To support the UK government's growth mission and Industrial Strategy, the Competition and Markets Authority (CMA) has today announced the next programme of work to be conducted by economists in the CMA's specialist Microeconomics Unit (MU).
In its recently published Industrial Strategy Green Paper, the UK government noted the importance of "competitive and innovative business ecosystems, particularly in industries with low market dynamism and high barriers to entry" and the need for "competitive markets to improve efficiency and improve the performance of interconnected value chains, ultimately benefiting consumers through better prices, quality, and choice".
The CMA's new MU Growth Programme will focus on critical drivers and blockers of growth including: how easily or not new technology spreads across the economy; the impact of upstream market power on economic performance and supply chain resilience; and how competition impacts investment.
This new work programme follows the CMA's third State of Competition report, also published today.
Sarah Cardell, Chief Executive of the CMA, said:
At a time of tremendous opportunity for the UK, effective competition has a key role to play in driving economic growth, investment, and innovation. That's why the CMA is launching the new MU Growth Programme to help inform the government's growth mission and Industrial Strategy.
This follows our latest State of Competition Report, which indicates that levels of effective competition in the UK have weakened slightly over time, although by less than in other economies, and that levels of business dynamism have fallen. The report reinforces the important role of effective competition enforcement to drive greater business dynamism and sustained innovation, productivity, and growth across the economy.
The CMA's third State of Competition report is the most comprehensive assessment to date of how competition is working in the UK. Today's report reinforces the importance of continued action by the CMA and wider UK government to keep markets open, competitive, and dynamic.
Key findings of the CMA's third State of Competition report include:
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Indicators suggesting levels of competition across the economy have weakened slightly over time, but at a slower rate than some other advanced economies. Markups - the difference between the selling price of a good or service and the amount it costs to make have risen by around 10% in Great Britain over the past 25 years. And the increase in markups is greater among firms that already have higher markups.
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Business dynamism has fallen across all measures, cementing concerns identified in the 2022 State of Competition report - as referenced in the UK government's Industrial Strategy Green Paper. Competition between firms jostling for market share spurs growth, but firm entry and exit rates have declined across most sectors. At the top of most industries, the largest firms are more likely to keep their position over multiple years , while new entrants are less successful than they used to be in displacing them.
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Technology plays an important role in markups. Investment in upfront fixed costs (like research and development, software, and branding) have become increasingly important for firms to compete effectively. As a result, markups in firms making these investments are higher, to cover upfront costs. But where investments in technology create barriers to entry, this can also lead to lower levels of effective competition.
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In an environment where dynamism is falling, and technological change may be benefitting larger firms, effective competition policy - merger control and the enforcement of competition law - is critical to keep market power in check. Competition may be weaker in some 'upstream' sectors, where markups tend to be higher and trade contributes positively to competition - markups are lower in sectors exposed to international trade.
The CMA's MU Growth Programme will focus analysis across a range of issues including:
- barriers to the spread of new technology and knowledge across the economy, recognised in the report as a potential barrier to dynamism and growth
- the role of competition in driving and directing productive investment
- the strength of competition along supply chains, and the impact of 'upstream' market power on downstream sectors - reflecting the importance of competitive markets for key inputs to UK economic performance and resilience
- pro-growth industrial policy interventions, and lessons from past experience and other countries, to help inform the UK government's Invest 2035
Notes
- The previous State of Competition Report was published in 2022.
- Recognising the importance of competition, in 2020 the then Chancellor and the Business Secretary asked the CMA to regularly publish a report assessing the state of competition in the UK economy over the last 25 years, which will continue under the new government.
