My family and friends do not always show a day-to-day interest in my decision-making role in the UK's merger control regime.
In 2021, I was not asked - over Sunday lunch - to explain the competition concerns I had about the merger of two suppliers of technology for pensions administration. Important though it was for the millions of people with pensions and other investments.
Nor, in 2022, did my mobile light-up when I chaired a group which cleared the London Stock Exchange's acquisition of Quantile - a provider of 'portfolio compression and margin optimisation services'.
A year may go by where merger control decisions are not of any great interest to anyone other than those directly affected by the deal and the specialist competition community, notwithstanding their importance for consumers and the wider economy.
2023 was not such a year. As chair of the inquiry group which prohibited Microsoft's original deal to acquire Activision, I was aware of the considerable degree of interest from the media, the business community and even some of the general public. This year, it is the proposed merger between Vodafone and Three (in which I have no decision-making role) which is attracting attention.
Microsoft / Activision and Vodafone /Three sit alongside transactions such as Sainsburys / Asda, Kraft / Cadbury, Melrose / GKN and Pfizer's attempted take-over of Astra Zeneca, as mergers triggering some degree of public debate.
While merger reviews generally may not be at the forefront of public awareness (one does not see merger control feature in opinion pollsters' lists of major public concerns!) these cases, high profile or not, have an impact on issues that the public certainly do care about such as the cost-of-living and economic growth. That is where the CMA comes in - our job, given to us by Parliament - is to apply statutory tests, and use our skills and capabilities, to defend key economic interests.
Explaining the value of merger control
Given our important public functions and the significant powers we have to fulfil them, it is right that we are ready to explain our work, and the interests it serves. For some parts of the competition regime, the public impact of what we do needs little explanation. Most people understand that businesses meeting in secret to fix prices are - as Adam Smith put it - a 'conspiracy against the public'. It is not hard to see that public wellbeing is served by vigorous enforcement.
Explaining how merger control contributes to the wider consumer good and economic prosperity is more complex. Partly, because M&A is a fairly standard business activity; it is widespread, usually transparent, and can produce a variety of benefits including a more efficient allocation of capital across the economy as a whole. So when we look at a merger, we are intervening in what would normally be considered an area of commercial autonomy.
A merger might affect investment, growth, resilience, national security, employment, regional development or how the UK is perceived internationally. Mergers can hold promise for, or raise concerns about, any one of these issues. And certainly, parties to a merger will make strong claims for the benefits it will bring.
Labour's 2024 election manifesto stated that "sustained economic growth is the only route to improving the prosperity of our country and the living standards of working people" [Footnote 1]. Rachel Reeves, in her first speech as Chancellor, said that the new government would "get Britain's economy growing again" and that there was "no time to waste" [Footnote 2]. It is therefore opportune to ask how competition policy, and in particular merger control, contributes to this growth mission.
For much of the last 45 years, competition policy was a core element of economic policy, with the belief that strong competition enforcement would support productivity, growth and innovation. While other policy instruments were employed to support specific sectors of the economy or places within the UK, these were considered to be complementary to competition policy.
Recent developments - the pandemic, the Ukraine war, advances in technology, increasing focus on climate change, the cost-of-living crisis, and the rise of populist movements sceptical about the benefits of free trade - have prompted debate about whether a more interventionist industrial strategy is needed to protect, shape and grow domestic markets. And, as I mentioned, the new government is committed to developing such a strategy. The UK is not alone in this - commentators have observed what has been described as "a global renaissance of industrial policy"[Footnote 3]. Mario Draghi's report on the future of European competitiveness is the most recent contribution to this debate [Footnote 4].
Many of the measures governments may consider under the banner of industrial policy - such as skills and training, investment in infrastructure and support for research and development - can be part of a coherent framework with competition policy. Competition authorities can contribute positively to the success of these policies by giving advice and, where necessary, undertaking investigations and enforcement activity to ensure the effective working of markets, as we did recently in our market studies on electric vehicle charging and housebuilding. Indeed, the UK's markets regime means that the CMA is exceptionally well equipped to support cross-government, mission led industrial policy; and we are seeing a lot of interest in our cutting-edge market investigation system from other countries keen to better connect competition policy to broader economic objectives.
The role of merger control in supporting national economic missions is perhaps more subtle but equally important. I propose, in the rest of this lecture, to discuss how merger control contributes to policies that support a growing, innovative and resilient economy and the impact of effective merger control on businesses in the UK. I shall consider whether we intervene too much and why we are interested in mergers between non-UK companies. Finally, I shall talk about how we are held to account for our activities.
But first, a caveat. As a competition specialist there is a risk that one sees the entire world through the prism of competition policy. We should not understate the significance of competition policy in driving economic growth, but other policies such as monetary and fiscal policy and trade are critical and there are sectors of the economy that may require more direct government support for markets to thrive. And there are aspects of our national life, such as health and education, which affect economic growth but where market forces will always be subsidiary to other important public goals.
That said, given the extensive academic and historical evidence, it is difficult to see how a productive, growing and innovative economy can be built and sustained without competition policy, including merger control, being an important element in the mix. This is one of the reasons we set up a Microeconomics Unit to conduct economic research focusing on issues of competition, innovation and productivity to support growth in the UK economy.
Why focus on competition?
In our day-to-day work, we apply the test that is enshrined in law - whether a proposed merger may give rise to a substantial lessening of competition and what any reduction of competition might mean for consumers. We consider the potential impact of the merger on the prices consumers might pay, the quality of goods and services they may receive and how they might benefit from innovation.
Although the regime is centred around protecting the competitive process in markets impacted by specific transactions, it has a benefit for the UK economy that is broader, because competition is a major driver of productivity, growth and innovation in the economy as a whole.
The importance of competition for the economy was at the core of the reforms that established the modern merger control regime in 2002. The Blair government policy proposal that formed the basis of the legislation said: "Vigorous competition between firms is the lifeblood of strong and effective markets. Competition helps consumers get a good deal. It encourages firms to innovate by reducing slack, putting downward pressure on costs and providing incentives for the efficient organisation of production. As such, competition is a central driver for productivity growth in the economy, and hence the UK's international competitiveness" [Footnote 5].
So while we apply micro-economic analysis centred on a specific transaction, and what it might mean for competition in affected markets and relevant consumers, the system as a whole has important macro-economic consequences for all people in the UK, businesses and the wider economy.
This critical linkage between decisions on individual mergers and wider benefits to people, businesses and the economy is sometimes overlooked, so let me give an illustration. We recently carried out work in the groceries market as part of our efforts to support consumers and help contain cost-of-living pressures. While we identified some concerns, we found that high price inflation for groceries did not appear to have been driven at an aggregate level by weak competition between retailers. UK consumers benefit from a relatively competitive supermarket sector. That is thanks - in part - to merger control, and the CMA's decision to prohibit the proposed merger between Sainsbury's and Asda in 2019 which we said at the time would lead to increased prices, reduced quality and choice of products for all UK shoppers.
This impact of merger control on the price consumers pay is measurable. We estimate that our decisions on mergers have saved consumers £685 million per year, over the last 3 years. But this is just the direct effect of merger control. What is less measurable, but of broader significance, is the indirect impact on productivity, growth and innovation in the economy as a whole.
Productivity and growth
The link between improved productivity and economic growth is well recognised, recent IMF research concluded that reforms that enhance productivity, including actions to enhance market competition, are key for reviving growth in the medium term.
Competition contributes towards productivity in 3 ways: First, more competitive markets dynamically allocate resources to the most productive and innovative firms. Better firms enter and succeed while the worst firms fail and exit. Second, competition is a disciplining device placing pressure on managers to become more efficient, and third competition drives innovation, not just in new products but in more effective ways of doing business.
In this way competition forces everyone to do better and separates winners from losers - and as a consequence resources get reallocated to more productive purposes.
For many of us, that will be intuitively matched by our own working experience. I know from my time in law firm leadership that the global growth of UK law firms and service innovation reflects the pressure to keep up with, and outdo, competitors, driven by the demands of clients who can choose between rival firms. Firms who manage this process well thrive and expand, others contract and decline.
This is supported by strong empirical evidence. Within-country studies demonstrate a positive relationship between the strength of competition and productivity growth across sectors and cross-country studies suggest that countries with lower levels of product market regulation, enabling stronger competition, tend to have higher levels of productivity growth.
This is not to imply that market regulation is a bad thing. In some markets it is an essential protection and contributes to ensuring fair competition between reputable businesses. The point is that there may sometimes be a trade-off between the extent of protection, and competition and growth.
The focus of merger control is not on targeting productivity directly but on preserving competition itself, measured by benefits to consumers in the form of lower prices, better quality and more innovation. However, the literature strongly suggests that if merger control is effective "in its own terms" in keeping or making markets more competitive, it will also promote productivity.
When we prohibit an anti-competitive merger there is an obvious direct consequence for competition in the affected sector. Effective enforcement also helps ensure that firms which are considering mergers have in mind the potential impact of their transaction on consumers and innovation. In this way merger control boosts competition across the economy and, as the evidence indicates, competition supports productivity. So, merger control at the level of the individual firm is likely to culminate in the improvement of economy-wide measures of performance such as GDP, employment, prices and aggregate productivity [Footnote 6].
Innovation
Helping to ensure competitive pricing is a major function of merger control, no more so than at a time of cost-of-living pressure. Protecting innovation is just as important [Footnote 7]. Economic growth is, after all, more likely to be driven by innovation than by ensuring that prices are closer to marginal costs.
The competitive process incentivises firms to invest in developing products and services to better meet consumer needs: new medicines, diverse forms of entertainment, improved transportation, energy efficient products, more effective production processes and better communication networks, to name but a few.
Two sectors in which the UK has great global strength are life sciences and technology - high growth and high productivity parts of our economy in which innovation is critical to success and where merger control has a role to play in protecting the innovative process and ensuring that the fruits of the process are available to consumers.
Let me describe 3 ways in which a merger might undermine competition in innovation:
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a merger might involve a loss of 'static competition', as where two pharma companies supplying similar drugs, decide to merge
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a merger might involve a loss of 'future competition', where one pharma company buys up another which had been about to launch a similar drug
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and then there is 'dynamic competition'. A pharma company looks over its corporate shoulder and sees another company developing a new generation of drugs. It may not know precisely what competitors are doing but knows that they are doing something that may well affect it down the road. If the incumbent wants to maintain its position it will be strongly incentivised to make investments. A process summed up by Andy Grove, the founder of In
