on. Many of these costs have risen substantially in recent months and are reflected in the prices pet owners are charged. With people experiencing free health care for themselves from the NHS (or other national provider), this may make them feel that the price of pet health care is excessive.

Then there is the issue of inequality. Pets provide great benefits to many owners and contribute to owners’ well-being. If people on low incomes cannot afford high vet bills, they may either have to forgo having a pet, with the benefits it brings, or incur high vet bills that they ill afford or simply go without treatment for their pets.

Finally, there are the external costs that arise when people abandon their pets with various health conditions. This has been a growing problem, with many people buying pets during lockdown when they worked from home, only to abandon them later when they have had to go back to the office or other workplace. The costs of treating or putting down such pets are born by charities or local authorities.

The CMA is consulting on its proposal to begin a formal Market Investigation. This closes on 11 April. If, in the light of its consultation, the Market Investigation goes ahead, the CMA will later report on its findings and may require the veterinary industry to adopt various measures. These could require vet groups to provide better information to owners, including what lower-cost treatments are available. But given the oligopolistic nature of the industry, it is unlikely to lead to significant reductions in vets bills.

Articles

CMA documents

Questions

  1. How would you establish whether there is an abuse of market power in the veterinary industry?
  2. Explain what is meant by the principal–agent problem. Give some other examples both in economic and non-economic relationships.
  3. What market advantages do large vet companies have over independent vet practices?
  4. How might pet insurance lead to (a) adverse selection; (b) moral hazard? Explain. How might (i) insurance companies and (ii) vets help to tackle adverse selection and moral hazard?
  5. Find out what powers the CMA has to enforce its rulings.
  6. Search for vet prices and compare the prices charged by at least three vet practices. How would you account for the differences or similarities in prices?
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Game over or game on? The Microsoft/Activision merger case concludes

In a recent blog post on this site about the Microsoft/ Activision Blizzard merger, the European Commission had just reached a decision to approve the merger subject to remedies, but the investigations in the USA and UK were still ongoing. Since then, the merger has been approved by competition authorities around the world, including in the USA and UK, and thus the merger has gone through.

However, there were some differences in the way the case unfolded under the regulation of these three competition authorities.

The European Commission’s (EC) decision

The European Commission (EC) was the first to give the merger the green light. The EC’s in-depth investigation revealed concerns about the market for the distribution of games via cloud game streaming services. In particular, the concern was related to the possibility that Microsoft might make Activision’s games exclusive to its own cloud game streaming service (Game Pass Ultimate) and restrict access from competing cloud game streaming providers.

The EC argued that this in turn could strengthen Microsoft’s position in the market for PC operating systems, as Microsoft may have an incentive to limit or reduce the quality of the streaming of Activision’s games on PC’s which do not use the Windows operating system.

Thus, while the merger was approved, this was subject to remedies. These remedies included 10-year licensing commitments from Microsoft, as outlined in the EC’s press release:

These licenses will ensure that gamers that have purchased one or more Activision games on a PC or console store, or that have subscribed to a multi-game subscription service that includes Activision games, have the right to stream those games with any cloud game streaming service of their choice and play them on any device using any operating system.

This type of remedy is called a behavioural remedy and often requires the merging firms to commit to taking particular actions post-merger. Unlike structural remedies (which may for example, require the merging firms to sell off an entire business unit), behavioural remedies often require monitoring and enforcement by competition authorities. The EC argued that the deal, with these behavioural remedies, could strengthen competition in the market for cloud gaming.

The Federal Trade Commission’s (FTC) decision

The FTC, in the USA, had similar concerns to those of the EC related to the cloud gaming market. These were outlined in the FTC’s press release:

[The deal] would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business.

The FTC also argued that when Microsoft had previously acquired gaming content, it had made this content exclusive to Microsoft consoles. This could result in higher prices, and reduced quality, choice and innovation. To this end, the FTC appealed in an attempt to block the deal, but the Court ruled in favour of the deal going ahead.

During this time, Microsoft announced that it had committed to keeping Call of Duty on Sony’s PlayStation after the merger, and this likely contributed towards the court’s decision. Hence, the FTC was unsuccessful in its attempt to halt the merger.

The Competition and Markets Authority’s (CMA) decision

The final hurdle remaining for Microsoft, was the CMA’s approval. As outlined in a previous blog post on this site, the CMA’s phase 2 investigation revealed similar concerns about the supply of cloud gaming services (amongst concerns related to the market for the supply of console gaming services, which were later dispelled), and whilst Microsoft offered some commitments similar to those accepted by the EC, the CMA did not deem these to be sufficient to address its concerns and thus prohibited the merger.

The CMA’s published remedies guidance suggests that the regulator has a preference for structural remedies over behavioural remedies. One of the reasons for this is because of the requirement to monitor and enforce the commitments, and this therefore formed part of the CMA’s reasons for not accepting the remedies. Unsurprisingly, Microsoft appealed this decision to the UK’s Competition Appeals Tribunal (CAT), probably partly driven by the fact that the EC accepted similar remedies to those rejected by the CMA. However, Microsoft and the CMA agreed that if the appeal was paused, Microsoft could propose a new deal.

The new deal: did the CMA make a U-turn?

In August 2023, Microsoft submitted a new restructured deal for the CMA to review. As described by the Chief Executive of the CMA, this deal was “substantially different from what was put on the table previously” and was therefore investigated as a separate merger case under the CMA’s phase 1 processes.

The new deal meant that Microsoft would no longer be purchasing the cloud streaming rights held by Activision. Instead, the cloud streaming rights would be sold to an independent third-party game publisher – Ubisoft. This means that Microsoft will not be in control of the cloud gaming rights for Activision’s gaming content (outside of the EEA), and therefore will not be able to restrict its competitors’ access to Activision’s games, which was one of the main concerns outlined by the CMA based on the initial merger proposal. The new deal also opens up the possibility that Activision’s games will be made available on cloud gaming services that run on a non-Windows operating system.

On 13 October, the CMA approved this deal, subject to the cloud gaming rights being sold to Ubisoft, and some subsequent commitments from Microsoft in relation to its relationship with Ubisoft post-merger, as outlined in the CMA’s final report. However, the Chief Executive of the CMA has emphasised that they are unhappy with the way that Microsoft dealt with negotiating the approval of the merger:

But businesses and their advisors should be in no doubt that the tactics employed by Microsoft are no way to engage with the CMA. Microsoft had the chance to restructure during our initial investigation but instead continued to insist on a package of measures that we told them simply wouldn’t work. Dragging out proceedings in this way only wastes time and money.

What’s next in big tech?

While the merger deal has now gone through, the FTC has recently re-opened its case against Microsoft, which will continue to unfold over the next couple of months until December when the case will appear in Court. This means it is possible that the FTC could attempt to undo the merger, though this would be challenging.

In the tech market more broadly, the CMA has recently launched a market investigation into cloud services. While the focus of this blog post was on cloud gaming, cloud services are now increasingly being used by many businesses. The CMA’s issues statement suggests that a key focus of its investigation will be on the ability for customers to switch between cloud service providers. Microsoft is one of the largest providers of cloud services in the UK, and therefore it is inevitable that it will be under scrutiny. Given all three regulators’ recent efforts to ‘crackdown’ on big tech, this is just one of a series of cases that will be interesting to see unfold.

Articles

Competition authorities documentation

Questions

  1. Discuss the effectiveness of behavioural remedies vs structural remedies for a merger.
  2. Why might the competition authorities have been concerned about the possibility of Microsoft making Activision’s games exclusive to its own cloud game streaming service? Is exclusive dealing always anti-competitive?
  3. Why was the transfer of the cloud game streaming rights to Ubisoft seen as a suitable remedy?
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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.