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
- Under what circumstances could a merger result in a substantial lessening of competition?
- Summarise the thresholds that have to be met by a potential merger before it is investigated by the Competition and Markets Authority.
- Explain the direct and indirect network effects that exist in the console gaming market. To what extent do they create barriers to entry?
- Outline some different ways that Microsoft could introduce a policy of partial exclusivity for the Call of Duty franchise of games.
- What would be the impact of a policy of exclusivity on the cross price elasticity of demand between Xbox and PlayStation consoles?
- Outline the difference between behavioural and structural remedies for merger.
- Discuss why the acquisition of Activision by Microsoft might reduce competition in the cloud gaming market.
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 online market for food delivery has grown rapidly grown in recent years. Deliveroo was founded in 2013 and has become one of the most recognised brands in this market. It now has a presence in around 100 towns and cities in the UK. In addition to offering customers restaurant cooked meals delivered straight to their homes, Deliveroo also provides a grocery store delivery service, for example in partnership with the Co-op.
Despite Deliveroo’s strong brand, the market leader in online restaurant delivery is actually Just Eat. Just Eat’s business model is built on it acting as an intermediary between restaurants and consumers who can use Just Eat’s website or app to order take-aways. This is in contrast to Deliveroo which also provides the delivery service. This means that Just Eat’s service is more viable in smaller towns. Deliveroo’s other main rival is Uber Eats.
Having been founded in the UK, Deliveroo has subsequently expanded its operations to around 10 other countries. However, this global expansion resulted in Deliveroo making losses of almost £200m in 2017. In part as a result of these losses, Deliveroo decided to look for new investment and by May 2019 had raised £450m. Deliveroo intends to use this money to fund its continued international expansion and to improve the service it provides. This includes growing its delivery-only kitchens business, which enables it to be less reliant on links with traditional restaurants.
Amazon was one of the big investors in Deliveroo, although the exact amount it invested is unknown. Interestingly, both Amazon and Uber have previously made approaches to buy Deliveroo outright. For Amazon this latest move may be a first step before looking to fully acquire Deliveroo.
Despite this not being a full merger or acquisition, it was still investigated by the UK Competition and Markets Authority (CMA). Its remit allows it also to examine situations where an enterprise gains a ‘material influence over the policy of another’. This was the case with Amazon’s investment which, despite only allowing it to become a minority shareholder, enables it to participate in the management of the company.
Last week the CMA announced that it had completed its initial investigation and that it had concerns about the investment. Andrea Gomes de Silva, CMA Executive Director, stated that:
If the deal were to proceed in its current form, there’s a real risk that it could leave customers, restaurants and grocers facing higher prices and lower quality services as these markets develop. This is because the significant competition which could otherwise exist between Amazon and Deliveroo would be reduced.
The CMA has two specific concerns. Firstly, it is worried that competition in online restaurant delivery will be harmed. Amazon had started competing with Deliveroo in this market in 2016 when it launched Amazon Restaurants. However, it shut this down two years later. The CMA uncovered internal documents from Amazon suggesting that it continued to monitor closely this market. Therefore, the CMA believed that Amazon re-entering the market was a distinct possibility and argued that this would be a substantial boost for competition. The CMA’s concern was that its investment in Deliveroo would make this re-entry less likely.
On the other hand, there is a counterargument to the CMA’s which says that Amazon’s entry through investment, even if only at this time resulting in minority ownership of Deliveroo, could itself boost competition. This is an important trade-off the CMA should take into account.
Secondly, the CMA is worried that Amazon’s investment will also harm competition in online grocery store delivery. Here, Amazon and Deliveroo are two of the leading players in the market. The CMA believes that, as the market grows in the future, competition between the two could intensify. However, the investment in Deliveroo would put this in jeopardy.
At the time of writing, Amazon and Deliveroo have five working days to offer proposals to the CMA to address these competition concerns. It will be interesting to see how they respond to the CMA and whether a full-blown investigation follows. If it does, this may eventually lead to the CMA blocking Amazon’s investment.
POSTSCRIPT: Amazon and Deliveroo did not offer a proposal to address the competition concerns and so on 27th December the CMA referred the case for a full-blown investigation.
To be continued.
Articles
Questions
- What are the key features of competition in the online market for food delivery?
- What are the pros and cons of Just Eat’s business model in comparison with Deliveroo’s?
- What are the potential advantages Amazon has over the other players in the online market for food delivery?
The USA has seen many horizontal mergers in recent years. This has turned industries that were once relatively competitive into oligopolies, resulting in lower output and higher prices for consumers.
In Europe, by contrast, many markets are becoming more competitive. The result is that in industries such as mobile phone services, airlines and broadband provision, prices are considerably lower in most European countries than in the USA. As the French economist, Thomas Philippon, states in a Guardian article:
When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper than in Europe. Twenty years later, American free markets are becoming a myth.
According to Asher Schechter (see linked article below):
Nearly every American industry has experienced an increase in concentration in the last two decades, to the point where … sectors dominated by two or three firms are not the exception, but the rule.
The result has been an increase in deadweight loss, which, according to research by Bruno Pelligrino, now amounts to some 13.3 per cent of total potential surplus.
Philippon in his research estimates that monopolies and oligopolies “cost the median American household about $300 a month” and 
deprive “American workers of about $1.25tn of labour income every year”.
One industry considered by the final two linked articles below is housebuilding. Since the US housing and financial crash of 2007–8 many US housebuilders have gone out of business. This has meant that the surviving companies have greater market power. According to Andrew van Dam in the linked Washington Post article below:
They have since built on that advantage, consolidating until many markets are controlled by just a few builders. Their power has exacerbated the country’s affordable-housing crisis, some economists say.
According to research by Luis Quintero and Jacob Cosman:
… this dwindling competition has cost the country approximately 150 000 additional homes a year – all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices.
Thanks to lobbying of regulators and politicians by businesses and various unfair, but just about legal, practices to exclude rivals, competition policy in the USA has been weak.
In the EU, by contrast, the competition authorities have been more active and tougher. For example, in the airline industry, EU regulators have “encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.” Politicians from individual EU countries have generally favoured tough EU-wide competition policy to prevent companies from other member states getting an unfair advantage over their own country’s companies.
Articles
Questions
- What are the possible advantages and disadvantages of oligopoly compared with markets with many competitors?
- How can concentration in an industry be measured?
- Why have US markets become more concentrated?
- Why have markets in the EU generally become more competitive?
- Find out what has happened to levels of concentration in the UK housebuilding market.
- What are the possible effects of Brexit on concentration and competition policy in the UK?
Earlier this week FIFA, the world governing body of football, announced plans to expand the World Cup from 32 to 48 teams starting in 2026. It is fair to say that this has been met with mixed reactions, in part due to the politics and money involved. However, for an economist one particularly interesting question is how the change will affect the incentives of the teams taking part in the competition.
As a result of the change in the first stage of the competition, teams will be play the two other teams in their group. The best two teams in the group will then progress to the next round with the worst team going home. This is in contrast to the current format where the best two teams from a group of four go through to the next round.
Currently, in the final round of group matches all four of the teams in the group play simultaneously. However, an immediate implication of the new format is that this will no longer be the case. Instead, one of the teams will have finished their group matches before the other two teams play each other. This could have important implications for the incentives of the teams involved. To see this we can recall a very famous match played under similar circumstances between West Germany and Austria at the 1982 World Cup.
The results of the earlier group games meant that if West Germany beat Austria by one or two goals to nil both teams would progress to the next round. Any other result would mean that Algeria progressed at the expense of one of these two teams. The way in which the match played out was that West Germany scored early on and much of the rest of the game descended into farce. Both teams refused to attack or tackle their opponents, as they had no incentive to so (see here for some clips of the action, or lack of!).
There is no evidence to suggest that West Germany and Austria had come to a formal agreement to do this. Instead, the two teams appear to have simply had a mutual understanding that refraining from competing would be beneficial for both of them.
This is exactly what economists refer to as tacit collusion – a mutual understanding that refraining from competition and keeping prices high benefits all firms in the market. Much like the fans who had to sit through the farce of a game (you can hear the frustration of the crowd in the video clip linked to above), the end result is harm to consumers who have to pay the higher prices or go without the product.
For this reason governments use competition policy to try to stop situations arising in markets that make the possibility of tacit collusion more likely. One way in which this is done is by preventing mergers in markets where tacit collusion appears possible and would be facilitated by the reduction in the number of firms as a result of the merger. The equivalent for the World Cup would be preventing a change in the format of the competition.
An alternative approach is to tinker with the rules of the game in order to make collusion harder. FIFA seems to have some awareness of the possibility of doing this as it is suggesting that it may require all tied games to extra-time and then a penalty shoot-out in order to determine a winner. Clearly, this would go at least some way to alleviating concerns about tacit collusion in the final group matches because coordinating on a draw would no longer be possible. In a similar fashion, competition authorities can also intervene in markets to change the rules of the game (see for example the recent intervention in the UK cement industry).
Therefore, more generally, the World Cup example highlights the fact that variations in the structure of markets and the rules of the game can have significant effects on firms’ incentives and this can have important consequences for market outcomes. It will certainly be fascinating to see what rules are imposed for the 2026 World Cup and how the teams taking part respond.
Articles
World Cup: Fifa to expand competition to 48 teams after vote BBC News (10/1/17)
How will a 48-team World Cup work? Fifa’s plan for 2026 explained The Guardian, Paul MacInnes (10/1/17)
The Disgrace of Gijón and the 48-team FIFA World Cup Mike or the Don (12/1/17)
Questions
- What is the difference between tacit collusion and a cartel?
- Why does a reduction in the number of firms in a market make collusion easier?
- What other factors make collusion more likely?
- How does competition policy try to prevent the different forms of collusion?
