Since 2005, our monthly publication Agenda (now Agenda in focus) has brought you the latest thinking from Oxera: engaging and relevant insights underpinned by economics as it applies to business, markets, law and regulation. The articles dig deeper into current developments and new insights in economics, supported by contributions from our network of external guest authors. Find out more by exploring our latest articles and extensive archive on this page.
Today algorithms influence all aspects of our lives, from how much we pay for groceries and what adverts we see, to the decisions taken by health professionals. As these tools become increasingly widespread, they pose new challenges to businesses. In order to begin to ‘demystify’ algorithms and AI, we ask: what benefits and risks do they bring to the economy?
In July 2020, the EU General Court annulled the European Commission’s decision that Ireland had granted illegal state aid of at least €13bn to Apple through two tax rulings. The General Court’s judgment in the Apple case was one of the most keenly awaited judgments in the area of state aid. What are the key economic issues raised by the General Court in this case? More generally, how can multinational companies and national tax authorities mitigate state aid risks?
Jessica Fletcher and her fellow protagonists in whodunnit stories, such as Jane Marple and Hercule Poirot, knew the formula: find the motive of the suspect, and you have solved half the crime. Dr Gunnar Niels, Partner at Oxera, discusses how competition authorities sometimes behave as if they were in a detective novel by Agatha Christie or Sir Arthur Conan Doyle, focusing on the intent of the dominant company.
Many firms are facing financial difficulty as a result of COVID-19, and are receiving state support. However, we have not (yet) seen the predicted increase in merger activity. Is it preferable to provide state aid to companies in order to allow them to continue operating, or should we allow these ‘failing or flailing’ firms to be acquired by others? Which is the right tool to use, and could there be more alignment between them?
On 2 June, the European Commission launched consultations on proposals for a New Competition Tool (NCT) and its Digital Services Act package. We look at the proposals for the NCT, drawing on lessons from the UK market investigations regime, and in particular the ability to use market investigations to act more quickly and effectively to remedy competition problems
Many markets involve local or regional competition between firms. Retailers, hospitals, airports, and even funeral directors compete for their customers locally. Empirical techniques for analysing competition in local markets have developed and become more sophisticated over time. But which techniques provide the most accurate assessment? We discuss and compare a range of practical methods that have been used in recent competition cases
Retail payments play an important role in the functioning of modern society. However, they are currently going through a period of upheaval due to changes in technology, consumer behaviour and regulation, and most recently the global COVID-19 pandemic. What are the underlying economics behind retail payment systems, and what are their implications for competition in the sector?
In March, the UK Department for Transport (DfT) published ‘Decarbonising Transport: Setting the Challenge’, a policy paper outlining current and planned policies needed to decarbonise the UK’s domestic transport sector. We provide a commentary on some of the DfT’s strategic priorities—the shift to active and public transport, as well as the decarbonisation of the passenger vehicle fleet. We then discuss some of the wider social implications raised by the proposed measures
Why do consumers become disengaged from effective decision-making, and how can we improve engagement and market outcomes? Amelia Fletcher, Professor of Competition Policy at the University of East Anglia, UK, looks at the latest developments in this fast-moving area, and discusses a number of insights from her recent paper on disclosure and other tools for enhancing engagement
The COVID-19 pandemic has caused large-scale disruptions to the global economy. One consequence is the emergence of commercial disputes following terminations or breaches of contracts during the pandemic. What challenges are likely to arise when quantifying damages in light of COVID-19 in commercial litigation or arbitration proceedings?
On 17 March 2020, the Dutch Trade and Industry Appeals Tribunal (CBb) published its long-awaited verdict on the appeal against the Netherlands Authority for Consumers and Markets (ACM) 2018 finding of joint dominance in the Dutch retail broadband market. Why did the CBb rule in favour of the appellants, and what are the implications of this finding for the regulation of wholesale broadband access in the telecoms sector?
The COVID-19 pandemic has had a major impact on businesses across the world. Many have turned to their insurance providers to claim compensation under their business interruption (BI) insurance. However, even if a firm is covered for financial losses caused by the pandemic, determining the compensation amount is far from straightforward. What are the challenges, from an economic and financial perspective, in determining the compensation for these policyholders?
Since the inception of Bitcoin over a decade ago, trading in cryptocurrencies has exploded. There are now thousands of cryptocurrencies and hundreds of cryptoexchanges to trade on. What is the secret of the few big cryptoexchanges, and is the high number of smaller cryptoexchanges sustainable? We look at the current landscape and competitive dynamics of the fast-evolving cryptoexchange market
Recent merger cases have seen an increased interest in ‘dynamic’ counterfactuals, where the market would have become more competitive in the future in the absence of the merger. What are these recent developments, how can competition authorities take them into account, and how can advisers help to reduce the uncertainty for the merging parties?
The COVID-19 pandemic has had a severe impact on public health, and significant and far-reaching effects across most sectors of the economy. Given the current global travel restrictions, with most of the world’s population living in countries with some form of travel ban or restriction, aviation has been one of the most dramatically affected sectors. What long-term effects will this have on the sector, and what are the implications for economic regulation?
The landscape for retail payments in Europe is going through a period of considerable upheaval due to technological developments and entry by new providers, supported by regulatory changes. What exactly are these changes, and what are their implications for the competitive dynamics and market outcomes in retail payments?
On 3 February Ofgem, the energy regulator for Great Britain, published its decarbonisation action plan to support the UK in achieving net zero carbon emissions by 2050. Outlining Ofgem’s role in facilitating decarbonisation, the plan lists the trade-offs faced and nine actions that the regulator will take. We look at what the plan says and its implications
The Netherlands Authority for Consumers and Markets (Autoriteit Consument en Markt, ACM) has recently published guidelines for online firms and other interested parties, indicating its view on which online business practices are allowed within the boundaries of consumer protection laws— and which are not. Annemieke Tuinstra, Senior Economist in ACM’s Chief Economist Team, discusses the economic and psychological concepts behind the guidelines
What do Google, Mastercard and Amazon have in common with early auction houses or the traditional village matchmaker? One answer is that they are all multi-sided platforms (MSPs). Much has been done in the last decade to try to understand the economics of such platforms. Yet current research is still uncovering new findings about pricing, multi-homing and the competitive dynamics of platforms—some of which can seem counterintuitive
The UK Competition and Markets Authority (CMA) has asked the government for additional powers to investigate firms and intervene more quickly in markets. At the same time, it wants to limit the scope for affected parties to appeal its decisions. Mark Friend, Partner and head of the London antitrust group at Allen & Overy LLP, considers whether the CMA’s arguments for reform are convincing and supported by the evidence from previous cases
There has recently been intense debate about the costs of equity trading market data. Following a consultation and Review Report by the European Securities and Markets Authority (ESMA) on market data in December 2019, we take stock of the debate and clarify the issues raised. We also check the main facts and explain how to assess market data from a public policy perspective
In the decade since the global financial crisis, Western Europe has seen increased calls for changes in the ownership of essential service assets. For example, during the UK’s 2019 general election, the Labour Party campaigned for the nationalisation of key strategic industries such as energy, water and telecoms. We ask how ownership can affect operational incentives and outcomes, and explore the implications for current ownership models and independent regulation
In February 2019, the UK Competition and Markets Authority (CMA) published a major study on consumer vulnerability, which puts vulnerability firmly on the agenda of regulators and firms. Peter Andrews, Oxera Senior Adviser, considers what is driving this focus on vulnerability, what its implications are, and the principles under which the concept of vulnerability would lead to intervention
The distinction between investment, insurance and gambling is an essential one for policymakers and regulators. At the most basic level it is easy to see the differences between these products. But is it possible to extend the theoretical distinctions to more complex products and so give consumers clearer guidance? Fod Barnes, Senior Adviser at the UK Payment Systems Regulator, and previously a Senior Adviser at Oxera, explores the issues
The Italian water sector is undergoing a period of significant change. The sector does not require radical intervention in its ownership structure to improve investment levels and quality standards, but rather a package of measures to improve the management model and enhance independent regulation. How can tariff regulation be extended nationwide, and how can existing industry fragmentation be overcome?
Calls to ‘do something’ about tech giants are getting louder. Some suggest that breaking them up is the best way to go, but such strong intervention is absent from the most developed regulatory proposals seen so far. Taking into account recent prominent reports from (or for) the European Commission and several national competition authorities, what are the main proposals on the table, and are they plausible?
Financial services providers around Europe are subject to clear expectations from regulators regarding conduct risk (or ‘the risk of misconduct’ that can cause poor consumer outcomes or undermine market stability or competition). What are these expectations, and how can providers meet them? In our experience, managing conduct risk requires a new toolkit based on behavioural economics, business model analysis, machine learning, competition economics, and good governance.
What should be the purpose of a firm? To maximise profits or shareholder value, or to pursue wider societal objectives? Professor Julian Franks of London Business School, and Oxera Partner, discusses the roles of trust and implicit contracts in redefining corporate purpose. He looks at changes that may be required in regulated utilities, with a focus on water
The UK Labour Party’s proposal to nationalise core utilities has renewed debate about whether nationalisation is a good or a bad thing. Tim Tutton, Associate at the Centre for Competition Policy (University of East Anglia, UK), takes a different approach. Focusing on the issue of political control, he explores whether lessons can be learned—from both the nationalised era and the privatised era—and how any future (potential) nationalisations might be made to work more effectively than in the past
The EU’s second Markets in Financial Instruments Directive (MiFID II), introduced in January 2018, requires brokers to charge separate fees for trade execution and for research, thereby ‘unbundling’ them. Since these rules came into force, there have been concerns about their impact on the provision of research and, more generally, the development of capital markets. What market failures does the unbundling rule intend to address, and what are its potential unintended consequences?
Statements by politicians about nationalising or intervening in the functioning of regulated industries have attracted substantial media attention in recent times, leading to an increase in political and regulatory risk for regulated industries. A case study focusing on National Grid, the energy transmission company in the UK, suggests that increased political and regulatory risk can affect the valuation of regulated utilities through a combination of lower expected cash flows and a higher cost of capital
The economic and political environment in which competition law is enforced and applied has changed extensively over the last decade. Globalisation and a renewed focus on industrial policy have generated calls for more flexible competition policy. Oxera Partner Sir Philip Lowe reflects on current debates around competition and industrial policy in Europe
In 2015, the European Commission ordered Starbucks and Fiat to each pay €20m–€30m in the Netherlands and Luxembourg, respectively, as their tax arrangements were found to constitute illegal state aid. On 24 September 2019, the General Court upheld the Commission’s Fiat decision, but annulled the Starbucks decision. What were the key economic issues in these cases, and what are the implications of the judgments?
State aid control became a focal point of the Brexit referendum debate in the UK in 2016. In a joint article with Dr Leigh Hancher, Professor of European Law at the University of Tilburg and Special Counsel at Baker Botts (Belgium) LLP, we discuss the government’s proposals for state aid rules in the UK if there is no deal, as well as a number of associated practical challenges
Recent months have seen increased discussion of merger control in Europe. One central question is whether the impact on labour markets should be examined directly, or indirectly in terms of product market concentration. We shed light on the main arguments in this debate, and discuss some of the challenges that would be faced by competition authorities if they were to consider labour markets concentration in their merger assessments
Rolling out very high-capacity networks (VHCNs) across Europe to deal with ever-increasing broadband demands is challenging. To incentivise investment, the European Commission has introduced new conditions relating to co-investment agreements, including a promise (subject to certain conditions) not to regulate SMP operators that enter into an investment agreement with at least one other operator. Peter Culham, Senior Adviser, Felipe Flórez Duncan, Partner, and Michael Weekes, Senior Consultant, ask: is it enough to unlock investment in VHCNs?
Dear reader, Since launching Agenda as a monthly publication in 2005, it has been our ambition to provide you with engaging and relevant insights underpinned by economics as it applies to business, markets, law and regulation.
The deployment of renewable energy technologies looks set to continue to grow. However, it can be challenging to integrate these technologies into existing policy frameworks and energy systems. Renewables have also been prone to legal disputes, as illustrated by recent cases brought against the Spanish government. As such disputes become more commonplace, a range of economic, financial and public policy issues will need to be examined
The recent rise of ecommerce has triggered debate around vertical agreements between suppliers and distributors/retailers. Against this backdrop, is the European Commission’s current Vertical Block Exemption Regulation (VBER) still fit for purpose, or should it be revised? Do its Guidelines on Vertical Restraints (VGL) also need to change? Drawing on Oxera’s response to the Commission’s 2019 consultation, we discuss a few areas where revision and further guidance might be welcome
Ofwat’s July 2019 draft determinations for water companies in England and Wales signal that the regulator is toughening its stance on allowed returns, cost efficiency and performance incentives. Credit rating agencies have provided their own thoughts on what this means for the sector. We go under the bonnet to explore the detail
Early 5G services are being launched in major towns and cities around the world, providing enhanced mobile broadband services to users. However, further investment in new network infrastructure will be required to support widespread deployment of 5G and take full advantage of the technology’s transformational capabilities. Given the significant costs involved, network sharing agreements may be increasingly important. Will this greater industry collaboration have an impact on head-to-head competition? If so, how should this tension be assessed?
Is a market-sharing agreement always an infringement of competition law, or could it be justified on the basis that it generates efficiencies? What analysis and evidence is required to answer this question? These were the questions facing the Hong Kong Competition Tribunal in only the second enforcement action brought before it. We look at the economic analysis that was instrumental in helping the Tribunal to decide the case
When faced with a cost shock—a tax increase or an overcharge following an antitrust infringement, for example—what can a firm do? And how can its actions be measured? Following publication of the European Commission’s guidelines for the assessment of pass-on in an antitrust damages setting, this article takes a wider look at the economic estimation of pass-on
Agreements between firms not to hire each other’s workers have recently come under the radar of competition authorities, particularly in the USA. However, there is a question about whether labour markets come within the remit of competition authorities, and whether it is their role to intervene. If it is, how can tools developed in competition economics help in such cases?
The Chinese payments industry has recently experienced significant disruptions from technology companies Alipay and WeChat. Although consumer preferences and the regulatory environment have played an important part in the success of Alipay and WeChat Pay in China, many factors are also applicable in the European context. With technology companies now evaluating opportunities in the European payments market (most recently, Facebook’s Libra), what can the Chinese example tell us about its likely evolution?
In the EU, support provided by the state to finance projects operating in competitive markets typically needs to comply with state aid rules. However, there may be challenges in structuring project financing from the state in a way that is compliant with these rules. What are the fundamental elements to consider when assessing whether the funding confers an economic advantage on the recipient? What alternative financing structures could be considered?
Flood Re, a pioneering flood insurance levy scheme in the UK, is celebrating its third birthday. Since its launch in April 2016, the scheme has helped over 200,000 households, and is now increasingly looking at how it can help the market to transition to ensure that Flood Re is no longer needed by 2039. Aidan Kerr, Director of Operations at Flood Re, explains the scheme’s history and underlying social purpose
With modern society increasingly relying on large infrastructure projects, we look at the economics and financial considerations that underpin their development and delivery. Three particular aspects are explored: how to finance them, weigh their costs and benefits, and build in effective incentive properties
Investors’ holdings in multiple firms give rise to what is known as ‘common ownership’. Are the strategic decisions of competing firms affected by the presence of common ownership? Albert Banal-Estañol of Universitat Pompeu Fabra, Barcelona GSE and City University of London, and Melissa Newham and Jo Seldeslachts of DIW Berlin and KU Leuven, provide evidence on the impact that common ownership has on market entry, one of the most important strategic decisions that firms make, in US pharmaceutical markets
Until recently, gas was seen in Europe as a complement to renewable energy—i.e. a cleaner (albeit costlier) alternative to coal. Since 2017, opinions have been changing, primarily as a result of stronger evidence on the pace of climate change. Nonetheless, as Sir Philip Lowe, Oxera Senior Adviser, explains, gas will continue to have an important role—albeit this is contingent on future innovation and the roll-out of gas investment, both of which in turn depend on politics and market regulation
Implementing new regulatory standards for remuneration is challenging for the financial services sector. What are the underlying issues, and how can firms deal with them effectively? Peter Andrews, Senior Adviser, and Jonathan Haynes, Senior Consultant, explain the issues and propose some practical tools for firms and regulators
Fairness is emerging as an increasingly important policy goal across sectors. We set out a framework for assessing fairness concerns, and examine the relationship between the aims of competition policy and fairness in current debates. Do the European Commission’s platform-to-business initiative and reputation systems for sharing platforms lead to fairer processes? And do online price differentiation and negotiations between platforms and content creators lead to fair outcomes? What is the role of competition in all of this?
In October 2018 the UK Competition and Markets Authority (CMA) cleared Post Office’s acquisition of Payzone’s bill payment systems business. This was a three-to-two merger in a two-sided market with network effects, but the CMA found that the merger...
Regulators are increasingly looking to firms to ensure that their practices are ‘fair’ in terms of the process followed (e.g. the type of data used) and the outcomes delivered (e.g. which consumers pay more). So, how can boards and senior managers satisfy themselves that practices are indeed fair and in line with their firm’s principles and risk appetite? We present Oxera’s practical framework, which has been used as a tool by senior decision-makers in financial services firms
Equity markets, where investors buy and sell shares, are crucial to the European economy. Regulatory change has opened up competition, leading to more choice and lower trading fees, but also fragmentation and risks to price formation. There is an ongoing debate about the provision of market data services that often overlooks the links between market data services, trading and price formation. How is equity trading functioning from a market design and an end-investor perspective?
On 31 January, Ofwat published its Initial Assessment of Plans as part of the current water sector price control review in England & Wales. Ofwat categorised three companies’ business plans as ‘fast track’, meaning their proposals over 2020–25 are ready to implement. Four companies’ plans were categorised as needing significant scrutiny and substantial rework, and the remaining companies’ plans were categorised as ‘slow track’, needing to undertake further work on their plans. What are the cost-efficiency and finance aspects of this initial assessment?
In competition and follow-on damages cases, courts often hear evidence from two types of witness: factual witnesses (usually from industry) and economic experts. What is the role of each, and how can courts deal with any differences between them? We offer some insight based on work by the founding father of economics, Adam Smith
‘Superstar firms’ are increasingly dominating markets. Network effects may consolidate the position of these firms, but they can also help new entrants to undermine them. In some markets, network effects will both dampen competition ‘within’ the market and spur competition ‘for’ the market. Francesca Arduini, Oxera Analyst, argues that we can employ the framework of evolutionary game theory to derive four key policy insights into this topic
The German government is looking at how competition law can better address abuse of dominance in digital markets. As part of this, an academic study has recommended giving authorities powers to intervene earlier and in additional settings where large platforms or valuable datasets are involved. How can these proposed reforms improve market outcomes while limiting the scope for unintended consequences?
The idea that there has been a widespread reduction in competition across many industries has been widely discussed in recent years by academics, policymakers and the media. But what does the empirical evidence actually say, and what are potential causes and policy options? The Oxera Economics Council met to discuss this topic in November 2018
Where airports do not face effective competition, it may be necessary to introduce economic regulation to protect passengers’ interests. Regulation can help to ensure fair prices, sufficient investment, high-quality service, and efficient costs. At the same time, it is important that regulatory interventions are targeted at areas where competition will not deliver the desired outcomes. With increasing competition between airports, what tools are available to help policymakers decide whether regulation is required?
As government policy, regulation and competition law all aim to make a positive difference for consumers, it is crucial to have a common understanding of what constitutes a consumer benefit. To date, consumer outcomes have been considered mainly in terms of price, quantity, quality, innovation and choice. However, Tim Hogg, Oxera Consultant, argues that advances in technology mean that authorities should consider an additional set of holistic consumer outcomes, including relationships, fairness, truth, and privacy
Does modern economics value the work of men more than women, and if so, what can be done about it? The traditional approach to economics prioritises fee-earning work rather than unpaid housework and caring duties, which are undertaken largely by women. Sarah Long, Partner, Euclid Law, discusses the benefits of incorporating this unpaid contribution into competition law internationally
In the digital services market, platform operators compete for the attention of consumers. However, there are increasing concerns about their degree of market power, which can be difficult to assess using the traditional tools of competition and regulation. As calls for further regulation increase, authorities must ensure that their interventions do not lead to unintended consequences, such as reducing the gains that such platforms bring to society
In commercial disputes and arbitrations, the remedy for a breach of contract may involve awarding damages calculated by reference to the wrongdoer’s profits. This is referred to as negotiating damages (previously, ‘Wrotham Park’ damages), and it can be controversial.
The very real prospect of large proportions of the road fleet being fully autonomous within the next 20 years means we need to capture the implications of this in demand forecasting and appraisals for other modes of transport.
In most countries, financial conduct regulation and competition regulation are undertaken by separate institutions. Yet there are questions about the efficacy of this arrangement, given the results seen in UK financial markets, which can sometimes favour neither consumers nor efficient and innovative firms.
During October and November 2018, the UK and the EU are hoping to agree on the basis for the UK to withdraw from the Union, with the Agreement to be ratified by EU institutions and the UK Parliament before the UK leaves on 29 March 2019. What happens if the UK leaves with no deal in place? In particular, what will be the effect on ports and trade?
On 5 July 2018 the European Commission published draft guidelines to help national courts estimate the share of overcharges ‘passed on’ to indirect purchasers and final consumers of goods affected by a cartel. The guidelines also cover estimation of volume effects, which are the natural counterpart to pass-on. How helpful are these draft guidelines, and how could they potentially be improved?
Common ownership—the simultaneous ownership of equity of two competing companies by the same investor—has been rising steadily. This trend has been largely triggered by increasing institutional investor participation, including index funds owned by asset managers such as Vanguard and BlackRock. However, as highlighted by Oxera Partner, Professor Julian Franks, and Oxera Associate, Professor Vikrant Vig, the rise has been accompanied by an important debate on the potential anticompetitive effects of common ownership
In March 2018 the Court of Amsterdam issued a verdict in a long-running abuse of dominance case involving funda, the largest property website in the Netherlands. The Court found funda to be dominant, but did not consider the company’s discriminatory listing of rival estate agents to be distortive of competition. Dr Gunnar Niels, Partner at Oxera and court expert in the case, describes how this makes for an interesting comparison with Google Shopping and other competition cases involving online platforms
Choosing the right energy mix is a hot topic for many countries around the world. In the UK, for example, the government appears committed to supporting new nuclear capacity; however, sceptics point to the declining cost of renewables as a reason why this commitment may be misplaced. What is the economic case for new nuclear capacity, given the objectives of security of supply, affordability, and decarbonisation?
In June 2018, the US District Court issued its decision to clear the proposed merger of AT&T and Time Warner, following an in-depth investigation and subsequent lawsuit by the Department of Justice (DOJ)—making this the first vertical merger to go to trial in the USA in 40 years. Oxera Partner, Maurice De Valois Turk, discusses the economics underlying the DOJ’s main theory of harm and why did it not convince the court
During October 2018, the UK and the EU are hoping to have agreed on the basis for the UK to withdraw from the Union, with the Agreement to be ratified by EU institutions and the UK Parliament before the UK leaves on 29 March 2019. What happens if the UK leaves with no deal in place?
Regulation of the Italian water sector has undergone profound change over the past decade. The Italian Authority for Electricity and Gas now has regulatory and control functions over water regulation.
Behavioural economics is now used by many competition authorities. A recent study at the across economics, neuroscience and machine learning analyses consumer ‘hesitation’, shedding new light on the limits of their ability to assess information.
Businesses increasingly use consumer data to offer better and more targeted digital products and services. Many of these new business models rely on data to facilitate transactions and generate revenues in a way that was not previously possible. Access to personal data has understandably raised concerns about privacy. Based on a study commissioned by Which?, we investigate the delicate balance between privacy and the value of digital services
In March 2018 the UK government announced a plan to introduce a deposit return scheme for plastic, glass and metal drinks containers in England. Aimed at curbing pollution by stimulating recycling, the scheme will be consulted on later this year, and will bring England into line with many other EU countries that already have such schemes. From a traditional and a behavioural economics perspective, what conditions are necessary in order for these schemes to achieve the intended policy objectives?
Given the approval of the UK government’s National Airports Policy Statement on 5 June 2018, observers may think that the last remaining major obstacles have been removed and the bulldozers are ready to roll in to clear the site for the third runway at Heathrow. But in truth, as Mike Toms, Oxera Director, explains, there are still many hoops to jump through before the project gets off the ground
Is an excess of information hurting competition? Although there are some well-established, economically founded principles for assessing the exchange of information between competitors, the general increase in information availability in the digital economy presents new challenges. We revisit the economic principles that can be used to understand the likely effects, both beneficial and malign, of information sharing, and how competition authorities could react to these trends
Many banks make capital allocation decisions using the same profitability hurdle rate for all business units. Does that matter? We look at how this practice could lead to distortions at the business unit level, with potentially important consequences for shareholders, competitors and consumers
The UK government is finalising its review into the future of telecoms infrastructure, which has included a call for evidence on market and policy models to support the necessary investment. Simon Pilsbury, Regulation Director at TalkTalk Group, one of the UK’s largest broadband providers, looks at the policy agenda that the government and Ofcom should adopt in order to stimulate ultrafast broadband investment across the UK. This follows an Agenda article in April 2018 on the same topic from BT’s perspective
This article was nominated for the 2019 Antitrust Writing Awards. In light of recent accounting scandals, there are widespread calls for the UK competition authority to re-examine the audit market. Yet spending a substantial amount of resources on a market...
Recent transactions involving the merging of wholesale and retail activities (most notably the Tesco/Booker merger and the Co-op/Nisa merger) have led the UK Competition and Markets Authority (CMA) to introduce a new framework for assessing vertical mergers. What is the framework of analysis of these cases, and how can the vGUPPI tool be used in the context of grocery mergers?
On 8 May, the High Court in London issued a judgment on the Signia Wealth v Vector Trustees Limited case. Mr Justice Marcus Smith determined that the fair value of the 49% stake in Signia Wealth owned by Ms Nathalie Dauriac (represented by Vector Trustees Limited) was £790k—in sharp contrast to the £21m claimed by Ms Dauriac. This valuation decision provides an important precedent on the choice of the appropriate valuation method and the importance of taking into account relevant contractual terms in the valuation exercise
When does price discrimination by a dominant firm amount to an abuse? Is the mere existence of a price difference sufficient? A recent ruling by the Court of Justice of the European Union (CJEU) provides some guidance on these questions, highlighting the ability to distort competition as a key criterion for a finding of abuse. Taking an economic perspective, we look at the CJEU’s approach and consider the implications for other cases of discrimination more broadly
The UK is experiencing a backlash against the liberal orthodoxy of utility regulation of ten years ago, which was based on privatisation, competition and deregulation. A recent Agenda article on the legitimacy of sectoral regulation in the UK asked ‘Is it policy, ownership, industry structure, governance, financing or regulation that is driving the problem?’ Martin Cave, Visiting Professor, London School of Economics, provides his perspective
The Future Telecoms Infrastructure Review by the UK Department for Culture, Media and Sport (DCMS) is investigating ‘what longer term changes could be made to market structures and policy frameworks to encourage investment’, and is aiming to reach initial conclusions in the summer. In the spirit of open and constructive debate, Emily Clark, Chief Economist at BT Group, sets out BT’s emerging thinking on what UK policymakers can do to support investment in ultrafast broadband networks across the UK
How does the presence of consumer protection affect decisions at retirement? Oxera undertook a behavioural experiment for the UK Financial Services Compensation Scheme (FSCS) to understand the role of FSCS protection—in both how consumers select their retirement income products, and whether they choose to obtain financial advice. This revealed how people behave in a realistic environment, providing insight into actual consumer behaviour and the importance of the FSCS in their decision-making
Are patent settlement agreements in the pharmaceutical sector an infringement of competition law by object? Could they be an infringement by effect? The March 2018 judgment of the UK Competition Appeal Tribunal (CAT) on the paroxetine case, which referred these key questions to the Court of Justice of the European Union (CJEU), sheds some light on the matter. What can we learn about both the judgment and the questions in light of the growing economic literature on patent settlements?
UK regulated utilities are facing the tightest scrutiny that they have experienced in years. A tit-for-tat battle between the two main political parties in proposing changes to address public concerns has culminated in the Labour Party proposing renationalisation and the Conservative Party greater regulatory supervision. So what is the regulatory outlook for customers, companies and their investors in the context of the renationalisation agenda and other recent developments?
In the UK, complex decisions by economic regulators for their respective sectors are reviewed and appealed according to bespoke regimes, and decided by specialist bodies such as the UK Competition and Markets Authority (CMA). Dr Gavin Knott, Director (remedies, business and financial analysis) at the CMA, looks at the current appeal regimes and how they might develop in future
In 2017 the European Commission imposed a record €2.4bn fine on Google for abusing its dominant position in online search by giving preferential treatment to its own comparison shopping service. Such complex cases of leveraging of market power also arise in other digital markets, and raise several questions. How should competition authorities weigh benefits to consumers against harm to competition and competitors? How can competition concerns be remedied without affecting incentives to innovate?
In February 2018 the European Commission published draft guidelines on determining significant market power (SMP) in electronic communications markets. This is one of several policy developments in the regulation of these markets, which are increasingly oligopolistic rather than monopolistic. What are some of the new (and old) issues raised by these developments?
The German federal network agency (Bundesnetzagentur, BNetzA) has determined the preliminary productivity factor X (Xgen) for gas networks in Germany—as in RPI - X (or CPI - X). The Xgen ensures that gains from technological progress and changes in input prices are passed on to final network customers via lower prices for network services. How was the Xgen determined? Why does it matter? And what lessons can be drawn?
Investment banks face potential conflicts of interest when conducting initial public offerings (IPOs) of shares, as they provide services for both issuing firms and buy-side investors. Tim Jenkinson and Howard Jones of the Saïd Business School, University of Oxford, and Felix Suntheim of the UK Financial Conduct Authority (FCA), use data gathered as part of the FCA’s market study into investment and corporate banking to shed light on the extent to which conflicts of interest drive allocation decisions
Cat videos have won the Internet—Grumpy Cat, Nyan Cat and Keyboard Cat fill our social media feeds. Why do people create these videos? What motivates them, and how does the cat video market work? Equally, why do we watch videos of cats rather than watching perceived higher-quality content such as opera or learning a language online?
The current power generation shift from carbon-intensive energy sources towards carbon-neutral, intermittent sources such as wind and solar continues to be a priority throughout the EU. This transition has consequences for the efficient design of power markets. Jan Bouckaert, Oxera Associate and Professor of Economics at the University of Antwerp, and Geert Van Moer, PhD Fellow of the Flanders Research Foundation, and University of Antwerp, discuss recent research on the implications for investments in conventional power plants
In December 2017 the European Commission published Oxera’s ex post assessment of the impact of state aid on competition, a study that could have significant implications for future state aid control. We first developed an economic framework that the Commission can use in state aid assessments to evaluate the competitive effects of the aid. We then applied the framework in four case studies, providing insights into the main drivers of the impact of aid on competition
There are growing concerns about large corporations dominating markets and economies, and calls on competition authorities to take a tougher stance on mergers and acquisitions. Are these concerns any different from those about large trusts a century ago, and those about conglomerates in the 1960s and 1970s? Does merger control require radical reform? Dr Gunnar Niels, Oxera Partner, shares some views
Are there good reasons for manufacturers to prevent retailers from distributing their products through third-party online platforms? On 6 December 2017, the European Court of Justice delivered a ruling on Coty, finding that, under certain conditions, manufacturers of luxury brands can restrict sales through particular online channels without raising competition concerns. What is the economic case for and against such restrictions, and is the Court’s judgment consistent with the economics?
On 13 December 2017, Ofwat published its final methodology for how it will set prices for water companies in England and Wales from April 2020. This follows a consultation paper issued in July. In the final methodology, many of the policy decisions remain the same. However, Ofwat has now provided an initial view on the cost of capital. We look at this and other changes in its approach
The passing-on of overcharges is a recurrent theme in competition law infringement cases. As purchasers further down the value chain are often affected by overcharges, contracts between direct and indirect purchasers are an important driver of this passing-on, and therefore the quantification of damages claims. Professor Markus Reisinger of the Frankfurt School of Finance & Management sets out how different forms of vertical contracts—and vertical restraints in general—affect who absorbs harm from antitrust infringements
A variety of new and old companies are looking to invest in space applications. From space tourism to on-demand meteor showers for that special occasion, entrepreneurs and investors are trying to understand the economics of space. Investing in space technology is costly and uncertain, but has the potential to generate large economic gains, such as those enabled by GPS technologies, satellite photography and earth observation. What could possibly go wrong? Let’s explore that final frontier…
In the EU, state intervention to assist firms in financial difficulty is often justified by demonstrating that the aid is compatible based on the European Commission’s Rescue and Restructuring Aid Guidelines. However, these Guidelines impose restrictions on firms’ activities, which can tie the hands of the beneficiary, limiting the options to ensure a return to financial viability. But can state intervention be justified on commercial grounds by focusing on the state’s overall portfolio of assets?
Richard Thaler has been awarded the 2017 Nobel Prize for his contributions to behavioural economics. His work on mental accounting, self-control and ‘nudging’ are stand-out achievements. Thaler’s work from the late 1970s to the present day reflects a combination of collaboration and determination, and has affected government and regulatory policy around the world
Competition policy and regulation are increasingly focusing on fair pricing, and various tests have been developed for assessing when prices are excessive or unfair. Do these tests differ in the case of intellectual property? And how have they been implemented in recent cases concerning copyright and standard essential patents?
The European aviation sector has evolved rapidly in recent years, with low-cost carriers (LCCs) and super connectors flourishing in particular. What effect do these changes have on competition between airports and on the competitive landscape in which they operate, and what do they tell us about a ‘new normal’ for European airports?
On 6 September 2017, the Court of Justice of the European Union (CJEU) published its widely anticipated judgment on the Intel case. It set aside an earlier General Court ruling that upheld the European Commission’s previous €1.06bn fine on Intel for abuse of dominance in the chip market. The judgment confirms the importance of analysing economic effects in cases involving exclusivity rebates to customers
Proposals by the European Commission to reform the regulatory framework for electronic communications services are under debate in the European Parliament. Meanwhile, national regulators are requesting new regulatory tools to tackle more concentrated ‘oligopolistic’ market structures emerging across Europe. Are their requests justified?
In July 2017, Ofwat, the economic regulator of the water industry in England and Wales, published its eagerly awaited consultation on the methodology for the 2019 price review of the sector (PR19). The key message? Across virtually all areas, things will be tougher for companies than at the previous review
What are the implications for ports and logistics companies of different scenarios for the future EU–UK customs agreements? Oxera Partner, Andrew Meaney, highlights the urgent need for a policy framework within which industry and civil services can develop solutions that fit both EU- and UK-based importers and exporters of goods
In July 2017, Oxera and CESS published the results of an experiment to identify the effectiveness of different summary cost metrics (information about total costs) in aiding consumer selection of income drawdown pension products. The study, commissioned by the UK Financial Conduct Authority (FCA), shines some light on how consumers respond to cost metrics and how, in this case, simplicity is not necessarily the most effective approach
Across the UK, large towns and cities are suffering from deteriorating air quality and chronic levels of traffic congestion, which affect public health as well as the economy. Robert Montgomery, former Managing Director of UK Bus at Stagecoach Group plc, and Matthew Shepherd, Oxera, explore how public transport can provide a solution to these problems, and consider the role of bus partnerships
The 2014 EU Directive on Private Enforcement aims to make it easier for parties affected by antitrust breaches to demonstrate the harm suffered. The Directive required member states to implement the new enforcement regime by the end of 2016 and on 12 June 2017 Belgium transposed it into Belgian law. Dr Christian Huveneers, Assessor at the Belgian Competition Authority and Oxera Associate, discusses the implications
Competition authorities have historically pursued very few cases against excessive pricing. This seems to be changing. In the past 12 months, the rules on abuse of dominance have been invoked to tackle high prices in a range of markets, including pharmaceuticals, musical works, and patents. Together with increased political calls for fairness to consumers, does this mean a revival of excessive pricing in competition law?
Social mobility: social justice or economic imperative? Even modest increases in social mobility in the UK could yield significant improvements in productivity, according to pro-bono research conducted by Oxera on behalf of the Sutton Trust. Our findings on the impact of social mobility on productivity are set out here
The UK Labour Party’s 2017 manifesto contains a proposal to renationalise some of the UK’s largest networks—electricity, gas, rail and post. Mike Toms, Non-Executive Director of Oxera, shares his reflections on this policy, which has risen in significance due to the recent growth in support for the Party
The digital revolution has led to a significant growth in companies’ ability to capture, store and analyse data about their customers, competitors and the wider world. Increasingly, companies are using this information to develop algorithms that set prices for them. But how might the automation of pricing through algorithms affect competitive outcomes in markets, and result in different consumers being charged different amounts for the same good or service?
On 6 April 2017, the European Commission and ten national competition authorities published a joint report on the online hotel booking sector. The report’s primary focus was the impact on prices and commission rates of the removal of parity or ‘most-favoured-nation’ (MFN) clauses in European countries. The results were not as conclusive as some economists and lawyers expected. Why might this be, and what’s next for MFN clauses?
The ease of international transfers is a central element of the EU banking system. So how is the UK’s forthcoming exit from the EU likely to affect investors, employees and customers of banks? Oxera Partner, Dr Luis Correia da Silva, looks at the areas that are likely to be affected and the scale of the impact
As the European mobile market continues to experience high growth in customer usage of data services, but at best stagnation of revenues, how should mobile mergers be analysed? Marc Lebourges, Europe and Economics Regulation Director at Orange, follows his 2014 Agenda article by looking at these developments and the current situation for mobile operators. The article responds to the February 2017 Agenda article, ‘Mergers and innovation: fewer players, more ideas?’
11 April 2017 saw the UK Competition and Markets Authority (CMA) clear Mastercard’s acquisition of VocaLink, the formerly bank-owned company that runs a large part of the payment infrastructure in the UK. This was one of the few cases in the UK that has received Phase 1 clearance with non-structural undertakings. This article gives an overview of the CMA decision and some of the lessons from it
In 2016 Dorothy Gibson made legal history by being the first representative to bring an action for competition damages under the UK’s new ‘opt-out’ collective proceedings regime. What can that case, which was ultimately withdrawn in May 2017, tell us about the economic and legal issues that will be central to these new class actions in the future?
Traffic is affected by the decisions travellers make. How does the framing of information and incentives affect travel decisions, and when are interventions most likely to influence long-term behaviour?
If applied correctly, conjoint analysis can be a powerful tool in merger cases, as it can overcome the artificial nature of hypothetical ‘what-if’ questions. The Netherlands Authority for Consumers and Markets (ACM) has used this survey technique in six merger cases to date. Marinus Imthorn, Ron Kemp and Ivo Nobel of the ACM illustrate how it can be used effectively to estimate customer behaviour, and share some lessons from their experience
While the price of a Toblerone bar has not changed in recent years, its size has—between 2009 and 2010, a standard bar became 30g lighter (from 200g to 170g), and by 2016 it had shrunk to 150g. What factors lead a firm to pass on a cost shock by changing the size of a product rather than its price? And what effect does this have on consumers and inflation statistics?
Political manipulation of voters is nothing new. However, ‘post-truth’ politics arguably takes matters to a new level. Behavioural economics has developed a framework for examining how people can be deceived in markets and whether the market corrects for this. So how might behavioural economics and ‘post-truth’ be regarded as two sides of the same coin? We examine ways in which people can be manipulated through deception—and the potential remedies
The German Federal Network Agency (Bundesnetzagentur, BNetzA) is currently determining the general productivity factor (Xgen) for all electricity and gas networks in Germany. This factor is intended to reflect the productivity gains that an efficient network operator would be expected to achieve as a result of technological progress or cheaper inputs. In a project for Germany’s utility association, BDEW, Oxera used advanced methods to calculate a general productivity factor for German energy networks of around 0%
Cross-subsidies, where one group of consumers pays a higher amount so that the price paid by another group can be reduced, are common in many markets. But the practice may raise concerns about whether firms are exploiting those consumers who pay more, and can lead to calls for competition authorities or regulators to intervene. How might we assess whether cross-subsidies represent a problem? We look at examples from the consumer credit sector
The EU General Court has aned the European Commission’s decision to block the UPS/TNT parcels merger. The Court was concerned that the parties were not given access to the final version of the Commission’s econometric model. This case highlights the importance of transparency in relation to economic evidence—not only from the merging parties, but also from the competition authorities
One of the biggest shake-ups in the English water sector will take place on 1 April 2017, when non-domestic customers—including businesses and public sector organisations—will be able to choose their retail supplier. But is the sector prepared? Will market opening be a ‘big bang’ or a slow-burner? And will companies play by the rules?
Executive compensation is an issue that all companies need to take seriously. The ‘extortionate’ levels of executive pay, seemingly disconnected from performance, have led to public distrust of business. Indeed, Donald Trump’s victory in the USA and the UK’s Brexit vote were, in part, protests by ordinary people against an out-of-touch elite. Alex Edmans, Professor of Finance at London Business School and Oxera Associate, considers how companies might redesign their compensation strategies not only to increase public trust, but also to create long-term value for shareholders
Is market consolidation detrimental to innovation? Conversely, do mergers create benefits to society by increasing innovation that brings better outcomes for consumers? While merger assessment has historically focused on static price and cost effects, regulators are increasingly being asked to consider whether a transaction will create the right incentives for product development and innovation over a longer time horizon. The Oxera Economics Council met to discuss this topic in November 2016
As the old saying goes: ‘football is a funny old game’. Indeed, some characteristics of football clubs create specific challenges when applying the standard state aid frameworks to assess whether measures constitute aid and whether any aid is in line with state aid rules.
Competition authorities around the world place great emphasis on measuring the effects of competition enforcement. In part, this is to justify to the public, and policymakers, that competition policy is desirable from a social welfare perspective. But are there costs as well as benefits to trying to measure the costs and benefits of competition policy interventions?
Italy is expected to introduce a capacity market, given its increasing risk of retirement of flexible generation capacity and a consequent reduction in security of supply. Simona Benedettini, Regulatory and Competition Specialist, and Giordano Colarullo, General Manager, both at Utilitalia, the Italian utilities federation, look at the Italian electricity capacity mechanism and whether capacity markets are compatible with the European single market
The UK’s withdrawal from the EU raises complex issues of policy in many areas of public life. Merger review is no exception, with both EU and UK merger policy being affected. How should the UK’s competition authorities respond to increased demands on their resources in the short-to-medium term? What would be the long-term consequences of applying non-competition considerations in merger review?
What is meant by economic (or distributive) justice has far-reaching implications for economic policies and their outcomes. However, in policymaking the interpretation is often implicit, with limited awareness and discussion of alternative concepts or their merits and drawbacks. What are these key concepts of economic justice, and what is their role in competition policy, regulation and regional state aid?
Due to concerns about insurance companies posing systemic risk during financial crises, some of the largest global insurers have been classified as systemically important, alongside the banking sector, and are subject to additional prudential regulation. But how systemically important are they, and what is the appropriate regulatory approach? Professor Dr Christoph Kaserer, Technische Universität München and Oxera Associate, and Christian Klein, Technische Universität München, have explored these issues and identified important policy implications for the insurance sector
If energy consumers say they are happy, and there are several suppliers in the market, then the market is functioning well—right? Not necessarily. Identifying the existence and scope of behavioural biases allows for a better understanding of the drivers of competitive market indicators. How can behavioural economics influence competition in retail energy markets, and how can hypothesised biases be tested? We consider the topic with Australian markets as a case study
Efficiency arguments play a role in abuse of dominance investigations, but often only implicitly and at the end of the process. Established quantitative techniques can help to make efficiency analysis more integral in abuse cases. Such techniques are often considered by regulators when concluding regulatory settlements. Can competition authorities use them too?
The UK Competition and Markets Authority (CMA) has completed its first in-depth (Phase 2) rail franchise case in over ten years—one of the largest it has ever dealt with. The investigation into the award of the Northern rail franchise to Arriva examined more than 1,000 local overlaps between Arriva’s bus services and Northern’s rail services, and over 150 rail–rail overlaps. Ultimately remedies were required on only three overlaps. What are the main insights?
Economists are increasingly used as experts in arbitration and court proceedings around the world. But how can tribunals and courts best deal with complex expert evidence, and how can litigating parties use experts most effectively? Sir Bernard Eder of Essex Court Chambers, former High Court judge in the UK, and now an arbitrator and International Judge at the Singapore International Commercial Court (SICC), shares his ‘golden tips’
Company failure can impose costs on customers as well as society more broadly. To mitigate this, regulators have in recent years subjected companies’ business models to increased scrutiny to enable a broader set of stakeholders to assess risks to financial viability. Stress-testing has been embedded in the banking sector and is increasingly being used elsewhere—such as in the UK water sector
On 10 October 2016, Oliver Hart and Bengt Holmström were awarded the Nobel Prize in Economic Sciences for ‘their contributions to contract theory’. Their research has helped to define how contracts enable cooperation between parties with potentially conflicting incentives. Applications of this work can be found in many areas of society and policy, from employment contracts to corporate finance and governance. What has been its effect on regulation?
In the March 2016 issue of Agenda , ‘The CAPEX factor—part 1’ considered ways in which regulators might deal with uncertainty when determining capital allowances at periodic reviews. In this second article we consider another recent trend in regulation—the enlarged role of customers and other stakeholders in the regulatory process—and its implications for the regulation of CAPEX
Over the last 15 years, the pendulum of abuse of dominance cases in EU competition law has been swinging between form-based and effects-based approaches. At a time when the former seemed to have gained prominence, the Opinion of Advocate General Wahl in the Intel case, delivered on 20 October 2016, expressed a strong preference for the latter. Where is the debate on abuse of dominance heading?
In September, the European Commission granted news publishers a new right that recognises their role in the creation of press content. But will this increase the remuneration they receive from online intermediaries and aggregators (such as social media companies and search engines) in negotiations over the publication of short news snippets on these sites? What can economics tell us about the dynamic surrounding these negotiations, and the likely success of the proposed regulations?
Lending to consumers and businesses through peer-to-peer (P2P) lending platforms has grown considerably in recent years, and this innovative form of finance has become an established element of the financial sector in the UK. But for the industry to continue to grow, and for it to reach a ‘mass market’ of investors, the economics need to be well understood. So what does P2P lending offer to borrowers and investors, and what are the risks?
Various European banks and other credit institutions are facing a challenging economic and commercial environment. This has brought the issue of state aid back to the fore. If these institutions do require state support, it is critical that this complies with both the European Bank Recovery and Resolution Directive (BRRD) and EU state aid rules. What exactly are these rules, and how can banks and their respective authorities demonstrate that support is compliant?
In recent years, bidding data analysis has become a key part of merger assessment in Europe. It has been instrumental in merger decisions across sectors—from energy to complex manufacturing to life sciences. What kinds of analysis are conducted in these cases?
How has regulation changed in the last six years? Oxera Director, Mike Toms, looks back at recent regulatory developments, and considers how his advice to company executives might now have a different focus in terms of markets, customers and regulators
On 30 August 2016, the European Commission handed down its largest-ever adverse state aid decision against the tax rulings of a single multinational, requiring Apple to repay €13bn of aid plus interest. The decision follows state aid investigations of the corporate tax affairs of a number of other well-known companies, and will have far-reaching implications for multinationals that currently have, or plan to have, operations in the EU
Controversy around doping was rife in the run-up to the 2016 Olympics and Paralympics. Insights from the economics literature on optimal punishment mechanisms show how penalties can be set so as to deter doping—at both the individual athlete and team level. The credibility and consistency of penalties are key to effective deterrence
To what extent do scheduling clashes between the BBC (the UK’s main public service broadcaster) and ITV (its main commercial rival) harm ITV’s audience figures? An Oxera study has found that, contrary to conventional wisdom, head-to-head clashes of weekend primetime entertainment shows do not seem to affect ITV’s audience figures. However, clashes between crime dramas do have an impact
With an ever-increasing array of products, services and bundles available in the telecommunications market, and in a world in which consumers have limited computational power, it is not a straightforward task to discern the best option. Does this complexity cause consumer harm, and should regulators do anything about it?
In June 2016, Oxera and the Nuffield Centre for Experimental Social Sciences (CESS) published the results of an experiment testing the effectiveness of different ‘prompts’ in encouraging consumers to shop around. The study, commissioned by the UK Financial Conduct Authority (FCA), found that personalised messages were the most effective in stimulating product comparisons, while generic messaging appealing to social norms also had a significant impact
Post-trading—the clearing and settlement of securities and money after a trade—has always been considered the dull but necessary part of ‘trading and post-trading’. This is about to change. Blockchain technology offers a new way of creating, exchanging and transferring ownership of financial assets, and has captured the attention of the post-trading community in the financial services industry. What is the potential impact of blockchain technology on securities post-trading activities?
How much is a new technology worth? What level of royalties could it generate? How much could a start-up sell for? The increasing use of intellectual property (IP) rights in today’s businesses has increased the importance of IP valuation in various contexts. We look at ways of valuing a new technology in a commercial context, such as the sale of a start-up
As the net neutrality debate rolls on, new areas of concern are being highlighted. One prominent topic is zero rating, whereby part of a user’s data consumption is not counted towards their monthly data allowance. Despite some countries banning specific cases of zero rating, little work appears to have been done so far to assess the economic effects of these offers. What are the important considerations for such an assessment?
The outcome of the UK’s EU referendum on 23 June 2016 had an immediate effect on the financial markets in the EU and beyond. However, exchange rate effects aside, it is arguable whether it has had any significant impact on the prices of energy commodities. We look at the main features of current UK electricity market policy, before examining two potential consequences of Brexit on the sector
The water sector in England is reshaping itself ahead of the non-household retail market opening in early 2017. There has already been some consolidation among existing players, and a number of others have signalled that they intend to enter the sector. What can be learned from these developments, and what can be expected going forward?
EU ‘net neutrality’ regulations prevent Internet service providers (ISPs) from blocking or degrading consumers’ access to online content and application providers (CAPs). However, the rules are mostly silent on the wholesale relationship between ISPs (such as Orange or BT) and CAPs (such as Netflix) in upstream IP interconnection markets—who should pay whom, how much, and on what basis. What are the economic issues involved in this relationship, and what are their implications for policymaking?
EU state aid rules play an important role in many member states. The UK has recently seen heated debates relating to the closure of steelworks and the construction of nuclear plants, where political and business decisions are in part shaped by state aid rules. What would happen in the case of Brexit?
Competition law may be one of the legal areas most strongly affected if the UK leaves the EU. This would be due to changes in the relationship between the UK and EU competition authorities, potential inconsistencies in the findings or approach of those authorities, and the potential migration of some types of work away from London and into one of the remaining EU member states
The UK Competition and Markets Authority (CMA) has conducted a two-year investigation of competition in the GB energy market, and concluded that low customer engagement and weak consumer responses to market signals have an adverse effect on competition. We review the CMA’s findings in light of analysis carried out during the investigation, and look ahead to the likely effect of some of the remedies proposed by the CMA
Recent international regulations have strengthened the role of central counterparty clearing houses (CCPs) in the financial system. This has increased concerns that problems in their operations could cause significant disruptions in the capital markets, and that CCPs have become ‘too big to fail’. Similar concerns in the banking sector led to the development of recovery and resolution frameworks to prevent the use of public money in stress scenarios. But should the same apply to CCPs?
What would be the impact on transport if the UK voted to leave the EU? Given the UK’s geographic position, sea and air transport provide important links to the rest of the EU and further afield. As Brexit would be likely to affect the cost of transporting passengers and goods between the UK and other countries, these industries and the economic activity that they support would also be materially affected. Meanwhile, the removal of EU rail legislation could enable significant changes in industry structure
As the sun sets on the UK Competition and Markets Authority’s (CMA) GB energy market investigation, Ofgem, the energy regulator for Great Britain, is looking to new horizons. How is the external environment changing? And what could this mean for the future development of energy regulatory policy?
Technological developments have encouraged the growth of many forms of ‘disintermediation’, whereby intermediaries that bring together consumers with producers are replaced by Internet-based marketplaces or platforms. Crowdfunding, which connects investors and fundraisers, is a rapidly growing example of this. So far, discussion has focused on the implications of crowdfunding for companies raising finance, but as crowdfunding investment reaches the mass market, there is a need to understand the phenomenon from the investor’s perspective as well
How do capacity constraints of merging parties affect how those parties set prices, and what impact does this have on the price effect of a merger? A recent publication by Oxera economist, Bertram Neurohr, shows how merger analysis can change when capacity constraints are taken into account
What were the odds of Leicester City’s triumph in the 2015/16 English Premier League football season? Whether the club will be able to sustain its success will depend on its risk appetite, luck, the wage bill it will need to maintain and, perhaps most importantly, the impact of UEFA’s Financial Fair Play (FFP) rules on the competitive dynamics of club football. These issues are explored in the first of a series of Agenda articles on football, finance and economics
Lorenzo Bardelli of the Independent Regulatory Authority for Electricity Gas and Water (AEEGSI) discusses how regulation in the Italian water sector is changing, including the initial challenges and recent initiatives. A new regulatory framework sets out cost reimbursement through tariffs, contractual quality incentives, and a standard agreement for concessions. AEEGSI will continue to promote regulatory initiatives that deliver a more stable, predictable and accountable water sector
As sector regulator for health services in England, Monitor is responsible for designing effective incentive mechanisms for NHS management to promote the interests of patients. To that end, it is tasked with setting prices for a range of healthcare services that reflect efficient costs. As part of the 2016/17 national tariffs, a sector-wide efficiency factor of 2% has been proposed. Here we explore the methodology underpinning the efficiency factor and compare it with approaches and frameworks considered by utility regulators
George Osborne, UK Chancellor of the Exchequer, recently announced a sugar levy on the soft drinks industry. A tax may discourage the consumption of sugary drinks by making them more expensive, but there are questions over how responsive consumers will be. The way in which the tax is presented will be important, as will be the introduction of complementary measures. Behavioural economics, and precedent from elsewhere, offer insights into effective policy design
The European Commission’s e-commerce inquiry and various investigations by national competition authorities have brought vertical restraints under the spotlight again. It is widely acknowledged that, while these practices can have anti-competitive effects, they can also bring consumer benefits. A recent Oxera report, commissioned by the UK Competition and Markets Authority, presents primary evidence on the business rationale for such practices
A central component of incentive regulation is determining an efficient level of future capital expenditure (CAPEX), which is rarely a straightforward exercise. This article, the first in a series on the issues surrounding CAPEX regulation, focuses on what regulators and regulated companies can do to set reasonable CAPEX allowances in the face of considerable cost uncertainty
The Water Act 2014 provides the legislative framework for non-household water retail competition to be introduced in England in April 2017. While water companies have been focusing on compliance with the new arrangements, they will soon be faced with a series of important strategic choices
In December 2015, the Italian Regulatory Authority for Electricity Gas and Water (AEEGSI) concluded its review of the methodology for estimating the allowed rate of return for energy networks in Italy. What are the key features of AEEGSI’s decision?
Martin Cave, Visiting Professor, Imperial College Business School, presents his views on the state of UK economic regulation. In doing so, he focuses on three core issues: regulatory independence, competition, and innovation. How can regulators assert their independence; what forms of competition are most promising in different sectors; and what does digitalisation mean for networks?
Ofwat, the economic regulator of the water industry in England and Wales, has recently consulted on a range of proposed reforms that would affect the structure and functioning of the market for water resources. What are these proposals, and what might they mean for the water industry, particularly regarding new entry?
In December 2015, the Italian Regulatory Authority for Electricity Gas and Water (AEEGSI) adopted its final decision on the fifth electricity transmission and distribution price control review. Andrea Oglietti, Director, and Marco Delpero, Deputy Director, of AEEGSI Directorate for Infrastructures describe the main features of the new Italian electricity network regulation for the period 2016–23
It is difficult to conduct competition and regulatory policy well, but the economic benefits can be substantial. This is particularly likely to be the case in small jurisdictions. Based on Oxera’s review of the competition and regulatory framework in Jersey, what are the challenges faced by authorities in applying regulatory and competition policy, and how might these be resolved?
What is the economic impact of introducing greater on-rail competition? A regular theme in transport markets concerns how to balance (in the same network) tendering for socially necessary services, and the benefits of competition where services are commercially viable. In December 2015, Oxera and consultancy, Arup, addressed this question for the GB Office of Rail and Road (ORR) in the context of the GB passenger intercity rail market
The water industry in England and Wales is unique in being subject to a ‘special merger regime’. Recently the UK government has sought to bring this regime more into line with the general merger regime that applies in other sectors in the UK. Meanwhile, the UK Competition and Markets Authority (CMA) has undertaken an inquiry into the Pennon acquisition of Bournemouth Water. What are the implications of these developments for the scope for water company mergers?
What are the economic impacts of befriending people? In December 2015 Oxera completed a pro bono project for the St Vincent de Paul Society (SVP), which looked at the economic impacts arising from befriending. While it was not possible to robustly quantify all of these impacts, our analysis nonetheless suggested that society benefits by approximately £3 for every £1 spent by the SVP
Streaming music at home, at work, or ‘on the go’ has become the norm for many consumers in the last few years. Several companies now offer ad-supported or subscription services in most countries. What are the differences between these streaming services, and how have they affected legal and illegal music downloads?
Since 2013, the foreign exchange (FX) market has been the subject of regulatory investigations resulting in more than US$10bn in fines globally. ‘Last Look’, a feature of some electronic FX venues, has been under increasing regulatory scrutiny amidst concerns around the impact on end-users of FX trading markets. Oxera Associate, Álvaro Cartea, discusses his recent academic work in this area carried out with colleagues Sebastian Jaimungal and Jamie Walton
Textbook economics tells us that competition has benefits for users—lower prices, better quality of service, and greater quantity of output. However, economic appraisals are often silent on the impact of assessed policies or projects on market competition and outcomes. How can the effects of changes in market structure and the level of competition be assessed in appraisals in the transport sector?
Do you want to travel to dinner in a limousine tomorrow? Stay in an apartment with disabled access in Paris? Invest a small amount in a high-risk start-up? The potential benefits of online sharing platforms for consumers are appealing, but some policymakers have questioned whether there is a level playing field with incumbent suppliers, and how far regulation should apply to these new entrants. The Oxera Economics Council met to discuss the topic in November 2015
Vertical integration between network operators and content providers, and growing consumer demand for bundles including premium TV content, are creating new challenges for regulators and antitrust enforcers. Is the European telecoms regulatory framework fit to deal with the convergence challenge?
In October 2015, the UK Competition and Markets Authority (CMA) published its price determination for Bristol Water, which had objected to the industry regulator, Ofwat’s, previous conclusions on a number of issues. While the CMA’s price profile is closer to that of Ofwat than to the price profile sought by the company, the devil lies in the detail. The determination has a number of potential implications for the future approach to regulation
In the UK—and several other major economies—productivity growth has fallen below its long-term trend. One likely culprit is an increasing gap between the most productive firms and the rest. Patrick Nolan, Principal Advisor, New Zealand Productivity Commission, discusses whether the problem is a slowing of the pace at which innovation spreads throughout the economy or, as the OECD puts it, a ‘breakdown of the diffusion machine’. He also asks how the diffusion of innovation might be encouraged
The French competition authority, Autorité de la Concurrence, has published a study (‘the Study’) about a requirement in French competition law for the effects of an anticompetitive practice to be taken into account in the determination of fines. This legal provision differs from European competition law, as it promotes an effects-based approach to fines. The requirement could be a useful tool for ensuring that punishments are proportionate, but is the Authority making the most of it?
On 12 October 2015, Angus Deaton was awarded the Nobel Prize in Economic Sciences ‘for his analysis of consumption, poverty and welfare’. Deaton’s unique contribution lies in his argument that welfare-promoting, poverty-reducing economic policy must begin with individual consumption choices. His Almost Ideal Demand System (AIDS) model, which monitors aggregated consumer behaviour to assess market demand, has influenced both academia and policymakers
The UK Transport Act 2000 gave GB local authorities the power to move to a franchised bus network under a quality contract scheme (QCS). The North East Combined Authority (NECA) has looked to use this power, with two (separate) Oxera teams providing advice to bus operators, Stagecoach and Arriva, on the economics of the proposal throughout its development. This article reflects on the experience in light of the current bus policy debate, with next year’s Buses Bill set to include bus franchising powers as part of the government’s devolution agenda
On 6 October 2015 the European Court of Justice (ECJ) issued its long-awaited ruling in the Post Danmark II abuse of dominance case. The ruling sheds light on how rebates offered by dominant companies should be assessed in terms of their form and effects. While ruling out the as-efficient competitor test as a necessary condition for finding an abuse, the ECJ leaves room for an analysis of effects on competition in the assessment of rebates
In June 2013, the Norwegian Ministry of Petroleum and Energy (MPE) reduced the tariffs for access to Gassled’s offshore gas transport infrastructure located primarily on the Norwegian continental shelf (NCS). As in other cases where similar actions have been implemented, there is often a price to pay for greater regulatory risk. What are the implications of the MPE’s tariff decision, upheld by the Oslo District Court, for future investment on the NCS?
On 29 September 2015, the UK Competition and Markets Authority (CMA) published its final determinations on two appeals against elements of the 2015–23 electricity distribution price control review (RIIO-ED1) by Ofgem, the GB energy regulator. One appeal argued that Ofgem had been too stringent in setting allowed revenues; the other that it had been too generous to the distribution network operators (DNOs). What were the CMA’s findings, and what are the implications of its decisions for these appeals?
Ensuring the success of domestic companies that are competing in an increasingly globalised environment is often a key priority for governments and policymakers. But how can the competitiveness of a nation be assessed within a particular industry in order to identify and prioritise policy responses? Oxera has developed a framework to answer this question in the context of the UK maritime sector
Is standard state aid practice under challenge? National courts in the EU are playing an ever more significant role in the application of state aid law, with litigation on state aid issues increasing considerably in recent years. Landmark court judgments raise important questions about the role of EU national courts in this area, and about the assessment of aid recovery. These judgments have potential consequences for every state aid decision
The results of the first UK auctions for contracts for differences (CfDs) for low-carbon electricity generators were published in February 2015, and demonstrated that competition between low-carbon generation technologies can reduce costs to consumers, or at least result in lower costs than official estimates. While prospective project developers await confirmation of future CfD allocation rounds, we consider the implications of recent auctions for onshore and offshore wind costs
Ofwat, the economic regulator of the water industry in England and Wales, has awarded the project licence for the Thames Tideway Tunnel (TTT), a planned £4.2bn ‘super sewer’ in London. The project’s low headline weighted average cost of capital (WACC) figure of 2.497% has attracted attention from several quarters. But what lies behind this figure, and what lessons can be learned for other regulated sectors and projects?
The issue of competition in upstream activities of the UK water sector has been debated for some time now. With new provisions outlined in the Water Act 2014, the practicalities of designing a regulatory regime that makes competition viable and delivers benefits to customers require careful thought. What should the upstream access pricing regime look like, and what are the implications for the regulatory capital value (RCV)?
How can we ensure that large infrastructure projects go ahead in a world where private investors, governments, regulators, users and local residents may all have different priorities? Drawing on more than 30 years’ experience in the airports sector, Mike Toms, Oxera Non-executive Director, formerly Planning Director of BAA plc, and now a director of Birmingham International Airport Ltd, proposes a checklist for governments to consider when approving such projects
Passenger transport markets in Europe have been, and continue to be, liberalised across jurisdictions and sectors. Since July 2015, passenger coach operators in France have been allowed to operate without regulation on longer routes (over 100km). For shorter routes, ARAFER, the French regulator for rail and roads, will test whether the coach service is likely to threaten the viability of the public rail service offered by SNCF on the same route. What changes could this reform bring, and how might the economic test be applied?
The UK Financial Conduct Authority’s (FCA) smarter consumer communications initiative places product disclosure at the centre of the Authority’s efforts to ensure consumer protection and facilitate competition. The FCA recognises that poorly designed regulatory disclosure material that does not present information in a clear and accessible way can hinder consumers’ ability to make informed decisions. But what is good disclosure practice, and how can behavioural insights be used to improve disclosure?
Continued M&A activity in the fixed and mobile telecoms sector is creating more concentrated oligopolistic market structures that may pose problems for regulators trying to impose remedies on the basis of joint dominance findings. In addition, vertical integration between network operators and content providers, and the growth of communications bundles including premium TV content, are creating new challenges for regulators and antitrust enforcers. Is the European telecoms regulatory framework fit to deal with these challenges?
A number of European mergers in the telecoms sector, including Liberty Global/Corelio/W&W/De Vijver Media and Liberty Global/Discovery/All3Media , have led to the convergence of traditional pay-TV and Internet service providers with TV channel providers and content producers. What vertical competition issues have these transactions raised with respect to the creation and distribution of content by production houses and channel providers?
The first ever CPI-linked bond in June 2015 heralds a milestone in UK capital markets. It follows calls for the Office for National Statistics (ONS) to make the consumer price index (CPI) the UK’s headline measure of inflation, and for regulators to cease using the retail price index (RPI) in setting charges for utilities. What does this imply for the future of index-linked gilts, and how might it affect RPI - X regulation?
Behavioural economics helps us to understand how consumers make choices and why they make choices that are not in their best interests. This allows firms and regulators to diagnose behavioural problems in markets and to design and test solutions. Stefan Hunt and Darragh Kelly, of the Behavioural Economics and Data Science Unit at the UK Financial Conduct Authority (FCA), discuss how the FCA is using innovative methods to build real evidence on consumer behaviour into policymaking and make financial regulation more effective
Equity beta is a key input in cost of capital determination. As estimates of beta can be significantly influenced by ‘noise’ in the data, sophisticated ways of dealing with this are valuable in areas such as regulation and litigation. This article outlines an effective beta estimation technique for such data, and also looks at more generalised techniques, such as the Kalman filter, that can be applied in such situations
On 8 May 2015, the UK woke up to a Conservative majority government—an outcome that flew in the face of opinion polls taken in the weeks and months before the General Election. Now that the dust has started to settle, what are the potential implications of this result for the UK energy, water, transport and communications sectors?
John Nash, who died last month, changed the world of academia forever. His work in theoretical mathematics, bargaining theory and development of the Nash equilibrium has had a huge impact on a wide range of fields, including political science, international relations, philosophy and economics. Practitioners such as Oxera owe Nash a huge debt. Many of the theories about how firms interact, and how markets work, come directly from his work on game theory
Competitive allocation mechanisms in the energy market are designed to reveal private information held by the participants, and crystallise the economic value of that information through the bidding process. However, the costs incurred by participants may sometimes outweigh this value. What factors determine whether allowing competing developers to bid for the right to deliver onshore transmission projects is likely to benefit electricity consumers, and what might such a mechanism look like?
What is ‘concurrency’? Jon Stern, City University, London, sets out the concepts of formal and informal concurrency, which show the degree of cooperation between sectoral economic regulators and competition agencies in the UK and elsewhere. He surveys the arguments for and against formal concurrency, and considers its outlook under the arrangements established in the UK Enterprise and Regulatory Reform Act 2013 (ERRA13)
Political rhetoric in the UK suggests that competition between healthcare providers benefits patients in a similar way to consumers in other sectors of the economy. However, the structure and organisation of the National Health Service (NHS) mean that there are significant differences between healthcare providers and suppliers in other sectors. This has important implications for how competition policy should be conducted in this sector
In follow-on claims for cartel damages, a key step is to estimate the cartel overcharge—the amount by which the cartel raised prices to purchasers. Margins analysis and price analysis are two widely used approaches for estimating overcharge. What are their strengths and weaknesses, and is one more appropriate than the other?
Behavioural economics has been popping up everywhere—from the UK Prime Minister’s ‘nudge unit’ to (extremely serious) academic courses at our most ancient universities. Regulators and competition authorities are also getting in on the act. But is behavioural economics actually of any real use? David Currie, Chairman of the UK’s Competition and Markets Authority (CMA), sets out his experience so far
On 6 May 2015, the European Commission announced its Digital Single Market (DSM) strategy and associated e-commerce sector inquiry. One major issue concerns the pricing practices of online suppliers—in particular, charging different prices in different member states. Economics has much to say on the merits and risks of differential pricing online and, ahead of the Commission’s announcement, the Oxera Economics Council met to discuss this topic from a competition policy and regulatory standpoint
Originally published in July 2008. 2015 commentary by Oxera After a number of years of the Tour de France being marred by doping scandals, this year’s doping incidents suggest that the stakes involved are so high that for some it continues to be worthwhile to illegally boost their performance, despite the risks involved. What is the case for and against a more accurate drug-testing regime, and how can this be related to performance comparisons in general?
Originally published in September 2005. 2015 commentary by Oxera Real or nominal? Pre-tax or post-tax? (Or even vanilla?) The number of ‘flavours’ for calculating the weighted average cost of capital is sometimes bewildering. It is often assumed that they all reach more or less the same conclusion, but is this always the case? Contrary to common belief among practitioners, different styles of calculation have a material impact on the value of cash flow to investors
Originally published in January 2010. 2015 commentary by Mike Toms It is now increasingly common for sectoral regulators to review periodically their organisation and process for determining price controls. But with regulation being the biggest single determinant of profitability in most regulated industries, shouldn’t companies also think hard about their management of the regulatory process? Mike Toms, Non-executive Director of Oxera, and former Planning and Regulation Director of BAA, gives his views on how regulated companies should organise themselves to respond to the regulatory process
Insuring against natural catastrophes is a global problem. We draw on research recently conducted for the Association of British Insurers on how to support the provision of private sector insurance against flood risk, and describe a possible new market-based model for the provision of flood insurance
Originally published in May 2005. 2015 commentary by Oxera The reform of Article 82 is high on the EU competition policy agenda. Many commentators are of the view that abuse of dominance cases should move away from the current form-based approach to an effects-based approach. This article explores one of the fundamental shortcomings of the current approach—the use of dominance determinations as a shortcut to infer anticompetitive effects
Originally published in September 2006. 2015 commentary by Oxera Do regulators need to impose constraints on the pricing structure of Internet service providers to foster competition, investment and innovation? For content providers such as Yahoo! and Amazon, the answer is yes; for infrastructure and Internet service providers such as AT&T and Deutsche Telekom, the answer is no. This article reviews the economic underpinnings of both sides of the ‘net neutrality’ debate, and asks: does Europe need net neutrality regulation?
Originally published in November 2012. 2015 commentary by Oxera A report by Oxera for the Netherlands Competition Authority (NMa) illustrates that buyer power is an often misunderstood area in both theory and practice. Regulators wishing to adopt a more ‘light-touch’ approach to network regulation should take note
Originally published in November 2010. 2015 commentary by Oxera Marketers know that people’s perceptions and decision-making abilities can be manipulated by external influences, and behavioural economics has also sought to take such issues on board. However, only more recently have policymakers begun to examine closely what behavioural economics means for biases in consumer behaviour, how these can lead to competition problems, and how remedies can be designed to help markets work better
Originally published in April 2005. 2015 commentary by Oxera Professor Paul Geroski, Chairman of the UK Competition Commission, explains why profitability analysis is of importance to competition policy. He discusses various applications of what is, in essence, backward-looking profitability analysis to mergers and market investigations, and then explores the scope for using forward-looking profitability analysis in merger investigations
Originally published in January 2008. 2015 commentary by Oxera Menu regulation is an innovative system in which companies are presented with a choice of regulatory contracts. Within its current methodology consultation, Ofwat, the England & Wales water regulator, is considering the introduction of menu regulation in the sector, meaning that there will be three sectors in the UK in which it will be applied: water, gas distribution and electricity distribution. What are the challenges of this new regulatory approach?
The number of cartel findings across Europe in markets that provide inputs (e.g. power transformers, plastic pipes and cement) to regulated industries is on the increase, as is the number of cartel damages claims brought by regulated companies. How does economic regulation affect pass-on? Are there situations where, despite incentive regulation, pass-on is more than zero?
What is the role of the weighted average cost of capital (WACC) for regulators in promoting the right level of investment by the industry? Regulators around the world have often chosen to ‘err on the side of caution’—in other words, to choose a high estimate when setting the WACC, in order to offset perceived risks of underinvestment. What are the reasons behind this approach, and is it likely to achieve its intended outcome?
Reform of upstream water and sewerage services in the UK can bring tangible benefits to customers and UK plc. Keith Harris, Oxera Associate, discusses the risks, opportunities and barriers to entry in different parts of the upstream value chain, and considers which reforms could be implemented sooner rather than later
The consolidation trend in fixed and mobile telecoms is leading to more concentrated oligopolistic markets with fewer, larger operators. In February 2015, BEREC (the Body of European Regulators for Electronic Communications) ran a workshop to discuss the implications of this trend for regulation. Based on Oxera’s contribution to the workshop, we discuss when ex ante regulation of oligopolies in the electronic communications sector might be required
A new independent review of consumer price statistics in the UK has recommended that the Office for National Statistics (ONS) should aim to make a variant of the consumer price index (CPIH) the UK’s headline measure of inflation, and that regulators should refrain from using the Retail Prices Index (RPI) to set regulated charges during a price control. How have regulators dealt with inflation in recent price controls, and what are the possible implications of the Johnson review?
Cities have both benefits (such as more productive workers) and costs (such as congestion and increased pollution) relative to smaller settlements. What is the role of a city’s transport networks in ensuring that the potential benefits of the city are enhanced, while the costs are minimised? And how can planning and funding help with the development of efficient transport networks?
How much should we spend on safety? Trading off safety against other factors is a difficult task, and politicians have looked to economists for help. The result is the ‘value of a statistical life’ (VSL), where income and other factors are measured to estimate society’s loss from a single death. But how has this economic measurement come about, how and why do the resulting values vary, and what are the implications for public policy?
Online markets have become one of the hottest issues in competition enforcement in recent years. Indeed, they play a big part in the UK Competition and Markets Authority’s (CMA) strategic goals. So how should competition authorities assess and address potential anticompetitive restraints in these markets? Dr Philip Marsden, one of the CMA’s Inquiry Chairs, discusses this much-debated topic and suggests a re-focus on exercising consumer choice
The question of commission payments to financial intermediaries has recently come to public attention, as EU policymakers discuss the issue in the context of the Insurance Mediation Directive (IMD2, a new set of rules for the European insurance sector) and the Markets in Financial Instruments Directive (MiFID, which aims to harmonise rules for investment services). What are the economics of commission payments, and what has been the experience of countries where specific regulations have been introduced?
Reforms in the UK pensions market announced by the Chancellor of the Exchequer, George Osborne, in the 2014 Budget are set to remove many of the restrictions on what people can do with their defined-contribution (DC) pension funds on retirement. Concerns have been raised about the likely impact of the reforms on the stability of retirement incomes for pensioners. What can comparative research from other countries tell us about the likely effects?
The Water Act 2014 paves the way for a number of market reforms in the England and Wales water sector. In addition to new sector-specific rules that will accompany these changes, water companies must comply with general competition law. What do recent competition cases in the sector say about the issues that might emerge in future?
National monopolies in Europe once provided services across their countries as a public service, sometimes on a non-commercial basis. However, where these monopolies now face competition, European law allows national authorities to require the costs of some non-commercial services to be shared with industry operators, but only if the costs are an ‘unfair burden’. But what is an unfair burden, and can a burden to provide these services ever be ‘fair’?
In 2014 the European Commission began in-depth state aid investigations into the corporate tax affairs of well-known multinational companies, including Amazon and Starbucks. If the Commission concludes that these arrangements constitute illegal state aid, its decisions could have far-reaching implications for European companies and their tax authorities. Why are these tax arrangements under investigation, and what are the potential repercussions?
The landscape of passenger aviation has transformed since the dawn of the industry 100 years ago. While it is clear that the sector will continue to change, it is less clear how it will do so. Oxera and PA Consulting have considered some of the issues affecting passenger aviation and how the industry is likely to evolve over the next 20 years, and have developed four future scenarios
Assessing buyer power has long been essential in analysing supplier mergers. However, it is often qualitative and does not isolate the marginal effect of buyer power on final prices from the effect of other factors such as the size of the transaction and supplier heterogeneity. Dr Walter Beckert, Oxera Associate and Senior Lecturer at Birkbeck, University of London, discusses an empirical methodology to differentiate these effects, and hence estimate the impact of buyer power on final prices charged by suppliers
Did a particular cartel cause prices to rise? Was a particular policy intervention effective? Is firm A more efficient than firm B? Quantitative economics, especially statistical analysis, is increasingly used in litigation and regulatory determinations, and to evaluate policy interventions. While statistics can test the reliability and extent of uncertainty of any analysis, these are not objective measures of right and wrong. How should, and shouldn’t, statistics be used in decision-making?
With the latest set of price control determinations for GB electricity distribution companies, NATS (en route services), England and Wales water companies, and (separately) Scottish Water due before the end of 2014, the current UK regulatory cycle is drawing to a close. What trends have emerged from the latest round of determinations, and what do they mean for regulators, companies and their customers?
Competition authorities across the globe are investigating most-favoured-nation (MFN) clauses in distribution contracts in industries as diverse as hotel bookings, books and insurance. Such clauses guarantee to a distributor that no other distributor will receive a better deal. Although there is concern that they may restrict competition and harm consumers, MFNs can also deliver benefits. How should competition authorities strike a balance?
Wider economic impacts (WEIs) in transport demonstrate the additional benefits to the economy from particular projects, and form part of an assessment of the total value for money provided by new transport schemes. While estimating WEIs is important, various approaches are available and estimation is not always straightforward. What are the different methodologies that can be used to quantify these effects, and what are their relative advantages and disadvantages?
How to deal with financial institutions that are ‘too big to fail’ has been at the heart of the debate on financial services regulation since the most recent crisis. But could the growing importance of central counterparties (CCPs) in financial transactions be creating a new set of such institutions? Understanding the economics of these institutions is vital for exploring whether regulation is actually making the financial system safer
EU policymakers have long been concerned with the cost of international roaming services within the EU, and the European Commission considers that unjustified roaming charges pose a significant barrier to the EU single market. Its Connected Continent package of reforms aims to address this by eliminating such charges within the EU—but are the proposed changes likely to be effective, or will further modifications be needed?
On 13 October 2014, the Royal Swedish Academy awarded the Nobel Prize in Economic Sciences to Jean Tirole ‘for his analysis of market power and regulation’. Tirole made a significant impact in demonstrating how economics theory can be applied to the world of regulation. Here we provide an overview of his contribution
The European Commission is becoming increasingly interested in investigating whether European football clubs are accessing state aid, and whether this funding is compliant with state aid rules. A judgment in the UK courts in June 2014 relates to whether Coventry City Council’s assistance to the stadium of Coventry City Football Club meets the market economy operator (MEO) test
New technologies are increasing the amount of personal information that is collected from users, especially on the Internet. Consumers often happily provide information in exchange for services, but also express rising concerns over privacy. How much privacy is good, and who should be paying for personal information? Economic insights into consumer behaviour and the costs and benefits of sharing personal information can inform the ongoing debate on privacy
The UK Financial Conduct Authority (FCA) has called for the unbundling of research from dealing commissions, which are paid from investment funds to brokers. The debate about these commissions raises wider questions about the FCA’s approach to the management of conduct risk, and its strategic objective of ensuring that markets function well
MiFID II, the updated rule book for European financial markets, will require trading platforms to make pre- and post-trade market data available on a ‘reasonable commercial basis’. The European Commission has invited the European Securities and Markets Authority (ESMA) to advise on what this means. With some fund management and brokerage firms arguing that current prices for market data services are high and should be regulated, will ESMA decide to become a price regulator?
Ahead of the 2015 UK general election, and given the problems faced by the rail sector, debate is increasing about the future of GB rail and whether renationalisation would bring economic and passenger benefits. In a July 2014 report, Oxera analysed, for the first time, the contribution of rail to the UK economy
The aim of electricity market reform (EMR) in Great Britain is to bring forward investment in low-carbon generation, through the use of long-term contracts for differences (CfDs). These CfDs will be allocated to generators via ‘auctions’, with the process beginning in December 2014. What are the features of the planned auctions, and what can auction theory tell us about their potential challenges and opportunities?
Following the Cartes Bancaires judgment in September 2014, anticompetitive agreements are once again at the forefront of the competition policy debate. Agreements between firms that operate at different levels of the supply chain are a normal part of business, but some of these ‘vertical agreements’ are anticompetitive and certain types are assessed under European competition law in terms of their object rather than their effects. What role is there for economics in such cases?
Policymakers in Europe and the USA have recently made important proposals in the area of net neutrality that affect end-users, operators and providers, but these have sparked controversy. Marc Lebourges, Europe and Economics Regulation Director at Orange, explains the basis of this controversy and explores the insights that economic analysis can provide. He then presents the implications of the debate for network operators such as Orange
Taxi operators in major cities across the world are facing competition from entrants with a new business model: the ability for consumers to book drivers via smartphone applications, who use their private cars to carry passengers. In August 2014, Berlin became the latest city to ban Uber, a smartphone-powered transportation company, under threat of a large fine. Against strong opposition from taxi operators, how should policymakers react?
After protracted negotiations with the European Commission and an intense national debate, the German renewable energy law has come into force (EEG 2014). It comes at a time when the German large-scale transition to renewable electricity production (the Energiewende ) is beset by rising costs and fading popular support. What are the principal features of the EEG 2014?
The Water Act 2014 provides the legislative framework for the introduction in April 2017 of non-household water retail competition in England. To start preparing for the new competitive market arrangements, OpenWater held a series of industry workshops. What issues were raised at the workshops, and what are the next steps for the industry?
For some time, financial regulators across the world have been looking at the appropriate market structure for securities trading and post-trading services. An international comparison of the costs of these services can provide powerful insights into the performance of different market structures. This article provides such an assessment, taking the perspective of an Australian investor, to inform the ongoing debate about the role of competition in the provision of clearing services
In January 2014, the High Court in London handed down a judgment in an abuse of dominance case between Luton Airport and bus operator, Arriva. Luton Airport was found to have abused its dominant position by excluding Arriva from accessing the bus station at the airport. The judgment provides useful insight into the economic and legal principles applying to access agreements in this type of case
In order to understand the impact of a merger, competition authorities and regulators first need to define the local market and assess how the merging firms compete. In this article, we look specifically at how the French Competition Authority identifies credible competitors to the merging parties’ businesses, and how it screens out areas that are unlikely to raise anticompetitive issues. We also consider the way in which it assesses local competitive constraints in areas where anticompetitive effects could arise
Regulating quality of service can be an essential part of the utilities regulation framework. But it is likely to present challenges, especially when regulation is in its early stages, as is the case in Italy. What are these challenges in relation to the Italian water sector, and what principles and approaches can be used to address them?
Do the new provisions in the ‘Financial Fair Play’ Regulation (FFPR) introduced by the Union of European Football Associations (UEFA) increase competition in the football industry? Or do they create an ‘oligopoleague’ of football clubs and ‘chill’ competition? Nicolas Petit, Professor at the University of Liège, Belgium, and Director of the Liège Competition and Innovation Institute, reviews the new rules and discusses what they mean for competition in the market for competitive football
The decline of the British coal-mining industry is the stuff of economic history textbooks. For a century, the industry has been contracting, and coalfields have gradually disappeared from the industrial map of Britain. The pace of decay accelerated after 1945—at the end of the war, the industry employed some 330,000 miners, and now it employs fewer than 2,000. Director at Oxera, Mike Toms, discusses his experience of the changes
In September 2013, the European Commission issued a proposal to promote a single digital market across Europe, including harmonising consumer protection. But is this desirable at the EU level, and is it suitable for all member states—and should the proposal be assessed at a national level? Given the increasing focus of policymakers and regulators on consumer welfare, the issues raised in this article are potentially also relevant to ongoing regulatory reform initiatives in the energy sector
What are the possible consequences of the European Commission’s proposed financial transaction tax (FTT) for the public finances of European governments? An Oxera report assessing the potential macroeconomic impacts of the proposed FTT found a significant risk that the imposition of the tax would actually worsen public finances, as it has a negative impact on other tax revenues from the economy, and increases the cost of funding government debt
In the May 2014 issue of Agenda , Harri-Pekka Korhonen, Head of Heat Policies and Regulation at Fortum Corporation, discussed EU policy, stakeholder expectations and the overall rationale for promoting competition in district heat (DH) markets. He now considers the appropriate definition and scope of heat market design, and how competitive conditions can be enhanced, and summarises key findings from recent Swedish and German surveys on third-party access (TPA) considerations in heat networks
The failing-firm defence provides a way to clear mergers in cases that would otherwise be characterised by significant anticompetitive effects. It requires a structured and rigorous economic approach. What are the lessons from recent UK and European clearance decisions that have relied on this defence?
Heat markets across Europe are legislated and regulated in a wide variety of ways. EU energy legislation provides limited guidance on preferred market rules. Instead, developments in district heat (DH) are driven mainly by national policy and regulation, with country-specific historical and political foundations. In the first of two articles, Harri-Pekka Korhonen, Head of Heat Policies and Regulation at Fortum Corporation, discusses the potential for encouraging competition in heat markets
The UK’s Financial Conduct Authority (FCA) has published provisional findings from its first market study, focusing on add-ons in general (i.e. non-life) insurance. The study draws heavily on insights from behavioural economics and provides new empirical evidence on consumer behaviour and market outcomes for a range of insurance products. The analysis raises some questions about the benefits (or not) of add-ons, and the under- or overprovision of insurance
In the last decade, the payment services sector has seen considerable technological change and has been subject to much regulatory reform and intervention. The European Commission has recently proposed revisions to the Payment Services Directive, which was initially adopted in 2009, to improve the functioning of the European market for payment services. In the UK, a sector regulator for payment systems is being established. Moreover, a number of high-profile competition investigations into payment service providers have taken place
Defining local markets in merger cases can be tricky, whether in supermarkets, construction materials or hospitals. Some innovative approaches have been adopted in recent merger cases in France, based around customer data and footprints. Are there any holes in these methods?
In March 2014, the Water Industry Commission for Scotland (WICS) published its draft determination for Scottish Water’s charge caps over 2015–21. The draft reflects a number of new regulatory developments, including the introduction of within-period performance-sharing between Scottish Water and customers. Such arrangements are also starting to emerge in other regulated sectors in the UK, but what are their possible implications?
Consolidation in the telecoms sector is driven by the convergence of network technologies and changing market dynamics. Merger remedies (when required) should safeguard consumer interests and allow industry evolution to adapt to these trends in the medium to long term. These two objectives are not mutually exclusive, and an evolving innovative industry will benefit consumers. What are some of the motivations underlying recent European Commission mobile merger remedies in this context?
The European Commission’s revised Environmental and Energy Aid Guidelines have had a rocky start, fostered by an intense consultation process with member states. The new rules suggest that renewable energy sources should become ‘grid-competitive’ between 2020 and 2030, with current subsidies eventually being phased out. In the shorter term, member states will retain substantial discretion as to their energy policy, a discretion that is particularly valued in the context of Germany’s ‘Energiewende’
The framework for regulating infrastructure is well established, and is designed to provide returns to investors in physical assets. However, market investigations and, potentially, regulation can also arise in other markets where assets are few in number. This article considers whether, and why, a different framework could be more appropriate in such markets
Competition authorities across the world are increasingly presented with cases involving partial acquisitions and minority shareholdings. Some jurisdictions, including the UK and Germany, can already address these under their merger rules, but the European Commission cannot, and it is consulting on closing this potential ‘enforcement gap’. What are the differences between minority shareholdings and full mergers from a competition perspective? Is Ryanair/Aer Lingus a typical case?
DG Competition’s latest probe into the pay-TV industry considers whether contractual terms between major US film studios and Europe’s leading pay-TV providers prevent cross-border competition between broadcasters. What is the current impact of these clauses from the perspectives of consumers, pay-TV operators and content producers, and what are the economic concepts in which these issues can be framed?
The European Commission has recently introduced new guidelines, due to become enforceable by the end of March 2014, on how member states can support airports and airlines in line with EU state aid rules. These guidelines have far-reaching implications for the financing of airport infrastructure, as well as how airports reach agreements with airlines. What does all this mean for the aviation sector?
In the UK, the Leader of the Opposition has called for reform of ‘broken markets’, and market share caps for current accounts and small business lending, enforced by the new Competition and Markets Authority. Does this usher in a new era of ‘trust-busting’ competition authorities? We comment from an economic and public policy (but non-political) perspective
The regulatory asset base (RAB) is a key aspect of infrastructure industry regulation in the UK and elsewhere. Jon Stern, Honorary Visiting Professor at City University, London, argues that the most important feature of the RAB is the process by which it is reassessed and revised, and that this provides considerable evidence on the consistency and transparency of regulatory regimes
The heavy fines imposed by regulators in Europe and the USA on banks involved in LIBOR manipulation have reopened speculation about the potential volume and value of follow-on damages claims. But what are the key issues that could determine the true liability and amount of damages?
In 2010, Oxera Non-executive Director, Mike Toms, wrote a series of Agenda articles setting out principles for best practice for regulated companies in price reviews, based on his long experience and observations as a regulation executive. Since then, he believes that companies have become better organised and regulators more sophisticated. New issues have arisen, and excellent examples of best practice have emerged—but also new mistakes. He now asks: how should these guiding principles be revised and expanded?
The passing-on defence is routinely invoked in cartel damages actions in Europe: customers of the cartel may see their claim reduced, to the extent that they have passed the cartel overcharge on to their own customers. However, there is still much debate about how the passing-on defence applies in various jurisdictions, and how to quantify pass-on
In June 2014 the world’s eyes will be on the FIFA World Cup in Brazil, but competition authorities are paying close attention to the way football broadcast rights are being marketed. Dr Christian Huveneers, Oxera Associate and assessor at the Belgian Competition Authority, discusses the economics of sports broadcast rights, how competition concerns can arise, and how they can be dealt with
Mergers between National Health Service (NHS) Foundation Trusts have recently been brought fully into the competition assessment process that applies to the mainstream economy. But the outcomes from the first major cases have been contentious. Oxera Senior Adviser, Fod Barnes, asks whether the process has exposed significant differences between the dynamics of service provision in the NHS and how the rest of the economy behaves, and/or an inability of health service stakeholders and competition authorities to communicate in a common language
As part of its state aid modernisation initiative, the European Commission is revising its guidelines for rescue and restructuring (R&R) aid. Oxera’s 2009 report on restructuring aid provided evidence on the indicators and impact of financial difficulty, to inform the Commission’s decision criteria. The Commission’s proposed revisions to the guidelines now emphasise a role for objective economic analysis—such as financial ratios and counterfactual economic scenarios—in assessing whether to allow R&R aid
The EU Emissions Trading Scheme (EU ETS) is the central pillar in the EU’s approach to limiting carbon emissions, but its recent performance is argued to have been poor. With an urgent need to address the climate change challenge, we take stock of the current debate around EU ETS reform. How is the scheme supposed to work, what are its problems and how might they be remedied?
Private pension schemes remain in the spotlight, as governments look for ways to ensure that people save enough for old age. Decisions about the distant future need to be taken at a relatively early stage in a person’s working life, and there is considerable risk in saving over such a long time. What are the main risks that can reduce returns from private pension schemes, which ones can be mitigated through scheme design, and at what cost?
Does the social benefit of intervention in the lives of homeless people outweigh the costs, and how large is the net benefit of intervening earlier rather than later? Oxera recently explored these issues through a cost–benefit analysis of interventions by Centrepoint, one of the largest UK charities specialising in addressing youth homelessness. The report informs decision-making in homelessness policy, particularly as it affects young people
Social networking sites such as Facebook and LinkedIn benefit from network effects: the more users they have, the more likely others are to join them. Does this mean the end for effective competition (a concern in competition inquiries into Google and Microsoft)? Economic theory, and the intense rivalry among smartphone and game console makers to appeal to Christmas shoppers, suggest the answer is no
In January 2013, the European Commission proposed measures that it hopes will bring Europe one step closer to a single European rail market. However, due to major differences in market circumstances across countries, these measures will have different implications for the various stakeholders. What are the consequences for stakeholders, and does one size really fit all?
The regulated sectors are central to the UK economy, so the government is naturally interested in how they are regulated. However, the independence of regulators is vital for the achievement of public policy goals, including consumer protection, competition and investment. Cathryn Ross, Chief Executive of Ofwat, the economic regulator of the water industry in England and Wales, analyses this relationship between government and regulators and asks how economic regulation might best be used for the benefit of the UK economy and society
‘Up in smoke, down the drain’, the August 2013 article in Agenda ’s series on the cost of capital, considered how regulators measure and remunerate risk in the price control. One of the tools that helps them to do this is the ‘financeability duty’. What is this duty, and how has its application changed over time?
Australian courts and agencies have been acknowledged as having the most experience with the ‘hot tub’ method, in which experts give their evidence concurrently—although international interest is developing, for example in the USA, Canada and the UK. Justice Steven Rares of the Federal Court of Australia and the Supreme Court of the Australian Capital Territory explains some of the history of expert evidence; the purposes and technique of concurrent evidence; and the technique’s virtues
In July 2013, the European Commission, for the first time, fined pharmaceutical companies for settling a patent dispute via what it terms as ‘pay-for-delay’ agreements. Under these deals, generics producers agree to delay launching their (less-expensive) drug in exchange for a payment from the branded company. The Commission has treated the agreements as illegal per se—but do deals of this type necessarily harm consumers?
Can economists look at the world from the perspective of an outsider: detached, disengaged, objective? Diane Coyle, Enlightenment Economics, discusses why the answer is ‘no’. Unlike Camus’ Outsider , economists are right at the heart of the societies they study. Change is needed, in terms of economists’ methodologies and approaches to policy applications
Consulting on the future of regulatory and competition appeals, the UK government is proposing substantial reforms, including a move away from appeals on the merits towards a judicial review standard. Oxera’s response to the consultation, summarised here, sets out why such a move may be unappealing
In October 2013 the UK Competition Commission (CC) published its final decision on the proposed merger of two hospital Foundation Trusts. This is the first such merger to be referred to the CC since the enactment of the Health and Social Care Act 2012
Hardcore cartels seek to increase profits at the expense of their consumers by deviating from competitive behaviour, while avoiding detection and punishment. Econometric screens, if designed well, can be a useful tool in detecting such deviations from competitive patterns, and can thereby help to improve cartel enforcement. Moreover, they can reduce the extent to which cartels are able to covertly restrict competition
In recent years, the German government has set ambitious targets for energy efficiency and reductions in greenhouse gas emissions, centred on its renewable energy law (EEG). Dr Michael Kraus, head of Oxera’s new Berlin office, argues that the feed-in tariff regime is over-supportive and economically inefficient, and that it has considerably increased costs for electricity customers. He sets out the drivers of German energy market reform and the rationale behind the principal options.
Over the past two decades, the competitive structures of stock markets across the world have undergone considerable change. In many new markets, new trading platforms compete with national stock exchanges, and in most European markets investors and traders can choose from several competing central counterparties (CCPs) for the clearing of equity transactions. Oxera has updated its analysis of the costs of trading and post-trading services, with a focus on Australia
The interdisciplinary field of behavioural economics studies the impact of psychological factors on economic decision-making. It contributes significantly to our understanding of how real people make choices, and shows us that there is a difference between choices made by individuals and those made by the ‘homo economicus’. Annemieke Tuinstra-Karel at the Netherlands Authority for Consumers and Markets (ACM) discusses latest developments in the field, and looks at the results of recent studies by ACM and Oxera
In July 2013, the UK Department for Transport published its command paper for the road network in England. The paper outlined a number of important reforms to the governance of the network and the role of the Highways Agency. What are these reforms, and what might they mean for the future structure of the industry? Is there the potential for introducing independent economic regulation in the roads sector, similar to that in the utilities sector?
Ofwat, the economic regulator of the water industry in England and Wales, has published its final methodology and business plan expectations for the 2014 price review. It is now over to the water companies to complete their business plans for submission in December. Here we give an overview of Ofwat’s main decisions and some of the issues that companies will need to tackle in preparing the business plans.
All companies face risk, and it is generally understood that increasing risk will increase a company’s required returns. The third in our series of articles on the weighted average cost of capital (WACC) considers the risk faced by regulated utilities and how it is addressed by regulators. Ultimately, when it comes to quantifying risk, judgement is just as important as technical skills. In that spirit, put down your calculator and enjoy the read!
Passengers may spend a large proportion of their time and money on rail transport, but they are not always involved in decisions about the railways or kept informed about developments. Anthony Smith, Chief Executive of Passenger Focus, argues that rail passengers must be given a greater voice in the priorities for the railways.
In June 2013, the UK government published the Water Bill, outlining its plans for the water sector in England and Wales. It proposes a number of reforms of the sector in areas such as competition, resilience and water resource availability. What are the key provisions of the Bill, and how might they affect the future of the UK water industry?
In June 2013 the European Commission made another push towards promoting private actions for damages under competition law, through the publication of a ‘Practical Guide’ on quantifying damages and a draft Directive. The latter includes a new rebuttable presumption that a cartel has caused harm, citing economic evidence in support. Does this make sense from an economic and policy perspective?
On April 1st 2014 the successor authority to the UK Office of Fair Trading (OFT) and the Competition Commission, the Competition and Markets Authority, takes up the reins of UK merger control (among other responsibilities). 2014 also marks a decade of the use of price pressure analysis by the UK authorities in their scrutiny of mergers. In view of these landmarks, OFT Chief Economist Chris Walters takes stock of the use of these techniques over the last ten years.
What might the future retail water sector look like in England once competition is introduced in the non-household market in 2017? Alan Sutherland, Chief Executive, Water Industry Commission for Scotland, and Sonia Brown, Chief Regulation Officer, Ofwat, make the case that competition will lead to improved services that are administered effectively and efficiently, while tailored packages would enable a more sustainable use of precious water resources and improved resilience.
The rise of behavioural economics has caused much debate in academia and among policy-makers. A new study for the Netherlands Authority for Consumers and Markets explores the implications for competition policy. Although there is no need for major rewrites of competition law and economics textbooks, behavioural economics will form an important part of the competition policy toolkit, and will be relevant in a small but significant number of competition cases.
In recent years, European competition authorities and courts have ruled on a number of margin squeeze cases. In some of these, the victims of abuse (usually competitors in the downstream market) have brought follow-on damages claims. This topic is covered in the European Commission’s new practical guide on quantifying damages. What are the economic questions surrounding the quantification of damages from margin squeezes?
The 4G spectrum auction in the UK has resulted in four mobile network operators being able to compete with new high-speed services. Is this enough? Bruce Lyons, Professor of Economics at the University of East Anglia and Deputy Director of the ESRC Centre for Competition Policy, discusses how recent research on the speed of uptake of mobile phones casts interesting light on the answer.
In May’s Agenda, Mike Toms looked back on the huge—and, in some respects, unintentional—consequences of Margaret Thatcher’s mission of privatisation. Graham Mather was an influential figure in Thatcher’s inner circle, first as Head of Policy at the Institute of Directors, then as Director General of the Institute of Economic Affairs, and latterly as a Member of the European Parliament. He shares his personal perspective on why and how the privatisation programme emerged and grew.
Simple tests based on firms producing a single product have become increasingly popular among competition authorities looking to assess the effect of mergers on prices. In reality, however, firms often produce several related products. Does this introduce any potential biases to these tests? If so, what can be done to mitigate them?
A recent consultation by the UK Financial Services Authority (now the Financial Conduct Authority) on the Financial Services Compensation Scheme asked whether levies imposed on financial services firms could be made more reflective of the risks that the different types of firm pose to consumers. Can the type of business or distribution model of such a firm indicate the likelihood that the Scheme will be required to compensate its customers?
A recent review by Oxera compared the economic regulatory regimes at seven international airports, looking at their incentives for investment and financing, the extent to which they promote consumers’ interests and competition, and the regulatory burden. What were the main findings, and what are the implications of the Civil Aviation Authority’s subsequent proposals for the future regulation of Heathrow, Gatwick and Stansted—three of the airports reviewed?
On April 8th 2013, Baroness Margaret Thatcher (UK Prime Minister 1979–1990) died. Recent obituaries and commentaries have focused on the Falklands War and on her role in breaking the trade unions. However, her greatest and most lasting legacy may have been her programme of privatisation of state-owned industries. Now that the mourning has subsided, Oxera Non-executive Director, Mike Toms, asks whether this programme delivered the changes and the benefits she envisaged.
Due to a European Court of Justice ruling in 2011, all insurance products are now priced the same for men and women. Oxera studies had previously considered how this ruling might affect consumers, but what actually happened in practice? Are restrictions on risk-based pricing useful for achieving public policy objectives, or are they just a crude and drastic form of price regulation? What other approaches are there to achieving desired outcomes in insurance markets?
The February 2013 Agenda article, ‘What WACC for a crisis?’, considered the regulatory assumptions for equity returns set by regulators. The series continues by looking at the cost of debt, a key component of the allowed WACC. Regulators tend to adopt a wide range of approaches that often result in a departure from the actual rate paid by companies on their debt, depending on the desired incentive and risk properties of the approach.
The GB passenger rail sector is ranked highly among those of EU Member States, and is set to improve further. Current projections suggest that, in the 2020s, Britain’s railways may be returning money to taxpayers, and that net government subsidy could decrease to zero. In such a scenario, how would the industry be organised, and what would need to change from its current structure?
The UK economy remains in the doldrums, with few signs of the long-awaited recovery. Current austerity measures in the UK and key export markets in the EU may well make matters worse in the next few years. Chris Riley, Oxera Associate and former Senior Economist at the UK Treasury, discusses whether changes in macroeconomic policy might help, including one idea floated recently by the incoming Governor of the Bank of England.
The investigations into a cartel in liquid crystal displays have grown significantly since the start of the first investigation in 2006. They have so far led to fines of millions of dollars across jurisdictions, criminal convictions of top executives, private damages actions and representative class actions. From an economics perspective, the case involves equally diverse issues, and highlights the need for careful consideration of sophisticated economic approaches when assessing the magnitude of damages.
In a market for commodities where local production competes against foreign imports, what would one expect the ‘competitive’ price to be? While the answer depends on several factors, the simple example of a mine/factory demonstrates that deviations from the predicted theoretical competitive market outcome do not necessarily indicate an abuse of market power.
Current reforms to state aid rules could lead to a number of far-reaching changes, with the European Commission focusing on those cases that represent the most pressing threats to the internal market. For cases that pose fewer concerns, Member States would have an increased role in ensuring that aid is in line with the Commission’s regulations. How this will play out in practice depends on whether there are sufficient incentives for compliance.
Since the start of the current economic crisis, there have been calls on competition authorities to take a step back in their enforcement activity. How should authorities respond to these calls? Professor René Smits, Netherlands Competition Authority and University of Amsterdam, addresses this question and provides recent examples of how ‘crisis cartels’ have been dealt with in the Netherlands and elsewhere.
The South East of the UK has an aviation capacity problem. The Mayor of London and others have suggested that a potential solution would be the construction of a new hub airport. The Transport Committee of the House of Commons asked Oxera to review the prospects for commercial viability of a hub and to indicate whether it was likely to need public subsidy.
One of the key changes recently introduced by Ofwat to how it regulates UK water companies is the move to outcomes-based regulation. While this may appear to pose some challenges for the industry, it can also be an opportunity to build on experience, deliver what customers want and value, and, potentially, gain greater rewards than in the past. What are the practical implications of this new form of regulation for the water industry?
Five years have passed since the trouble in the US subprime mortgage market and the subsequent financial crisis. Most utility regulators have made at least one price control determination during this period, and now is a good time to review these determinations and draw out any general themes. In the first of a series of articles on the subject, we look at the elements of the allowed return, focusing on the risk-free rate and the equity risk premium.
When was the last time you went to a new place without checking a digital map first? Digital maps and navigation services are having an increasingly wide-reaching impact, affecting how consumers and businesses operate in their day-to-day lives. Oxera, on behalf of Google, has examined and quantified how these services are contributing to the global economy.
The High-level Expert Group on reforming the structure of the EU banking sector presented its final report in October 2012. The Group’s work, under the leadership of Erkki Liikanen, Governor of the Bank of Finland, has since remained in the limelight, with its recommendations and their underlying argumentation generating great interest. Dr Hanna Westman, who assisted Erkki Liikanen in his role as chair of the Group, discusses the report’s conclusions.
The EU and its Member States are committed to decarbonisation, security of energy supply, and affordability. A step change in policies appears necessary in order to encourage the investments required to meet these objectives. The economic factors associated with creating a stable investment environment include encouraging efficient price formation, investment incentives, and mitigating the adverse impacts of unintended consequences of electricity sector reforms.
Creating an EU internal energy market requires both ‘software’ and ‘hardware’ solutions—ie, rules to allow trade across borders, and financing models to increase the physical capacity of interconnections. The EU target model defines a number of market design elements for this purpose, raising the question of whether the design options chosen will necessarily improve market efficiency, or could risk hindering it. We look at two examples: the management and pricing of congestions, and investment in interconnectors.
Life Healthcare Group, a national private hospital provider in South Africa, has increased its stake in Joint Medical Holdings, a private hospital group in Durban, from 49% to 70%. Despite the concern of the South African Competition Commission that the merger would result in a combined market share of over 45% in the Durban area, it was unconditionally cleared by the Competition Tribunal in 2012. What arguments did the parties put forward?
Did the UK Office for National Statistics avoid the political challenge from pensioners and bond-holders of moving to a lower measure of inflation when it published its decision not to change RPI? Or has it empowered those using the price indices to choose the most appropriate measure for their situation by offering an alternative in the form of RPIJ? What was wrong with RPI anyway, and what is RPIJ?
The recently published Energy Bill and Gas Generation Strategy are intended to facilitate significant investment in UK energy generation. Although the proposals contain positive developments, they also highlight the current tensions facing energy policy-makers, and the problems that this can cause in making credible policy commitments. We examine progress and threats to a stable investment environment.
The Turks and Caicos Islands government asked Oxera for advice on developing a new framework for electricity regulation. The Oxera study found that regulation should be tailored to the specific geography, population, skill sets and fuel distribution channels faced by small jurisdictions. Moreover, given resource constraints, it needs to focus on the most important issues. The findings are highly relevant for regulators in other small-island jurisdictions.
On November 22nd 2012, the UK Department for Work and Pensions published ‘Reinvigorating Workplace Pensions’, in which it proposes the introduction of a new category of pensions in the UK market: defined-ambition (DA) pensions. Dr Thurstan Robinson, AEGON Global Pensions, and Erik Schouten, AEGON Adfis, take a closer look at DA pensions, and examine the Dutch experience of introducing them.
Regulatory, procedural and substantive trends are creating opportunities and potential hazards for claimants seeking damages arising from antitrust infringements. Scott Campbell, Partner, and Tristan Feunteun, Solicitor, at Stewarts Law LLP discuss how these developments are opening up new areas and mechanisms for cartel damages claims before the English courts.
A report by Oxera for the Netherlands Competition Authority (NMa) illustrates that buyer power is an often misunderstood area in both theory and practice. Regulators wishing to adopt a more ‘light-touch’ approach to network regulation should take note.
Over the past two decades, the competitive structures of stock markets across the world have undergone considerable change, and in many markets new trading platforms compete with national stock exchanges. With reference to Brazil as a topical case study, we tackle the question: what are the costs and benefits of introducing competition to a stock market?
The recent cancellation of the InterCity West Coast rail franchise competition by the UK Department for Transport might imply a radical rethink, and raises fundamental questions about the ‘British model’ of running railways. However, while there may be some economic deficiencies in the current approach, there are plenty of lessons from incentive regulation that can be implemented within the current arrangements.
Reforms to the UK electricity sector are currently being discussed. Tim Tutton, Adjunct Professor in the Energy Futures Lab at Imperial College, looks at why the role of the System Operator is apparently so important for reform in the sector in the UK—in respect of not only the wholesale electricity market but also electricity networks—and considers some of the issues arising from this expanded role.
The Internet has been altering the way we create, distribute and consume creative content. This has led to some proponents of the Internet claiming that the creative sector is ‘booming’, while parts of the sector itself claim to be ‘devastated’ because of the side effects of the Internet. One topical issue where policy choices are likely to shape market outcomes in the creative sector is the licensing of cloud services, which is explored here.
Consumers do not always behave fully rationally. In some cases their purchasing behaviour can be a contributing factor to concerns about competition and poor market outcomes. Can interventions that help to inform consumers and influence their behaviour be more appropriate than more structural interventions in these cases? The extended warranties market is one example where access to information has been improved in order to resolve a competition authority’s concerns.
What alternatives to traditional bank lending do small and medium-sized businesses have? Tim Breedon, former chief executive of Legal & General plc, chaired a non-bank lending taskforce that examined this question. The taskforce’s recommendations, which range from new forms of access to capital markets, to improvements in supply chain financing, were presented to the UK Department for Business, Innovation and Skills in March 2012, and are expected to be followed with government announcements later this year.
The growth in high-frequency trading has been a significant development in equity markets, with regulators and governments under pressure to ‘do something’ about it, notwithstanding the diversity of views on whether this growth is good or bad for investors. What is the likely impact of some of the proposals that have been put forward to control HFT, and how will these interventions actually affect the market place, if at all?
Overbidding has received increasing media attention over the past few months. In the UK, controversy surrounds the Department for Transport’s decision to award the InterCity West Coast rail franchise to FirstGroup ahead of the incumbent. Further afield, the new Brisbane Airport Link has been unable to meet its forecast traffic numbers. What can drive overbidding? What are its implications for bidders, procurers and end-users, and how can it be overcome?
The UK Competition Appeal Tribunal recently issued a judgment in a follow-on competition law damages action between 2 Travel and Cardiff Bus. The latter had previously been found to have abused its dominant position, leading 2 Travel to claim £50m in damages. The decision, which awarded £33,818.79 in lost profits and £60,000 in exemplary damages, provides important precedent on how courts use facts and economic evidence in determining the amount of lost profit.
The auctions for 4G spectrum are currently taking place in a number of countries. Many regulators are agreed that auctions in which mobile operators bid for spectrum are an effective way of allocating this economically valuable resource. However, stakeholders are split on how exactly the auction should be conducted and regulated, whether spectrum should be reserved for smaller entrants, and how far spectrum trading should be allowed in the aftermath of the auction.
New Zealand was among the first countries to implement wide-ranging microeconomic reforms to improve the performance of infrastructure-intensive industries, and light-handed regulation was chosen as the preferred regulatory tool. Although other forms of economic regulation now exist, light-handed regulation is still important. Tobias Maugg, economist at the Commerce Commission, New Zealand’s main economic regulator and competition agency, explains how this form of regulation is used in airports and electricity distribution networks.
Purchasing power parity indices are intended to make measures of GDP and per-capita income comparable between countries. However, sometimes such indices are used to compare prices of individual items or specific sectors—for example, in reviews of telecommunications services by the OECD. Dr Adriaan ten Kate, independent economist based in Mexico, explains why this approach is spurious.
In May 2012, the UK Competition Commission cleared a water merger without requiring any undertakings: the first time this has happened in the history of the privatised water sector. Building on previous analysis, the CC changed its approach to valuing the detriments to regulation of the water sector caused by mergers. Along with proposed changes to the merger regime being put forward in the Draft Water Bill, this case should provide clearer guidance to those considering acquisitions in the sector.
The European Commission and various Member States would like to see more competition law cases in court. The UK government recently set out a number of proposals to improve on the current regime. Based on Oxera’s response to the consultation, we discuss two aspects of the reforms: the plan to make the Competition Appeal Tribunal a major venue for competition actions, and the introduction of a rebuttable cartel overcharge presumption.
Financial regulation is topical, partly due to what it could or perhaps should have done to stop banks feeding asset price bubbles. Peter Andrews, Head of Research and Economic Analysis, Financial Services Authority, does not discuss these controversies, but describes the government’s plan for better protecting financial consumers. He shows that successive statutes have imposed progressively greater requirements for economic analysis, argues that these improve financial regulation, and outlines how the latest requirements can help make the new Financial Conduct Authority successful.
The European Commission has proposed a tax on financial transactions, but its potential economic impact is still uncertain and subject to debate. We contribute to this debate by considering how the proposed tax might be expected to affect the EU economy, and where the burden of the tax would lie.
In January 2012, Richard Feasey, Public Policy Director at Vodafone, wrote for Agenda about the failure of European telecoms policy-makers to understand the challenges they and the industry face today, and claimed that critics of the current arrangements had yet to propose a coherent alternative. He now outlines such an alternative and discusses some of the issues that will need to be tackled.
The eurozone crisis has re-intensified over the past few months, following a steady stream of negative news. Given the uncertainty about how recent events will unfold, what are the implications for the cost of raising finance for companies operating in the hardest-hit countries? As regulators face a delicate balancing act of ensuring that the regulated companies can continue to raise finance while minimising the impact on consumers, we also explore the options open to regulators.
The UK government is consulting on proposals to reform the regime for private actions under competition law, including a right of opt-out collective action, an increased role for the Competition Appeal Tribunal, and a focus on alternative dispute resolution. Based on international comparators, Iain Mansfield, UK Department for Business, Innovation and Skills, considers the potential economic impact of the proposals, contrasts them with a regime in which redress is facilitated primarily by the public competition authorities, and discusses the role of non-monetary remedies such as injunctive relief.
Economic regulation, and the role that it created for economics consultancies such as Oxera, has changed considerably since the first UK privatisations in the 1980s. Professor Colin Mayer, one of Oxera’s founding Directors, looks back at 30 years of economics consultancy and Oxera’s place within it, and asks what lessons the past can teach us about future economic policy.
In February 2012, European Commissioner, Michel Barnier, appointed a ‘High-level Expert Group’ to make recommendations on reforms to the structure of the EU banking sector to strengthen financial stability and market functioning. Dr Luis Correia da Silva, Oxera Managing Director, discusses how there is as yet a lack of fundamental economic analysis to inform such recommendations, in terms of both whether structural reform is required and what shape it might take.
The UK is facing an increasingly urgent demand for more airport capacity, and the alternatives being discussed by government are all up against serious opposition. Mike Toms, Oxera Non-executive Director, formerly Planning Director of BAA plc, and now a director of Birmingham International Airport Limited, assesses the options available. He concludes that the prospects for a new runway anywhere are extremely uncertain, but that shorter-term incremental measures that make better use of existing infrastructure offer significant opportunities that could be exploited.
In prosecuting a price-fixing agreement among airlines (one of several such cases around the world), the New Zealand Commerce Commission faced a jurisdictional challenge centred around whether there is a market for inbound air cargo services ‘in New Zealand’. Dr Gunnar Niels, Oxera Director, explains why, after a trial involving five economic experts in a ‘hot tub’ debating the geographic aspects of market definition, the High Court ruled in favour of the Commission.
The recent market inquiry by the UK Competition Commission raised fundamental questions about how competition in the local bus industry is working and how it should work. What are the key economic issues raised by the inquiry and subsequent developments?
UK Prime Minister, David Cameron, has recently called for more private investment in England’s strategic road network. However, private investment is just one part of an ongoing movement towards reform of the road network, which encompasses wider strategic and governance issues. What does such a reform involve, and what options are available for road funding?
Tim Tutton, Adjunct Professor in the Energy Futures Lab at Imperial College, suggests that the future role of Ofgem, the energy regulator for Great Britain, could be a lot less exciting than either its own past or that of its predecessor bodies, Offer and Ofgas.
Energy suppliers are currently subject to a licence condition that limits the differences in the tariffs that they can charge to their ‘in-area’ customers compared with their ‘out-of-area’ customers. Ofgem, the GB energy regulator, is minded to retain this licence condition, claiming that it has helped customers. However, Stephen Littlechild, Emeritus Professor, University of Birmingham, and Fellow, Judge Business School, University of Cambridge, argues that the condition is anti-competitive and has made things worse rather than better.
When a large company decides to acquire the majority of a rival’s shares, it may well attract the attention of competition authorities. For minority acquisitions, however, the implications for competition are not straightforward. How can unilateral effects tests, which are increasingly applied as standard in merger investigations, be adjusted to the special case of passive minority acquisitions?
Strategic decision-making always takes place under uncertainty—not least when it comes to patent licensing. Luckily, clever use of economics can provide a small but decisive edge. Dr Pekka Sääskilahti, Director of Economics, Nokia Corporation, discusses some (alleged) best practices in using economics to support managerial decision-making in patent licensing, with a focus on the telecommunications industry.
European telecoms regulators have, for some time, been faced with the question of how next generation access (NGA) networks should be regulated. Based on Oxera’s recent work for the Commission for Communications Regulation in Ireland, we provide insights into whether NGA networks warrant regulatory pricing obligations similar to those imposed on legacy access inputs, and, where price regulation is considered appropriate, on designing these remedies such that they are fit for purpose, given market developments.
After three years and four consultation papers, the UK Financial Services Authority is nearing the end of its Mortgage Market Review, with a final policy statement and rules expected in summer 2012. Paul Smee, Director General at the Council of Mortgage Lenders (CML), reflects on the CML’s analysis of the proposals, concluding that the new regime is likely to tighten access to mortgage finance overall, increasing consumer protection but potentially at the expense of access to finance for some creditworthy borrowers.
After four years of consultation, the UK government has published its Water White Paper. This proposes changes to the water resources and abstractions regime, and measures to increase competition in the sector—both shorter-term measures, and intentions that the government has left open for the longer term. Will the proposals solve water resource problems in the medium to longer term, particularly in the south-east of England, where hosepipe bans have just been announced?
The features of the energy sector mean that identifying competition law infringements is challenging, as is subsequently quantifying damages potentially caused by any such infringements. Are there ‘typical’ infringements found in the energy sector, and what issues might be encountered when quantifying the damages they cause?
The majority of EU countries have a system of copyright levies on blank media and devices with storage capacity, such as MP3 players, mobile phones and recordable DVD players. Yet the rationale for, and implementation of, these regimes have been subject to a series of legal disputes and economic criticism in recent years, and some countries, including Spain, Finland and the Netherlands, have begun to look for change. Could an alternative system be less distortionary while still adequately compensating rights holders?
In a landmark judgment, the General Court ruled in March 2012 that the European Commission had overstated the state aid received by Dutch bank, ING Groep NV, during the financial crisis by up to €2 billion, and, as such, ING may be relieved from certain remedies imposed by the Commission. What was the Court’s reasoning, and does it have a bearing on the support given to other banks in recent years?
As part of its retail market review, Ofgem, the energy regulator for Great Britain, has proposed to limit the number of standard energy tariffs available and to set the standing charge itself. Stephen Littlechild, Emeritus Professor, University of Birmingham, and Fellow, Judge Business School, University of Cambridge, examines whether these proposals will help consumers in practice.
HS2, a high-speed rail link between London and Birmingham, has been given approval by the UK Secretary of State for Transport, despite ongoing debate about the value for money (VfM) of the project. Why might one go ahead with a project that appears to have lower VfM than that of strategic alternatives? What further evidence would make the case more compelling?
In 2010 the UK Office of Fair Trading fined two tobacco manufacturers and a number of major UK retailers for anti-competitive agreements relating to the retail prices of cigarettes. One manufacturer and five retailers appealed against the OFT’s Decision. In December 2011 they won their case. What was the economic theory of harm at the heart of the case, and why did the Competition Appeal Tribunal rule against the OFT?
When compared with the depressed national economic situation, it is perhaps not surprising that the large bonuses paid to directors and other executives of public companies are hotly debated in the UK press. Jonathan Hutchings, Principal at remuneration advisers New Bridge Street, examines the current state of affairs regarding executive pay and incentives in the UK. He discusses some of the reasons behind the current situation, and suggests some ways to improve the pay-setting process.
Following a study into privately funded healthcare services in the UK, in December 2011 the Office of Fair Trading provisionally referred the market to the Competition Commission for a full market inquiry. A wide range of techniques are available for defining markets in the private healthcare sector, but which of them should be applied in future competition analysis in the UK?
Pension funds that have suffered from losses in equity markets amid the ongoing financial crisis may be tempted to move to investments in lower-risk assets such as corporate or sovereign bonds. What does economics have to say about asset accumulation by pension funds, and about whether switching from equity to bonds is a wise move for a long-term investor?
How can competition authorities make the most of the available information within a given timeframe? Alexander Italianer, Director-General at the European Commission Directorate General for Competition, discusses the possibilities and limitations of incorporating economic analysis in competition law decisions. He describes how economics was used in three recent merger cases, and looks at some of the issues that the parties involved in such cases should bear in mind.
The economic environment for the European telecommunications industry has changed considerably since the financial crisis hit, but its regulators appear to be living in the Golden Age of robust industry growth and falling prices for consumers. Richard Feasey, Public Policy Director at Vodafone, asks where European regulation needs to change and suggests options for a new approach to telecommunications regulation that is more suited to the current and future challenges.
The European Commission’s ‘Digital Agenda for Europe’ envisages substantial new investments in telecoms assets, particularly next-generation access infrastructures. Telecoms regulation has thus far focused on outcomes, rather than investments. Based on Oxera’s recent report for Vodafone, we explore whether there is an economic case for a model where several operators co-invest in fibre access infrastructure.
According to a recent European Court of Justice ruling, by the end of 2012 all insurance products will need to be priced the same for men and women. Previous Oxera studies have shown that the ruling could have unintended market consequences. But how might this affect consumers across Europe in terms of prices and demand for insurance products? Is there evidence to quantify the potential impact?
Offshore wind has the potential to meet 70% of the UK’s renewable electricity target, but has high costs compared with other renewables technologies such as onshore wind. In light of concerns about rising energy bills and the costs of decarbonisation, as well as the challenges from wind relating to security of supply, what policy action would need to be taken to enable offshore wind to maximise its potential?
Keith Harris, Oxera Associate, and Luis Correia da Silva, Oxera Managing Director, discuss how regulation of the England and Wales water industry looks set to change following the publication by Ofwat of its consultation on a framework for setting future price limits. Their particular focus is on how Ofwat’s proposals may affect incentives and the business planning process.
Profit is typically the incentive that motivates good performance in private sector firms, but the same does not apply to companies in the public sector. Given the pressure on such companies to deliver value for money, is it possible to build in alternative forms of motivation for not for profit entities, using organisational incentives instead?
The European Commission has powers to control the compensation granted for the provision of services of general economic interest (SGEI), where Member States intervene in markets to deliver social objectives such as universal service. From 2012 the Commission will implement reforms of the state aid rules used to carry out this control. A new, stricter set of principles is proposed for large-scale commercial activities in SGEI. How will these principles, such as the concept of ‘reasonable profit’, operate in practice?
The UK Office of Fair Trading recently consulted on commitments offered by several motor insurance providers following concerns about the exchange of pricing data between competitors. What was the logic behind the commitments, and what are the competitive effects of sharing price data in the insurance sector?
How can the value of water as a resource be included in the Ofwat regulatory framework? Jon Stern and Jonathan Mirrlees-Black, Centre for Competition and Regulatory Policy, City University London, recommend that, for the medium term, companies be required to set a bulk supply tariff price—ie, a