CMA impact assessment 2020 to 2021

Question 1

Summary

Accepted Answer

The Competition and Markets Authority (CMA) is the UK’s lead competition and consumer authority and its primary duty is to promote competition, both within and outside the UK, for the benefit of consumers. The CMA has a wide range of tools to use in addressing competition and consumer problems including carrying out investigations into mergers and markets, enforcing competition and consumer law, and working with sector regulators. The CMA also has a function to consider regulatory references and appeals.

As part of its performance framework agreement with the Department for Business, Energy & Industrial Strategy (BEIS) the CMA is required to report annually on:

the delivery of a target of direct financial benefits to consumers of at least 10 times its relevant costs to the taxpayer (measured over a rolling 3-year period)
the ratio of direct financial benefits to consumers and costs for its principal tools

In this seventh CMA Impact Assessment, we report on the performance against this target for the financial year 2020/21. As the target is measured as a 3-year rolling average, for 2020/21 the calculation is based on the performance of the past 3 financial years.

For the period 2018/19 to 2020/21, the estimated direct financial benefit to consumers was £7,694.4 million in aggregate, representing annual average consumer savings of £2,564.8 million. The average ratio of direct benefits to cost over the last 3 years was 25.0 to 1. The largest project contributing to this year’s estimates was the Online Platforms and Digital Advertising market study, followed by the work of the COVID-19 Task Force.

Table 1: Estimated average annual CMA consumer savings and costs for 2018/19-2020/21

Area of CMA work	Direct benefits (£m)
Competition enforcement	109.5
Consumer protection enforcement	130.3
Merger control (*)	445.4
Market studies and market investigations	1,879.5
Total benefits	2,564.8
Costs	102.5 (**)
Benefit/costs	25.0:1

(*) The CMA has a duty to investigate mergers that legally qualify for scrutiny. This means that CMA merger control work is demand-led and not discretionary, unlike most other areas of the CMA’s work. Given that the number of qualifying mergers can vary considerably from year-to-year (because of fluctuations in the economic cycle for example), the number of investigated mergers and the direct consumer benefits of the CMA’s merger control work can also vary significantly from year-to-year.

(**) This is total CMA costs (actual spend) minus the costs of the CMA work on regulatory appeals.

The assessment is undertaken by the CMA itself and is reviewed by an external expert. This year the expert was Dr Peter Ormosi of the University of East Anglia (Dr Peter Ormosi is an Associate Professor in Competition Economics at the University of East Anglia). The methodology used by the CMA is based on that developed and used by the Office of Fair Trading (OFT) and the Competition Commission (CC), validated by successive independent academic reviewers and consistent with approaches now regarded by the OECD as international good practice.

Impact estimations are conducted immediately after cases are completed and are, therefore, based only on information available during the case and on assumptions regarding the expected impact of our interventions. On this basis, most of the estimates are considered to be ‘ex ante’ evaluations (In rare circumstances we have used ex post information to improve our impact assessments for some cases). For example, for market studies and investigations the impact estimates capture the expected future benefits of remedies, rather than an ex post assessment of their effectiveness in practice. In general, the assumptions we apply are cautious and, hence, we consider our estimates to be conservative. In order to gain further understanding of the impact of the CMA’s work, we also conduct ex post evaluations for a small subset of cases that help us to critically assess the effects of past interventions, drawing lessons and implications to inform future decision making at the CMA (see examples in Overview of our methodology).

Our estimates exclude the impact of a number of cases where the CMA’s intervention is likely to generate considerable consumer benefits, but these benefits were difficult to quantify in a sufficiently robust manner.

The estimate of benefits excludes the CMA’s compliance work,^{[footnote 1]} international activities,^{[footnote 2]} and regulatory appeals.^{[footnote 3]} In the latter case this is because the CMA’s role is an appellate one rather than being the primary regulator.^{[footnote 4]} The benefits from our advocacy to government are also excluded.^{[footnote 5]}

In addition, the focus on direct financial benefits means that we exclude many important wider impacts of the competition regime. For example, we do not take into account the deterrence effect of our work, such as the deterrence of anti-competitive mergers or of anti-competitive conduct. Evidence from existing academic studies,^{[footnote 6]} previous OFT research,^{[footnote 7]} and ex post evaluations conducted in 2018,^{[footnote 8]} indicate that such deterrence can be significant albeit very difficult to measure precisely. The impact of this deterrence is likely to be particularly strong in the areas of competition and consumer protection enforcement.

Studies also show that increases in competition in a market are often associated with increases in productivity, and that competition policy interventions can, therefore, improve productivity. This impact on productivity is not captured in our impact assessment. In sum, evidence suggests that the direct impact of interventions is only a part of the overall positive impact of the CMA’s work.

Question 2

Overview of our methodology

Accepted Answer

The impact estimates included within this report focus on the direct financial benefits to consumers of the CMA’s work completed over the past 3 financial years. We average the benefits over 3 years to reduce yearly fluctuations in the impact estimates due to uneven caseload^{[footnote 9]} and to reflect the fact that some of our cases take more than 1 year to complete. The direct financial benefits to consumers may include, for example, the direct reduction in prices to consumers or the value to consumers of improvements in quality, service, or information provision following an intervention.

We present estimates of the impact of our work for each of the following areas:

Competition law enforcement
Consumer protection enforcement
Merger control
Market studies and market investigation references (collectively referred to as ‘markets work’ in this document)

For merger control and markets work, the CMA is both the phase 1 and phase 2 authority in a 2-stage process (phase 1 cases being referred to phase 2 where there are sufficient competition concerns to require further, more in depth, investigation). Although the decision makers at phase 2 comprise a group of independent members drawn from the CMA panel (to ensure a transparent and distinct process), the CMA has responsibility for both phases including their resourcing. Where cases have been referred to phase 2, benefit estimates are only made once the phase 2 process has been completed, although both phase 1 and phase 2 costs are part of the impact assessment.

For confidentiality reasons, we do not publish impact estimations for individual cases and projects. However, our estimates have been independently reviewed by Dr Peter Ormosi to ensure that our benefit estimates are reasonable and robust.^{[footnote 10]}

The CMA impact assessment estimates include benefits from cases where the outcome is under appeal at the time of publication of the report. We include these benefits as we consider this ensures the impact assessment is the best estimate of the likely impact of CMA cases at the time of the publication of the report. In addition, this approach also ensures that the benefit estimates are included in the impact assessment at roughly the same time as the costs the CMA incurred in carrying out the case.^{[footnote 11]} This approach may require that subsequent impact assessments are revised to take into account the outcome of any appeals.^{[footnote 12]}

In order to calculate the impact of any case or project, the CMA usually estimates the following components based on information and evidence available from the original investigation:

the size of the affected turnover
the price, quality or other negative effect removed or avoided due to the CMA’s intervention (ie usually increased price, but may be in the form of decreased quality, decreased choice, etc)
the length of time the detriment (eg higher prices) would have prevailed absent the intervention

First, we estimate the annual impact on consumers by multiplying the turnover of the affected goods and services by the assumed price increase that was removed or avoided due to our action. Second, we estimate future consumer savings by multiplying the annual impact by the number of years we believe the detriment to consumers would have prevailed. We discount future accruals of benefits.

Data on the size of the turnover affected by our intervention (referred to as ‘affected turnover’) is usually gathered by the case team as part of its evidence-gathering and can be recalled from the original investigation. To be conservative, the CMA typically applies a narrow definition of the affected turnover by estimating it as the turnover of the directly affected firms. That is, we typically assume that the price of the goods or services competing with those offered by the firm(s) subject to the investigation in the market are unaffected, even though it is likely that, in some circumstances, they would also be affected by our intervention. At other times, where the CMA tackles a sector more widely (for example, through markets or consumer protection work), to estimate the affected turnover we need to make assumptions on the size of the market that is affected by our action (we also accounted for the impact of restrictions related to COVID-19 on the estimates for cases particularly affected by these measures, eg secondary ticketing or airlines).

In relation to the effect avoided or removed due to the CMA’s intervention, where possible, we base our estimations on information collected during the original investigation. This may be, under rare circumstances, information on the actual effect (for example, the price overcharge due to an unfair pricing practice, or the amount refunded to customers after cancellations due to restrictions related to COVID-19), or more frequently, an estimation of the likely effect on consumers (for example, the magnitude of upward pricing pressure resulting from a merger) as assessed by the case teams during the original investigation. Where such information and data are unavailable, we apply rules of thumb that are conservative interpretations of estimated effects and consistent with recent academic research.

Similarly, when estimating the expected future duration of the detriment prevailing absent our intervention, we draw on information collected at the time of the original investigation. As a starting point, we tend to take a default duration value that is based on, but not necessarily equal to, existing international practice and academic research, and we adjust this value where case-specific information suggests this would be appropriate.

Ex ante estimates of impact are based on the best information available at the time of estimation, which is typically when the decision or recommendations have been made but the full impact is not yet observable. In contrast, ex post evaluations are usually more robust and are based on information gathered after the recommendations or remedies have been implemented and the resulting impact realised, often several years after the case has been completed. The CMA commissions independent ex post evaluations on a regular basis in order to consider the effects of enforcement and merger review in key markets.

For example, in 2019 the CMA hired the economic consultancy LEAR to undertake an independent ex post evaluation of past merger cases in digital markets. LEAR assessed potential competition theories of harm in mergers involving major digital platforms, focusing on 4 previous OFT merger inquiries.^{[footnote 13]} The project drew lessons from economic theory and literature on technology markets, and from reviews of past merger decisions in digital markets, to understand whether the CMA should re-think its approach in assessing mergers in digital markets. Other ex post evaluations include an evaluation of the impact and deterrence effect resulting from 5 competition enforcement cases, carried about by the economic consultancy DotEcon and published in 2018.^{[footnote 14]} This review estimated the change in behaviour and competition awareness of firms in industries where the CMA had previously taken enforcement action. The review found that awareness of competition law was higher in both the industry where the CMA took enforcement, and in adjacent industries, than the average across businesses in the UK. It also found that some businesses had modified (or intended to modify) an agreement or commercial initiative as a result of enforcement action in their industry.

In line with central government techniques for discounting future accruals of benefits or costs, we discount future consumer savings by the HM Treasury endorsed Social Time Preference Rate (3.5%).

Under certain circumstances we also need to use the Consumer Price Index to bring the benefits to the price level of the current year. This is the case when, due to the CMA’s investigation, consumers are able to seek redress for any past harm suffered.

Question 3

Consumer savings by area

Accepted Answer

Competition enforcement

The CMA engages in a range of activities aimed at ensuring compliance with the Competition Act 1998 (CA98), including formally investigating and taking enforcement action against anti-competitive practices and using ‘softer’ tools such as providing guidance and targeted compliance initiatives (the benefits from these softer tools are not typically included in the quantified estimate of benefits). Under the Enterprise Act 2002 (EA02), the CMA can also investigate and prosecute individuals for certain breaches.

We estimate that the CMA’s interventions in this area saved consumers at least £328.5 million in aggregate during the financial years from 2018/19 to 2020/21, representing annual average consumer savings of £109.5 million. These figures are based on anticipated price reductions that are likely to follow the break-up of a cartel or the termination of other unlawful conducts.

Our impact figure for the 2020/21 financial year is based on 11 competition enforcement investigations concluded by the CMA in this period. This is a substantial increase from 2019/20 when 3 such cases were concluded. Cases concluded in 2020/21 include, among others, anti-competitive practices investigations involving suppliers of pharmaceuticals,^{[footnote 15]} an anti-competitive agreement among construction firms, and 3 resale price maintenance investigations into suppliers of musical instruments.^{[footnote 16]}

There was an additional competition enforcement case this financial year which may have had significant indirect benefits but that did not contribute to the impact figure. As part of its COVID-19 taskforce, the CMA opened an investigation into the excessive pricing of hand sanitisers. The investigation, which centred around 4 retail pharmacies, did not result in any enforcement action. Its deterrence effect, however, is likely to have been significant, as demonstrated by the DotEcon report on the deterrence effect of competition enforcement cases mentioned earlier.

Consumer protection enforcement

The CMA’s consumer protection enforcement work seeks to change trader behaviour that appears to contravene consumer protection legislation using a range of interventions such as publishing guidance, issuing informal warnings, accepting undertakings under the EA02, or obtaining court orders. All interventions are aimed at protecting consumers, particularly vulnerable consumers, from rogue trading, unfair commercial practices, and other breaches of consumer protection legislation.

The CMA often works together with other organisations, for example Trading Standards,^{[footnote 17]} who are also responsible for consumer protection enforcement and tackling unfair trading practices. It also cooperates with other national authorities within the Consumer Protection Cooperation Network to apply and enforce consumer rights legislation. In our impact assessment, we include consumer benefits resulting from these joint actions, where these have been led or significantly influenced by the CMA, by allocating a proportion of the benefits to the CMA.

For the financial years 2018/19 to 2020/21, the aggregate consumer benefit from relevant consumer enforcement work is estimated to be £391.0 million, giving an average of £130.3 million per year. These benefits may include a reduction in consumer detriment as a result of stopping unlawful practices, or the estimated price impact of the CMA’s interventions, for example as a result of increased transparency and more informed consumer decisions.

The CMA’s COVID-19 Taskforce accounts for the largest part of the 2020/21 impact figure for consumer enforcement. The Taskforce undertook a variety of activities aimed at protecting consumers during the COVID-19 pandemic, including giving advice to consumers, businesses, and government, and taking enforcement action where necessary. Any indirect impacts from the Taskforce associated with providing guidance or from deterrence are not estimated and so do not contribute to the impact figure. Notably, however, several firms signed undertakings with the CMA to refund customers who had to cancel bookings due to the pandemic. Refunds made as part of this undertaking are considered to be a direct impact of the CMA and, as such, do contribute to the estimated benefits.

The 2020/21 figure does not include estimates for a number of consumer cases where we were unable to develop a robust methodology. For example, we did not include estimates for the CMA’s work with the Dutch Authority for Consumers and Markets and the Norwegian Consumer Authority in relation to changes to Apple’s and Google’s privacy policies.

Our estimates, as already noted, do not include the deterrence effect of the CMA’s consumer protection activities, even though we tend to prioritise cases where we expect that changing the behaviour of one business would set an important precedent or have other market-wide implications.

Merger control

The CMA operates both stages of the UK 2-stage merger regime. Businesses can (voluntarily) notify a merger to the CMA and, in addition, the CMA has a duty to keep merger activity under review and can investigate mergers that have not been notified to it. At phase 1, the CMA reviews merger situations falling within its jurisdiction^{[footnote 18]} and refers to phase 2 any cases where there is a realistic prospect of a substantial lessening of competition (SLC) in a UK market. The CMA has the power to accept undertakings in lieu (of reference to phase 2) (UiLs) from the merging parties at phase 1, if these are deemed to address potential concerns identified in the course of its investigations.

At phase 2, a CMA panel of independent members conducts an in-depth investigation to assess if a merger is expected to result in an SLC. If an SLC is expected, the CMA panel decides on the remedies required and can impose remedies by order if it is not able to agree on them with the businesses.

Our estimates of consumer savings in this area include merger proposals amended through UiLs, mergers that are abandoned, and mergers amended or prohibited by the CMA at phase 2.

The impact of phase 1 mergers is scaled down by the SLC rate to reflect the fact that not all cases where the merger parties remedied the CMA’s concern, either through UiLs or abandoning the merger, would have resulted in an SLC at phase 2. The SLC rate is calculated as the proportion of phase 2 mergers completed in the past 4 years which resulted in SLCs after the parties had offered UILs that were rejected in phase 1. This approach is in line with our updated methodology explained in detail in the 2016/17 report. The SLC rate used to scale down the impact of all phase 1 mergers in the 2020/21 assessment is 75% (this is lower than 83% in 2019/20, but greater than 60% in 2018/19).

Using the approach described above, our estimates show that during the past 3 financial years (2018/19 to 2020/21) the merger regime saved consumers £1,336.3 million in total, giving an average of £445.4 million per year.^{[footnote 19]} A substantial portion of the 2020/21 benefits estimates relate to a phase 1 case which was remedied through undertakings in lieu.

The benefits from the UK merger regime are dependent on the cases that come to the CMA for assessment and are, therefore, driven in part by the economic climate and can vary significantly from year to year. They are also dependent on the nature of the mergers being assessed by the CMA in each year. If a given year happens to see a greater number of anti-competitive mergers being proposed and, therefore, prohibited or remedied by the CMA, then the estimated direct benefits of the merger regime will be greater in that year. Our estimates exclude benefits from mergers affecting UK consumers which were reviewed by the European Commission^{[footnote 20]} and, where relevant, take into consideration action taken by other competition authorities.^{[footnote 21]}

Benefit figures for mergers do not include the wider benefits, such as deterrence, of the CMA’s mergers work and the wider merger regime. We would expect deterrence effects to be significant and, therefore, that having an effective merger control regime in itself prevents anticompetitive mergers from being proposed.^{[footnote 22]}

Market studies and market investigations

Market studies are examinations of why particular markets appear not to be working well for consumers and may lead to proposals as to how they might be made to work better. They take an overview of regulatory and other economic drivers in a market and patterns of consumer and business behaviour.

Markets may be referred for a market investigation for further analysis where there are reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK is preventing, restricting, or distorting competition. In estimating consumer savings, we consider the impact of both market studies that have not resulted in a market investigation and completed market investigations. Given the wide variety of projects that our markets work covers, the exact method used to estimate impact differs from case to case. We include ex ante estimates of impact from those projects where the CMA’s recommendations and/or orders are expected to be implemented by the relevant bodies (eg regulators and other government departments) and, therefore, have a positive impact on consumers.

When estimating our impact from any markets project, we also consider how likely the recommendations or orders are to be implemented by the relevant bodies. To account for the uncertainty associated with the market and policy context and, therefore, with the overall effectiveness of the remedies, we use cautious assumptions when estimating the benefits. Moreover, where we think that the proposed remedies may not be fully implemented by the regulators, estimates are further scaled down according to the assumed likelihood of implementation.

We estimate that the direct consumer benefits from the CMA’s interventions through the markets regime were £5,638.6 million in total during the financial years from 2018/19 to 2020/21, giving an average of £1,879.5 million per year.

Two markets cases were concluded in the financial year 2020/21. They were:

the Funerals market investigation
the Online Platforms and Digital Advertising market study

Given a timetable has been set out for implementing the remedies of the Funerals market investigation, we accounted for their impact in the 2020/21 estimates. Similarly, actions have been taken to implement the recommendations of the Online Platform and Digital Advertising. We apportion part of the benefits resulting from these actions to the 2020/21 estimates and this accounts for the majority of the overall benefits from markets work.

The Statutory Audit and Scottish Legal Services Research market studies, which were carried out in 2019/20, have not yet been implemented. For this reason, these cases are not yet estimated as having had any impact within our figures. We shall return to these cases and estimate an impact for them as and when it is appropriate to do so.

Question 4

Costs

Accepted Answer

To ensure that yearly fluctuations in the cost figure which are not reflective of the true cost of running the CMA do not distort the picture for the CMA’s impact, we use a 3-year moving average for total costs. This is consistent with the way in which we report estimated benefits.

For the purposes of calculating the benefit to cost ratio, the total costs of the CMA exclude the costs incurred in fulfilling the CMA’s function with regard to the determination of regulatory appeals as we do not include any benefits from these in the impact assessment.

On this basis, the average annual CMA cost over the financial years 2018/19 to 2020/21 is estimated to be £102.5 million.

CMA impact assessment 2020 to 2021

Summary

Overview of our methodology

Consumer savings by area

Competition enforcement

Consumer protection enforcement

Merger control

Market studies and market investigations

Costs

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Summary

Overview of our methodology

Consumer savings by area

Competition enforcement

Consumer protection enforcement

Merger control

Market studies and market investigations

Costs

Is this page useful?

Help us improve GOV.UK

Help us improve GOV.UK