Post a comment
Print articleTen Years of Evolution and Reform
June, 2007 - John Schmidt
Ten years ago, we would not have been discussing this topic with the Chairman of the then Monopolies and Mergers Commission. Ten years ago, the MMC was a very different animal from today's Competition Commission. Ten years ago, the MMC was largely outside of the daily media spotlight, less transparent and much closer to government.
When in 1998 the MMC was renamed the "Competition Commission" it not only got rid or the old joke of "Why is there only one Monopolies Commission?" but it heralded a much more fundamental reform of the UK's competition law regime; institutionally, procedurally and substantively. In fact, the profile of the Competition Commission has over the past years increased to such an extent that Peter Freeman could be described as the 'visible hand' leading industry.
More than just a new name
The Competition Commission's functions evolved under new primary legislation from that of a largely consultative body advising the Secretary of State to being the main decision maker in most reference cases.
Even though the Secretary of State retains the power of intervention in public interest cases, this is rather residual power and was exercised for the first, and hitherto only, time this year in connection with BSkyB's acquisition of a stake in ITV.
In line with the change of its functions, the composition of the Competition Commission has also significantly changed. While it still reflects the wide spectrum of British business and public life, there is a significant and growing trend towards specialist competition expertise. Past and present Chairmen, as well as Commission members, have had successful careers as specialists in competition law and economics in private practice, industry and academia.
Perestroika
Hand in hand with becoming a decision maker, the Competition Commission became a significantly more transparent and predictable organisation.
While under the previous regime very little, if anything, was published beyond the MMC's reports in individual cases, the Competition Commission is under a statutory obligation to publish a set of published guidelines on how it applies the legislation and runs its cases. The Competition Commission is also under a statutory duty to consult all that may be affected by a decision and to publish information about its investigations.
Over and above these statutory duties, the organisation's approach has also changed significantly, so that it now publishes a significant amount of documentation during an investigation. These include a statement at a relatively early stage in the enquiry of where the Competition Commission sees the issues and, much later in the investigation, a paper on its "emerging thinking".
This provides the parties, interveners and the wider public an indication of the direction in which the Competition Commission is heading. Moreover, as the inquiry unfolds the Competition Commission publishes dedicated working papers on particular issues of an investigation as well as non-confidential versions of the main parties' and third parties' submissions and responses.
Outside of live cases, the Competition Commission also engages to a significant extent in advocacy and debate about competition policy, the way it decides cases and the road ahead and this evening's seminar is a very good example of the Commission's engagement with the users of the system.
A new substantive test
Finally and fundamentally, the legal test on which the Competition Commission now bases its decisions has changed from a rather loosely defined 'public interest test' to a strictly competition based test. This means that the Competition Commission can no longer examine other consumer issues.
It is also fair to say that the UK has led the way in forcing a more significant alignment between competition regimes in Europe and United States by shying away from a dominance based test in merger cases to a substantial lessening of competition based test.
Even looking at the way the competition test is applied, the Competition Commission, has without doubt moved significantly to a more economics based approach. This, in turn, has led to a more rigorous, more coherent and more predictable regime, whether or not we agree with the approach or outcome in particular cases.
Quo Vadis?
One of the natural corollaries of progress and development is the need to pause and, in the spirit of Hume, to test progress that has already been made. In a constantly evolving market it is impossible for the Commission and its fellow competition authorities to remain static.
Below, I have picked up on two points, one substantive and one procedural, upon which we touched in some of questions and discussions during and after the seminar.
Consumer Welfare Test
Even within a strictly competition or economics based approach, the test goes beyond the somewhat facile assumption that a low price always equals competition and a relatively higher price always demonstrates the opposite.
While this might be an appropriate starting point, the effect on prices is only part but not the whole story in assessing consumer welfare. As US Supreme Court Justice Scalia points out in a current case before the court:
"I just don't think that all the customers want is cheap. I think they want other things besides cheap. I think they want service. I think they want selection. I think they want the ability to view goods and so forth. Why do you discount all of those things?"
There might be a temptation on the part of competition authorities to short-circuit the non-pricing aspects of consumer welfare and focus too quickly on the pricing aspects. This should be resisted.
Is the Competition Commission getting the right cases?
The Competition Commission, unlike other competition authorities, does not choose its own cases. It has to await a referral from the Office of Fair Trading or the sectoral regulators. While this arguably ensures a more dispassionate approach by a completely fresh collection of eyes, it brings with it the risk of an imbalance of caseload, particularly in a situation where the threshold for reference has been lowered.
In the merger field, for example, caseload statistics suggest that the UK regime results in an overly high proportion of references where ultimately the competition concerns prove unfounded. More than twice as many UK mergers are referred to detailed examination compared to mergers notified in Brussels and of those that are referred, almost a third more UK cases end up being cleared outright (i.e. without remedies). Moreover, more than twice as many cases are abandoned in the UK following a Competition Commission reference than in Brussels. Given the commitment in terms of resources and management time of a full reference there is a suspicion that a significant proportion of small mergers that are referred tend to be abandoned because of cost considerations.
In respect of market investigations, the Competition Commission itself points out that, given the relatively small size of the markets involved its cases have not so far had a significant effect on UK productivity.
While this is not to say that these enquiries were not useful, it does allow us to pause and ponder on whether there is a need to fine-tune the reference mechanisms in future.
There are a number of other areas that could be debated, such as the approach to remedies, the issue of repeated references in particular industries and absence of reference in other industries, or the question of whether the largely document and submissions based enquiry methodology is still the most appropriate and efficient method of the current type of cases. However, none of this should detract from the significant transformation of the Competition Commission over the past ten years.
Such debates on the road ahead and the sometimes heated arguments on the direction or the speed at which we are travelling should be viewed in the spirit of Hume that:
“Truth springs from argument amongst friends."
When in 1998 the MMC was renamed the "Competition Commission" it not only got rid or the old joke of "Why is there only one Monopolies Commission?" but it heralded a much more fundamental reform of the UK's competition law regime; institutionally, procedurally and substantively. In fact, the profile of the Competition Commission has over the past years increased to such an extent that Peter Freeman could be described as the 'visible hand' leading industry.
More than just a new name
The Competition Commission's functions evolved under new primary legislation from that of a largely consultative body advising the Secretary of State to being the main decision maker in most reference cases.
Even though the Secretary of State retains the power of intervention in public interest cases, this is rather residual power and was exercised for the first, and hitherto only, time this year in connection with BSkyB's acquisition of a stake in ITV.
In line with the change of its functions, the composition of the Competition Commission has also significantly changed. While it still reflects the wide spectrum of British business and public life, there is a significant and growing trend towards specialist competition expertise. Past and present Chairmen, as well as Commission members, have had successful careers as specialists in competition law and economics in private practice, industry and academia.
Perestroika
Hand in hand with becoming a decision maker, the Competition Commission became a significantly more transparent and predictable organisation.
While under the previous regime very little, if anything, was published beyond the MMC's reports in individual cases, the Competition Commission is under a statutory obligation to publish a set of published guidelines on how it applies the legislation and runs its cases. The Competition Commission is also under a statutory duty to consult all that may be affected by a decision and to publish information about its investigations.
Over and above these statutory duties, the organisation's approach has also changed significantly, so that it now publishes a significant amount of documentation during an investigation. These include a statement at a relatively early stage in the enquiry of where the Competition Commission sees the issues and, much later in the investigation, a paper on its "emerging thinking".
This provides the parties, interveners and the wider public an indication of the direction in which the Competition Commission is heading. Moreover, as the inquiry unfolds the Competition Commission publishes dedicated working papers on particular issues of an investigation as well as non-confidential versions of the main parties' and third parties' submissions and responses.
Outside of live cases, the Competition Commission also engages to a significant extent in advocacy and debate about competition policy, the way it decides cases and the road ahead and this evening's seminar is a very good example of the Commission's engagement with the users of the system.
A new substantive test
Finally and fundamentally, the legal test on which the Competition Commission now bases its decisions has changed from a rather loosely defined 'public interest test' to a strictly competition based test. This means that the Competition Commission can no longer examine other consumer issues.
It is also fair to say that the UK has led the way in forcing a more significant alignment between competition regimes in Europe and United States by shying away from a dominance based test in merger cases to a substantial lessening of competition based test.
Even looking at the way the competition test is applied, the Competition Commission, has without doubt moved significantly to a more economics based approach. This, in turn, has led to a more rigorous, more coherent and more predictable regime, whether or not we agree with the approach or outcome in particular cases.
Quo Vadis?
One of the natural corollaries of progress and development is the need to pause and, in the spirit of Hume, to test progress that has already been made. In a constantly evolving market it is impossible for the Commission and its fellow competition authorities to remain static.
Below, I have picked up on two points, one substantive and one procedural, upon which we touched in some of questions and discussions during and after the seminar.
Consumer Welfare Test
Even within a strictly competition or economics based approach, the test goes beyond the somewhat facile assumption that a low price always equals competition and a relatively higher price always demonstrates the opposite.
While this might be an appropriate starting point, the effect on prices is only part but not the whole story in assessing consumer welfare. As US Supreme Court Justice Scalia points out in a current case before the court:
"I just don't think that all the customers want is cheap. I think they want other things besides cheap. I think they want service. I think they want selection. I think they want the ability to view goods and so forth. Why do you discount all of those things?"
There might be a temptation on the part of competition authorities to short-circuit the non-pricing aspects of consumer welfare and focus too quickly on the pricing aspects. This should be resisted.
Is the Competition Commission getting the right cases?
The Competition Commission, unlike other competition authorities, does not choose its own cases. It has to await a referral from the Office of Fair Trading or the sectoral regulators. While this arguably ensures a more dispassionate approach by a completely fresh collection of eyes, it brings with it the risk of an imbalance of caseload, particularly in a situation where the threshold for reference has been lowered.
In the merger field, for example, caseload statistics suggest that the UK regime results in an overly high proportion of references where ultimately the competition concerns prove unfounded. More than twice as many UK mergers are referred to detailed examination compared to mergers notified in Brussels and of those that are referred, almost a third more UK cases end up being cleared outright (i.e. without remedies). Moreover, more than twice as many cases are abandoned in the UK following a Competition Commission reference than in Brussels. Given the commitment in terms of resources and management time of a full reference there is a suspicion that a significant proportion of small mergers that are referred tend to be abandoned because of cost considerations.
In respect of market investigations, the Competition Commission itself points out that, given the relatively small size of the markets involved its cases have not so far had a significant effect on UK productivity.
While this is not to say that these enquiries were not useful, it does allow us to pause and ponder on whether there is a need to fine-tune the reference mechanisms in future.
There are a number of other areas that could be debated, such as the approach to remedies, the issue of repeated references in particular industries and absence of reference in other industries, or the question of whether the largely document and submissions based enquiry methodology is still the most appropriate and efficient method of the current type of cases. However, none of this should detract from the significant transformation of the Competition Commission over the past ten years.
Such debates on the road ahead and the sometimes heated arguments on the direction or the speed at which we are travelling should be viewed in the spirit of Hume that:
“Truth springs from argument amongst friends."
Footnotes: Published as paper for the David Hume Institute, Edinburgh. John Schmidt is a partner with UK law firm Shepherd and Wedderburn +44(0)20 7429 4967 |
