Miguel de la Mano

9 March 2017

OECD MARKET STUDIES WORKSHOP

Why conduct market studies?

COMPASS LEXECON 1

In June 2015 the OECD Secretariat conducted a questionnaire (“Questionnaire”) on Market Studies – Responses encompass 59 jurisdictions.

The vast majority of surveyed authorities indicated that they resort to market studies for multiple purposes.

OECD classified the goals of market studies in four major groups: pre-enforcement, advocacy, information gathering, and ex-post assessment. This classification reveals that market investigations is a

regulatory swiss-knife. A swiss-knife cannot cut very deep.

WHY AUTHORITIES CONDUCT MARKET STUDIES

COMPASS LEXECON 2

MULTIPLE GOALS Goal Description % of

CA

Pre-enforcement

When a market/sector is not functioning well for consumers, but more investigation needed to deciding whether to initiate enforcement action

70%

Pre-enforcement

To support or provide evidence for enforcement action 47%

Advocacy When a market/sector is not working well for consumers but there is no suspicion of a violation of competition law

72%

Advocacy In preparation for intervention in the legislative process (i.e. modify or abolish laws or regulations that affect competition)

57%

Advocacy To support and provide evidence for competition advocacy initiatives 65%

Information gathering

To assess the state of competition in a market/sector, even if no specific competition problem has been identified

67%

Information gathering

To enhance knowledge of a sector or a market 60%

Ex-post assessment

For an ex –post assessment on the impact of the introduction, modification or elimination of a governmental policy, law or regulation on a market.

53%

COMPASS LEXECON 3

OECD questionnaire: competition law enforcement interventions and recommendations to governments for changes to laws, regulations or public policies are the primary outcomes expected from market studies.

PERCEIVED BENEFITS ? 1) BETTER ENFORCEMENT, 2) BETTER REGULATION

COMPASS LEXECON 4

25% of respondents to an ICN survey said that government is required to respond to their recommendations, 14% said that businesses are under a legal obligation to act upon recommendations.

On a scale from 1 (not often) to 6 (very often), most respondents found that their recommendation was implemented at a level of 3 to 4 (72%)

ACTUAL IMPACT? IMPLEMENTATION OF RECOMMENDATIONS

COMPASS LEXECON 5

IF MARKETS FAIL… COMPETITION FAILS

Market Power Economies of scale

Network effects. etc

Information asymmetries

Externalities Public Goods

Consumer biases Bounded rationality

Transaction costs

Agency problems

Regulatory Failure

Political objectives: Redistribution, efficiency, liberty, social cohesion, stability

Legal framework, property rights

Institutional design

COMPASS LEXECON 6

IF MARKETS FAIL… COMPETITION FAILS

Cement Incumbent Taxis

sugary drinks vaccines

Household electricity Personal current accounts

Auditing services Pharmacies

Regulatory Failure

Political objectives: Redistribution, efficiency, liberty, social cohesion, stability

Legal framework, property rights

Institutional design

Health Care Credit rating agencies

COMPASS LEXECON 7

Unclear or unprecise objectives of market studies / market investigations undermine their effectiveness. One goal-one instrument principle.

If the source of the market failure is not identified and well understood it will be difficult to design an appropriate remedy and limit or address the risks of unintended consequences.

If several market failures overlap (or even reinforce each other) the remedy package must contain elements that address each market failure separately but takes into account the overall impact

Prioritisation, investigation or diagnostic tools and remedy design/implementation must take into account exogenous factors and trade-offs.

Multiple goals across jurisdictions limit the emergence of best practices and international convergence

COMPASS LEXECON 8

In the last decade there were several investigations and reviews of the provision of personal and SME banking

– OFT – CMA – The Netherlands – The European Commission – Ireland

EXAMPLE: RETAIL BANKING INVESTIGATIONS - FINDINGS & RECOMMENDATIONS

The OFT (2010): Consumer inertia; Limited information on SME; Barriers to entry to deposits and mortgages segments

The CMA (2014): Information asymmetry between lenders regarding SME; consumer inertia

The Netherlands (2014): switching costs, lack of account number portability, regulatory barriers to entry.

The EU (2007): data sharing issues/negative data, product tying, customer inertia, access to clearing platforms.

Ireland (2005): barriers to switching PCAs

Increase effectiveness of switching service

Ease regulations for credit unions

Enhance coverage and scope of the Deposit Guarantee Scheme

The Netherlands The EU

Ensure credit data sharing partial sharing and non-discrimination

Review credit data sharing

Steps to decreasing switching costs an increase customer mobility

Lower capital and

liquidity requirements to entrants.

Share SME credit data with challenging lenders

Enhance c/a transaction data comparability

Enhance scope and sharing of SME credit data (BoE)

The OFT

Require banks to

share data on SME with Credit Reference Agencies

Require banks to loan price and eligibility indicators on websites

The CMA

Introduce a switching code

Require banks to provide 12-month account records (free of charge)

Promote interest rate awareness and prices charged by non-banks

Ireland

COMPASS LEXECON 9

The focus of the recommendations in the UK, Netherlands, EU and Ireland: –Decrease barriers to customer switching. – Increase scope of gathered and exchanged credit data between

lenders, especially SME.

Customer inertia is an important barrier to competition –However, for example, the CMA did not consider this to be a

sufficiently strong rationale for proposing an intrusive structural remedy.

And yet, progress has been modest

RETAIL BANKING INVESTIGATIONS: SUMMARY

COMPASS LEXECON 10 |

COMPASS LEXECON 11 |

COMPASS LEXECON 12

• The (contingent) taxpayer support to date that benefitted the EU banking sector amounts to 40% of EU GDP (€5.1 trillion in parliamentary committed aid measures) and undermined the solidity of several MS' public finances.

• As a result of their TBTF status, certain banks have an implicit government guarantee. Bond investors are willing to lend them money at lower interest rates than their smaller competitors.

• This is why large banks could pay up to 4% points less for funding than small banks in the wake of the financial crisis, giving them a huge competitive advantage. This made them even larger…

AND WHAT ABOUT TBTF AND RELATED COMPETITIVE DISTORTIONS?

COMPASS LEXECON 13 |

COMPASS LEXECON 14

IN GENERAL TERMS...

Market investigations and market studies are instruments that operates alongside other regulatory mechanisms and competition enforcement.

Allows the authorities to assess whether competition is working well in a given sector or market

• focus on the functioning of the market as a whole rather than on a single aspect of it or the particular conduct of firms within it

• its overarching framework allows the investigation to consider different types of market failure and how they interact.

11 January 2012 Slide 14

COMPASS LEXECON 15

Make markets work better:

- Better regulation: - Corrective regulation (generally ex-ante) to address

different types of market failures - Market design (theory of second best)

- Better competition enforcement - Correct for market power (abuse of dominance, cartels,

vertical restraints, mergers)

YES, MAKE MARKETS WORK BETTER…BUT HOW?

COMPASS LEXECON 16

• Exploitation of excess market power harms consumers but benefits the firms engaging in that conduct

• Other market failures, if not corrected, lead to inefficiencies that harm both consumers and firms (e.g. adverse selection can unravel a market)

• Investigation tools • UK regime: the identification of anti-competitive features in a market investigation

or the imposition of remedies does not mean that market participants are suspected of having infringed the law.

• EU regime: DG Comp is focused on enforcement. Market inquiry is expected to lead to antitrust cases

• Efficiency vs redistribution (or public interest)

TRADE-OFFS

COMPASS LEXECON 17

OBJECTIVE: BETTER REGULATION BETTER ENFORCEMENT

WHO? Sectoral regulator Competition authority

FOCUS? All Market Failures Market power

GOAL? Efficiency, Equality, Access, Social cohesion, plurality etc

Consumer (or total) welfare (i.e. allocative, productive and dynamic efficiency)

TYPE OF INVESTIGATION? Cooperative Adversarial

INFO GATHERING TOOLS? Public consultation, Call for interest Dawn raids, RFIs (fines)

REMEDY POWERS? Structural remedies, Behavioural ( monitoring), Recommendations? (ex-ante)

Fines, Cease and desist (ex-post)

EX-POST Evaluations? Continuous evaluation and adjustments. Trade-offs between goals explicit.

Prices, quality, concentration metrics…

COMPASS LEXECON 18

• Single Market Strategy: a regulatory initiative on a market information tool, which enables it to collect information from selected market players. The aim is to improve the Commission’s ability to monitor and enforce Single Market law.

• Example: discrimination of services recipients by service providers based on their residence/nationality (Art. 20 para. 2 Services Directive). In these cases, it could be difficult for the Commission to obtain the necessary information from the Member State, because the Member State itself might not be able to gather the information (e.g. on pricing algorithms) from the company. On the other hand, the Commission also aims at obtaining information from market players in order to properly design future Single Market policies, e.g. to assess the effects of the Collaborative Economy.

• Most likely, the Commission will refer to Art. 114 or 337 TFEU as possible legal basis for the Single Market information tool.

• Similar tools already exist in other policy fields: In State Aid, the Commission has the power to directly gather information from sources other than Member States, if this is limited to a formal investigation procedure that has been identified as being ineffective and the Member.

SINGLE MARKET INFORMATION TOOL