LawFlash

CMA Consultation on Revised Merger Assessment Guidelines: Status Quo or Codifying Digital Overreach?

November 20, 2020

The UK Competition and Markets Authority published for consultation updated guidelines setting out its approach to analysing mergers on 17 November. The guidelines update the current merger assessment guidelines (CC2/OFT1254), which date back to 2010, in order to reflect developments in the Authority’s approach to merger control and, in particular, its approach to the assessment of mergers in digital markets.

Summary and Key Takeaways

Following the launch of a consultation on proposed amendments to its procedural merger guidelines on 6 November 2020, the UK Competition and Markets Authority (CMA) has now launched a consultation on proposed amendments to its substantive merger assessment guidelines (the Draft Revised Guidelines), which were published by the OFT (the CMA’s predecessor) in 2010. The consultation on the Draft Revised Guidelines will remain open until 8 January 2020.

While many of the proposed updates merely bring the existing guidance in line with the CMA’s current practices, a number of changes are aimed at addressing competition in digital markets. According to the CMA, digital technologies have changed the way goods and services are delivered to consumers and the way that businesses compete. It notes that, while “these changes have not introduced new theories of harm or economic principles in the field of merger control, [they] nevertheless require the CMA to consider carefully its approach to assessment of mergers in such digital markets.” In particular, the CMA refers to the Final Report of the Digital Competition Expert Panel (Furman Report), and the Report on Ex-post Assessment of Merger Control Decisions in Digital Markets (Lear Report), which reviewed and evaluated the CMA’s past merger decisions in digital markets in light of subsequent developments on the market.

It is in that context that the CMA notes that it has largely adopted the findings set out in the Furman Report, and quotes that report’s instruction to the CMA to “address underenforcement in the [digital] sector.” The Lear Report likewise concluded that “[t]here is a concern that merger policy has put too much weight on the risk of incorrect intervention (type I error) compared to incorrect clearance (type II error) when assessing mergers in the digital sector, leading to increased concentration in digital markets.”

These changes sit within a broader context of proposed reforms intended to increase regulatory oversight of digital players in a number of jurisdictions, including the United Kingdom. In the United Kingdom, this drive for reform has resulted in the CMA proposing, among other things, the establishment of an enforceable code of conduct to govern the behaviour of platforms that are designated as having “Strategic Market Status.” Separately, the Furman Report recommended that digital companies designated as having Strategic Market Status should be required to make the CMA aware of all intended acquisitions, and that, in assessing digital mergers, the CMA should move away from the existing substantive test of whether a merger would give rise to a substantial lessening of competition and adopt a new “balance of harms” test.

While the proposed “updates” to the guidance may therefore be presented by the CMA as a mere codification of its existing practice, stakeholders in digital markets will likely see these proposed reforms as part of a larger trend, and perceive the resulting risk of regulatory overenforcement. In addition, given the number of ongoing and potential appeals of CMA merger decisions, including in digital markets, further changes in the CMA’s practice in this area may be expected in the next one to two years.

Proposed Updates

Informed by the above developments and the CMA’s experience of investigating mergers since 2010, the CMA has proposed the updates summarised below.

Greater Clarity on Types of Mergers Liable to Raise Competition Concerns

Merger assessments in the United Kingdom consider how likely a merger is to reduce competition. If a substantial lessening of competition (SLC) is more likely than not to result, a merger may be blocked. In the interests of clarity, the Draft Revised Guidelines contain a nonexhaustive list of certain types of horizontal mergers that are capable of constituting an SLC.

This list includes mergers (1) involving a market leader where the number of significant suppliers in a market is reduced from four to three; (2) involving firms that are close competitors in a differentiated market; (3) where, absent the merger, one of the merger parties would have entered or expanded and could be expected to become a strong competitor; (4) where innovation is a key aspect of competition and the level or pace of future innovation or product development is threatened by a merger; and (5) where the merger prevents effective competition emerging in other markets or services, even if these markets or services are new or nascent at the time of the merger.

The influence of developments in digital markets on this list is clear, with the risk of a merger preventing or inhibiting potential innovation or the emergence of new markets being central to the CMA’s thinking.

The CMA has chosen not to propose the replacement of the current SLC test with the “balance of harms” approach recommended by the Furman Report, which takes into account the scale as well as the likelihood of harm in merger cases involving potential competition and harm to innovation. Such a change is beyond the CMA’s power and would require legislative reform.

Additional Detail on Non-Price Competition

The CMA has noted that in a number of recent mergers, the potential harm to consumers would come not from increased prices, but from a reduction in innovation or the resulting reduction in the range or quality of products. This is particularly relevant in mergers relating to online platforms, where services are offered for free to customers on at least one side of the platform.

Accordingly, the Draft Revised Guidelines include new language to reflect this, and explicitly note the importance of non-price competition, drawing particular attention to the fact that competitive effects may arise even where customers do not pay a monetary price for a good or service.

How the CMA Assesses Evidence

The CMA has sought to clarify (without changing) its position as to the standard of proof it applies in the course of the merger review process, in particular in markets that are characterized by a greater degree of uncertainty. Accordingly, the Draft Revised Guidelines contain a new section, “How the CMA Assesses Evidence,” which sets out the CMA’s position as to the weight it will ascribe to certain types of evidence, and how the interpretation of evidence may be affected by the context in which the evidence was generated.

The CMA notes in particular that, in sectors that are characterized by fast-moving technological and commercial developments, the types of evidence that are available to it may be more restricted, and that in such cases it may place particular weight on evidence such as internal documents, the expected number of competitors after the merger, similarities between the characteristics of the products or services that are under development, and the views and expansion plans of market participants.

Greater Flexibility in Assessment of the Counterfactual

In assessing any merger, the CMA will analyse the prospects for competition in the presence of the merger against the competitive situation in its absence: the counterfactual. The Draft Revised Guidelines make some changes to how the CMA will assess the relevant counterfactual:

  1. The Draft Revised Guidelines clarify that complexity and uncertainty will not mean in themselves that the CMA will assume the pre-merger situation to be the appropriate counterfactual.
  2. The Draft Revised Guidelines acknowledge that the time horizon that the CMA considers when describing the counterfactual will depend on the context. In some markets, relevant developments may not take place for years, while in others a much shorter period of time may be appropriate.
  3. The Draft Revised Guidelines also propose removing the third limb of the current test on the application of the exiting firm scenario. That limb currently requires the CMA to consider what would have happened to the sales of the firm in the event of its exit. The CMA notes that, in practice, it has not applied this limb of the test mechanistically, and that the removal of the limb would bring the test in line with the tests applied in the United States and by the European Commission.

Further Detail on Assessment of Two-Sided Platforms

The CMA notes that the increased prevalence of online platforms has led to the CMA carrying out merger analyses involving two-sided or multi-sided platforms. The Lear Report recommended that competition authorities take a more rigorous analytical approach to such markets, and should not focus their attention on the users’ side of the market but consider all aspects of the market in the round, as choices made by the platform on the various sides are interdependent.

Accordingly, the Draft Revised Guidelines include a new section on two-sided platforms, which outlines the factors the CMA may consider when reviewing such markets, and how network effects and the risk of tipping may influence the CMA’s competitive assessment of two-sided platforms.

Further Clarity on Assessment of Potential Competition

The CMA notes that mergers involving dynamic markets are more likely to raise concerns about a loss of potential competition (e.g., where the merger concerns the acquisition of a target that may be a new entrant or may provide an important competitive constraint in the future).

Accordingly, the Draft Revised Guidelines seek to provide clarity on the CMA’s assessment of potential competition. In particular, the revisions describe two situations in which the elimination of potential competition can occur:

  1. Where a merger involves a potential entrant and there is therefore a loss of the future competition between the merging firms after the potential entrant would have entered or expanded.
  2. Where existing and potential competitors interact in an ongoing dynamic competitive process and a merger could lead to a loss of this dynamic competition.

This reflects the CMA’s recent approach in a merger in the payment services sector, in which it examined the potential competition that the firm being acquired would have offered in the market for omni-channel payment services absent the merger.

De-emphasising Countervailing Factors

Countervailing factors (such as buyer power, entry or expansion by a rival, or efficiencies) may prevent or mitigate any SLC from arising from a merger. However, unlike the current guidelines, the Draft Revised Guidelines do not contain a separate section on countervailing buyer power, and note that, in the CMA’s experience, it is rare for countervailing measures to be the primary reason why a merger is cleared.

Revised Approach to Market Definition as Analytical Tool

Where the CMA finds that a merger may result in an SLC, it is required to identify the market or markets within which an SLC exists. However, the CMA notes that, in many cases, the evidence assessed in the CMA’s competitive assessment that leads the CMA to make an SLC finding could have been interpreted in the same way without having defined the market, and so the value of a formal market definition exercise can be limited.

Accordingly, the Draft Revised Guidelines clarify that there is no need for the CMA’s assessment of competitive effects to be based on a highly specific description of any particular market definition, and that the CMA may take a more simple approach to defining the market.

Conclusion

While many of the CMA’s proposed updates simply bring the existing guidance in line with the CMA’s current practices, stakeholders in digital markets will likely perceive the CMA’s proposed reforms as part of a larger trend intended to regulate more strictly the activities of players in the digital sector. In that context the CMA’s proposals, and the CMA’s express references to the findings of the Furman Report and Lear Report, will be seen as signalling an approach to digital markets that favours regulatory overenforcement over the risk of underenforcement. It is therefore to be expected that these proposed changes will come under intense scrutiny in the course of the consultation period.

Contacts

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Omar Shah