Competition is a good thing. It brings new ideas, stimulates innovation and keeps prices low and quality high. By making goods and services more affordable, it can also reduce inequality. But it needs to be fair \u2013 and that is why we need vigilant competition enforcers to make sure that the power held by big companies, many of them global corporations, does not become excessive and that abuses do not happen. How is all this going to be ensured with the UK\u2019s departure from the European Union (EU)?<\/p>\n\n\n\n
Competition policy is already in a state of flux around the world \u2013 and the disruption of Brexit adds extra volatility in the UK. Estimates of soaring corporate profits in the United States over the last 30 years (De Loecker et al<\/a>, 2020), and across the OECD more generally (Calligaris et al<\/a>, 2019), have recently been replicated by the UK\u2019s competition authority, the Competition and Markets Authority (CMA<\/a>, 2020). The CMA analysis suggests that in the UK, competition across the economy may have declined over the last two decades. It finds, for example, that since the global financial crisis of 2007-09, there has been a 6% increase in mark-ups \u2013 the difference between companies\u2019 costs and the prices they are able to charge.<\/p>\n\n\n\n A firm\u2019s power to raise prices (or reduce quality) can be amplified through acquiring or excluding existing and\/or potential<\/a> rivals that could moderate their ability to do so. Competition agencies can block these anti-competitive acquisitions, and punish exclusionary behaviour and collusive agreements, as well as recommending remedies to address other features of markets that prevent, restrict or distort competition.<\/p>\n\n\n\n As a result of these increasing mark-ups and detailed assessments of past enforcement by competition authorities like the CMA (Argentesi et al<\/a>, 2019; Kwoka<\/a>, 2014; Cunningham et al<\/a>, 2020) which also point to a record of policy under-enforcement, there has been a major policy rethink in the UK, the EU, the United States<\/a> and beyond.<\/p>\n\n\n\n In order to address this loss of competition, the CMA has <\/a>recently consulted<\/a> on tougher new merger guidelines, and has adopted a stronger enforcement stance, at least on mergers, such that eight out of the nine mergers it examined in detail in 2020 were blocked, remedied or abandoned (CMA<\/a>, 2021). Proposals for legislative change have also been made by independent experts (Baker et al<\/a>, 2020; Motta and Peitz<\/a>, 2020; Caro de Sousa and Pike<\/a>, 2020; Kwoka and Valletti<\/a>, 2020).<\/p>\n\n\n\n Where competition is lacking, imports may play an important role. Research shows <\/a>that while antitrust enforcement has helped to slow excessive profit growth in non-tradable goods and services, in tradable sectors, competition from imports has been more important in reducing profits (Besley et al<\/a>, 2020). By destroying frictionless trade with the EU, Brexit leaves the UK facing additional non-tariff barriers and isolation in a world in which tariff barriers are rising. For example, the World Trade Organization (WTO) identifies<\/a> that 8.8% of G20 trade is now covered by import restrictions compared with 0.7% after the financial crisis. The OECD suggests<\/a> that trade restrictions in services increased by 30% in 2019.<\/p>\n\n\n\n The tougher stance by the CMA therefore makes a lot of sense: competition policy will have to do more work in the years ahead just to make up for the loss of the useful discipline provided by import competition.<\/p>\n\n\n\n In this context, Brexit creates a number of opportunities. First, it creates the chance to strengthen the EU\u2019s enforcement regime, for example by speeding up and improving the effectiveness of the remedies that are applied when firms behave in an anti-competitive way.<\/p>\n\n\n\n Second, it provides the UK with the chance to continue in its efforts to strengthen merger control. For example, by disregarding the EU Court\u2019s controversial decision to allow further dangerous concentration in mobile phone networks (Centre for Competition Policy, CCP<\/a>, 2020), and taking a tougher line with digital acquisitions such as Google\u2019s recently cleared purchase of Fitbit, which threatens privacy and healthcare markets, according to academics<\/a> and privacy<\/a> experts.<\/p>\n\n\n\n The CMA has proposed taking a tougher approach when assessing acquisitions by dominant digital platforms. Under this plan, it would permit only those mergers where it sees no realistic prospect of harm to consumers. By contrast, at present, if it is unclear whether a merger is likely to harm consumers, then the merger is permitted even if it poses a significant risk. There is no reason why such sensible adjustments could not be made, not only in digital markets, but across the board to offer the same protection to consumers in other markets.<\/p>\n\n\n\n Third, the CMA will be empowered to build on its strong record of challenging mergers such as Siemens\/Alstom, which create national or European champions, even if, under political pressure<\/a>, the EU were to choose to abandon its own impressive record of such challenges.<\/p>\n\n\n\n Fourth, while EU membership never prevented the CMA from examining important emerging concerns such as common ownership (Azar et al<\/a>, 2018), monopsony<\/a> (where a single firm has control of a purchasing market) in labour markets (Naidu et al<\/a>, 2018) or privacy and competition (Valletti<\/a>, 2019), these topics have rarely percolated from academic research to the practice of competition policy. Brexit provides the CMA with an opportunity to rethink its approach and to tackle these issues.<\/p>\n\n\n\n The consequences of doing so might prove to be dramatic for inequality (Ennis et al<\/a>, 2019). Indeed, the UK has already made good progress towards developing a more inclusive competition policy, and so is well placed to adopt recent proposals to add gender inclusive (OECD<\/a>, 2020) and racially inclusive (Slaughter<\/a>, 2021) elements to its policy.<\/p>\n\n\n\n A great opportunity also lies in the ability to experiment with novel approaches, continuing the leadership that the UK has demonstrated with its Open Banking initiative, which developed rules and open API standards that required leading banks to allow interoperability. This allows consumers and small firms to manage their finances more effectively through innovative products designed by smaller \u2018fintech\u2019 firms.<\/p>\n\n\n\n This is important when it comes to digital platforms, where the debate is typically led by big players (like Apple, Facebook and Google) with experienced lobbyists. In contrast, local entrepreneurs, which are much more directly relevant to the UK economy, are unfamiliar with the shaping of policy: these are the voices that need to be heard.<\/p>\n\n\n\n The possibility of progressive divergence that Brexit offers would allow the UK to deliver these reforms even if the recent EU proposals for digital markets<\/a> were to be watered down during the legislative process. At the same time, there are clear risks from going it alone.<\/p>\n\n\n\n In the first place, two sets of standards could result in cost, uncertainty and inefficiency (Vickers<\/a>, 2018). This is clearly not good for business decisions.<\/p>\n\n\n\n Second, there are some global problems, not least with the big digital platforms, that will only be effectively addressed through global cooperation. By surrendering its traditionally powerful influence on EU policies, especially on economic matters, the UK has reduced its ability to shape those solutions. This may make the level of cooperation that is required much more difficult to achieve.<\/p>\n\n\n\n Third, there is the risk that the UK might revert to the types of public interest test on which it relied prior to the Labour government\u2019s decision to strengthen competition policy by introducing the Enterprise Act in 2002. As John Vickers, former director-general of the Office for Fair Trading (a predecessor of the CMA) has said: \u2018The lure of the \u201cpublic interest\u201d, which means different things to different people, should be resisted when it comes to competition policy. That is not because competition is the be-all and end-all. Of course it is not. But making decisions about competition on non-competition grounds is generally a poor way of advancing other objectives\u2019 (Vickers<\/a>, 2018).<\/p>\n\n\n\n Last, and perhaps most dangerously, there is a serious risk that those who would prefer to turn the UK into an unregulated tax haven will use Brexit to attempt to impose the type of lax antitrust enforcement that the United States has suffered for many years. While the EU-UK trade cooperation agreement has been set up to prevent precisely such a prospect, it remains to be seen whether the institutional arrangements it creates are sufficient to protect EU or indeed UK consumers and workers from the risk of such a reckless course of action.<\/p>\n\n\n\n This brings us to state aid and subsidy control. These rules prevent governments from providing unfair advantages such as cheap loans or favourable contacts to favoured domestic companies. In the past, the UK has provided little in the way of selective advantages that distort competition between firms and reduce value for consumers. For example, the country spent just 0.34% of GDP on state aid in 2018, less than a quarter of the Germans, who spent of 1.45% (EU<\/a>, 2019).<\/p>\n\n\n\nWhat opportunities does Brexit bring?<\/h3>\n\n\n\n
What are the main risks?<\/h3>\n\n\n\n
Should the government be allowed to support UK companies?<\/h3>\n\n\n\n
Figure 1: Aid by instruments in current prices<\/h4>\n\n\n