1 Introduction

The last year brought several opportunities and challenges that will likely be recurring themes for the Competition and Markets Authority (CMA) in the coming years. Parliament introduced the bill to establish the Digital Markets Unit, which is tasked with enforcing the UK’s digital regulation regime. The Office for the Internal Market (OIM) and the Subsidy Advice Unit (SAU) both took their first cases, which foreshadows the larger role that the CMA will play on regulatory matters.

The CMA has also given increasing attention to the dynamics of competition, and the possibility that companies might seek to foreclose competition in nascent markets. In addition to the Meta/GIPHY case that is described in this article, dynamic competition concerns were central in the CMA’s case vis-a-vis Microsoft/Activision. The recently published report on Artificial Intelligence (AI) foundation models also shines a spotlight on a market where first movers could lock in long-term advantages.

This article focuses on three specific accomplishments from the last 12 months: the successful Meta/GIPHY merger case, which explored dynamic competition concerns in horizontal markets; the road fuels market study, which highlighted how competition had weakened because historic price leaders had been taking a less aggressive approach to pricing; and the establishment of the Microeconomics Unit: a new policy-focused research team that is aimed at bringing economic expertise into the CMA and the wider government.

2 The Meta/GIPHY Merger Case

2.1 Introduction

Facebook, Inc.Footnote 1 (Meta) completed its purchase of GIPHY, Inc. (GIPHY) in May 2020 for $315 million in cash and an additional provision of Facebook stock to certain GIPHY personnel.Footnote 2 In November 2021, the CMA found that the merger had resulted or would result in a substantial lessening of competition (SLC) and required Meta to sell GIPHY—in its entirety—to a suitable buyer. Meta sold GIPHY to Shutterstock—a US provider of stock photographs and other stock materials—in May 2023. This section examines the CMA’s economic assessment of the merger.

The CMA’s concerns focused on the horizontal unilateral effects that can arise from a loss of dynamic competition in the supply of display advertising in the UK, and the vertical effects that would result from input foreclosure in the supply of social media services worldwide (including in the UK).The finding of a loss of dynamic competition was particularly novel: The CMA had updated its guidance on this subject in its revised Merger Assessment Guidelines (the Guidelines), which were published in March 2021, and Meta/GIPHY was the first Phase 2 inquiryFootnote 3 to apply this revised guidance.

In the remainder of this section, we first provide a brief overview of the economics of dynamic competition that underpins the assessment of unilateral effects in this case. We then summarise the CMA’s theories of harm and findings, the analytical approach, and the evidence—as well as developments that followed the CMA’s decision. Finally, we consider the wider implications of the case.

2.2 The Economics of Dynamic Competition

The CMA assessed whether the Merger had reduced the potential competitive pressure faced by Facebook in the UK display advertising market, thereby affecting the ongoing dynamic competitive process. The concept of ‘dynamic competition’ is explained in the Guidelines: Firms (such as GIPHY) that are making efforts or investments that may eventually lead to their entry or expansion will do so based on the opportunity to win new sales and profits. Meanwhile, incumbents (such as Meta) may seek to improve their own competitive offering to protect future profits against potential entrants such as GIPHY.

This process of dynamic competition can increase the likelihood of new innovations or products being made available—whether by the incumbents or entrants. Dynamic competition can therefore be seen as having economic value in the present—even where entry by the firm in question is unlikely and may ultimately be unsuccessful.

In this sense, and as the Guidelines make clear, a loss of dynamic competition can be seen as distinct from a loss of future competition: where, absent a merger, the acquired firm would have entered the market and competed with the acquirer on price and quality.Footnote 4

The concept of dynamic competition is not new or unique to the CMA: For example the current FTC/DoJ Horizontal Merger Guidelines (2010) note that ‘Competition often spurs firms to innovate. The Agencies may consider whether a merger is likely to diminish innovation competition by encouraging the merged firm to curtail its innovative efforts below the level that would prevail in the absence of the merger.’

The Guidelines’ conception of dynamic competition is consistent with how this concept has been described in the recent economic literature. For example: Rose and Shapiro (2022), Federico et al. (2020), and Kokkoris and Valletti (2020) all highlight the importance of assessing a merger’s effect on incentives to innovate. Federico et al. (2020) in particular comment that a merger may be anticompetitive even if the pipeline product has a low probability of being introduced in the absence of the merger, as long as the value to consumers of the entry by the new product is high. Rose and Shapiro (2022) make a similar point with respect to mergers’ causing immediate harm to innovation even if the actual product market competition they eliminate is nascent.

As we shall see, the CMA’s conception of dynamic competitionc—which is informed by the academic literature—was one of the points at issue in Meta/GIPHY.

2.3 Case Background

Meta is by far the largest provider of social media and messaging services in the UK, with over 80% of internet users’ accessing at least one of its platforms (Facebook, Instagram, WhatsApp, or Messenger) each month. In 2020, 98% of Meta’s (then Facebook) global revenues were from digital advertising.

A GIF (graphic interchange format) is a digital file that displays a short, looping, soundless video.Footnote 5 Social media users add GIFs to online messages to convey emotions or reactions—so they serve a broadly similar function to emojis. Every day, millions of social media users in the UK post content that includes a GIF, via a ‘GIF’ function that is embedded in the social media platform. This function allows the users either to view and select from trending GIFs (e.g., relating to sports or news events) or to search for GIFs on specific themes (‘Friday’, ‘Happy Birthday’, etc.), which they can then add to their messages within the platform.

GIPHY is the world’s leading provider of GIFs and GIF stickers: It accounts for two of every three GIF searches. Its early years were largely focused on developing its presence on social media platforms, and by 2022 it was the sole GIF supplier on Instagram and TikTok, and was present on Facebook, WhatsApp, Twitter, and Messenger,Footnote 6 and many other platforms.

Prior to the acquisition, GIPHY was seeking to grow its nascent advertising business in the United States: It offered brands and advertisers a ‘Paid Alignment’ service, through which customers could pay to have their GIFs appear prominently in the results of popular search terms, or inserted into GIPHY’s trending feed. GIPHY’s Paid Alignment grew year-on-year from its introduction in 2017, and attracted brands that included Pepsi and Dunkin Donuts. On its acquisition of GIPHY, Meta terminated all of GIPHY’s Paid Alignment activities.

Meta’s primary stated rationale for acquiring GIPHY was to secure ongoing access to GIPHY’s GIF services, which Meta saw as an important driver of social media user engagement—particularly for Instagram.

2.4 CMA’s Assessment

The CMA found that GIPHY had market power in searchable GIF libraries, and that Meta had market power in the provision of social media services and in the provision of digital advertising services.

The CMA found that the merger would give rise to a substantial lessening of competition: This was based on two theories of harm: The first of these related to horizontal effects: A loss of potential competition in display advertising, by removing GIPHY as a potential competitor. The second related to vertical effects: input foreclosure in social media, since Meta would have the ability and incentive to foreclose access to GIPHY by its social media rivals, which relied on GIPHY.

This section focuses on the horizontal theory of harm, given its relative novelty. While Meta (naturally) challenged both theories of harm, the assessment of the vertical theory followed a more familiar framework.Footnote 7

Meta’s significant market power in display advertising was an important aspect of the horizontal SLC finding: The loss of GIPHY as a potential competitor was a particular concern because Meta faced limited competitive constraints from other providers. The CMA’s market power assessment in the case was informed by its own recent Market Study into Digital Advertising.Footnote 8 The CMA found, consistent with the Market Study, that Meta accounted for 40–50% of display advertising, followed by YouTube with 5–10% and a large number of smaller providers. Meta also enjoyed a level of audience reach that advertisers could not achieve through other providers, and its position was protected by a range of barriers to entry, including data advantages.Footnote 9

Much of the CMA’s assessment of this theory of harm related to the question of whether GIPHY was sufficiently important to dynamic competition for the merger to have resulted in an SLC in display advertising. Meta argued that GIPHY’s advertising model relied on social media platforms’ (including the Meta-owned Facebook and Instagram) agreeing to carry advertiser-sponsored GIFs on behalf of GIPHY, in exchange for a share of advertising revenues, and that GIPHY had been unable to demonstrate that such a model was sustainable.Footnote 10 It noted that GIPHY had been operating at a significant monthly loss, and that at best it could have secured only limited funding from investors, which would force it to scale back its plans. Meta also said that there was no realistic prospect of an alternative purchaser acquiring GIPHY, as GIPHY had already explored this option prior to the acquisition.Footnote 11

The CMA explored these issues through a detailed examination of a large number of GIPHY internal documents, including board meeting papers, marketing materials, and communications between senior executives. In addition, the CMA spoke to and obtained evidence from a wide range of market participants, which included former GIPHY investors and potential investors, advertising clients, rival GIF providers, and social media and messaging platforms.

GIPHY had been a pioneer and market leader in the provision of GIFs on social media platforms. Following its launch in 2013 it had developed a powerful GIF search algorithm, assembled a strong creative team (who worked closely with ‘brand partners’ such as movie studios and sports leagues to create GIFs), and achieved wide distribution of its services across social media platforms. Meta’s reasons for acquiring GIPHY were themselves evidence of the importance of GIFs as a tool for driving engagement on these platforms, and of GIPHY’s leading position as a GIF provider.

While GIPHY’s initial focus had been in developing its content and its presence across platforms, in the two or three years before its acquisition it had been taking initial steps to monetise its service through advertising. As Meta noted, GIPHY faced significant challenges in developing a profitable and sustainable advertising business. However, it was working to address these challenges from 2017 to 2019. In doing so it was building on its strong presence as the leading GIF provider and had received positive feedback and interest from advertisers in the US and internationally—including in the UK.

COVID-19 had a negative impact on GIPHY and its nascent advertising business: Covid put pressure on GIPHY’s ability to raise finance, increased its hosting cost as traffic on social media grew, and led to a slowdown in the advertising market. This was the context in which GIPHY decided to accept an acquisition offer from Meta. However, following a detailed examination of internal documents and engagement with investors, the CMA concluded that, absent the merger, GIPHY’s investors were likely to have provided the funds that were necessary to overcome any short-term impact of Covid-19, and also to fund GIPHY’s further expansion.

Meta also argued that GIPHY had not expanded its Paid Alignment business into the UK,Footnote 12 and that there was no realistic prospect of its doing so. The CMA’s view was that GIPHY was likely to have entered into the supply of Paid Alignment services in the UK. GIPHY was a global market leader in the supply of GIF services, and there was no convincing reason why it would seek to monetise this position in the US but not in the UK. In addition, internal GIPHY documents reflected a strong interest in international expansion, including to the UK, and demand from UK advertisers.

The CMA’s finding that the merger would result in an SLC was based on: Meta’s significant market power in display advertising; GIPHY’s strong position as the leading provider of an important social media engagement tool; GIPHY’s pre-merger efforts to develop an innovative advertising model that had the potential to compete with Meta; the potential for GIPHY’s business model to achieve network effects—for example in partnership with other social media platforms; and high barriers to entry in display advertising, which GIPHY was relatively well placed to overcome.

2.5 Wider Implications

2.5.1 Applying the Guidelines in Dynamic Competition Cases

As the first phase 2 merger decision to assess dynamic competition in light of CMA’s revised Guidelines, Meta/GIPHY can be seen as providing a grounding for how the CMA will apply the Guidelines when assessing concerns about a loss of dynamic competition in future cases. However, this will only be true in a broad sense—any finding of a horizontal SLC based on dynamic competition will need to be informed by a detailed assessment of the facts of the case, and a close engagement with the submissions that were put forward by the parties to the merger—as was the case in Meta/GIPHY.

One of Meta’s grounds of appeal was that, if the CMA sought to rely on a concept of dynamic competition, it was required to assess, on the balance of probabilities, whether: (a) GIPHY would have become a significant competitive threat on a relevant UK advertising market; and (b) Meta and/or other competitors would have responded to any such threat by changing their own competitive conduct or investment decisions.

In assessing dynamic competition CMA continues to apply the legal test of whether, on the balance of probabilities, the merger will harm competition: whether such harm is more likely than not. However, as we noted above, dynamic competition can be important even where successful entry by the firm in question may be unlikely. In other words, the CMA may find that harm to competition is more likely than not, and hence find an SLC, without necessarily concluding that that successful entry by the acquired firm is more likely than not. Meta/GIPHY is an example of such a finding. As the Final Report notes,Footnote 13 uncertainty about the future outcome of a dynamic competitive process does not preclude the CMA from assessing the effect of a merger on that dynamic process. In contrast, the standard proposed by Meta for a finding of dynamic competition would essentially make the concept redundant—if the CMA had found that GIPHY would have become a significant competitive threat to Meta, this would have been sufficient for an SLC based on a loss of future competition, regardless of any consideration of dynamic competition.Footnote 14

2.5.2 Incentives as Evidence

Meta argued that, for an SLC that is based on dynamic competition to hold, the CMA was obliged to forecast the extent of future competition and to assess whether the risk to its future profits would be sufficient to prompt a reaction from the incumbent. Meta also stated that the lack of a competitive response to GIPHY’s commercial activities in the US—and the lack of evidence that such a response would emerge in the UK—was a critical failing in the CMA’s assessment.Footnote 15

As the Guidelines note,Footnote 16 while the CMA may take into account any evidence of explicit intentions on the part of the merging firms, there is no requirement for the CMA to find any such direct evidence of explicit intentions, and the CMA will often rely on an assessment of the firms’ economic incentives. Large firms such as Meta have an incentive to respond to competitive entry, as Meta has demonstrated in the past.

In the CMA's view, the removal of GIPHY as a dynamic competitor was particularly concerning in light of Meta’s significant market power in display advertising, which made it difficult for innovative platforms to enter and compete. We expected that GIPHY would be in close competition with Meta and found that each had been looking at expanding its services in ways that could have brought it into closer competition with the other absent the merger. In particular, Meta was seeking ways of monetising messaging, and its internal documents indicated that it saw the opportunity to do this through GIFs as a potentially important upside of the merger. Our assessment of GIPHY’s capabilities was also an essential part of the decision, and this will generally be true in cases of dynamic competition.

2.6 Merger Control of Big Tech Acquisitions

Meta/GIPHY is the first case of a competition authority blocking an acquisition by one of the ‘Big Tech’ firms. The CMA and other competition authorities have been criticised in recent years for failing to investigate or block potentially anticompetitive mergers by Big Tech firms. In particular, Facebook’s acquisitions of Instagram and WhatsApp were cleared with limited scrutiny by authorities, but internal Facebook documents subsequently revealed Facebook’s concern about competition from these entrants.Footnote 17 A 2019 study by Lear for the CMA found that the acquisition of Instagram had provided a competitive advantage to Facebook, and that Facebook’s actions following the acquisition appeared consistent with the realisation of a foreclosure concern that the UK’s Office of Fair Trading had considered and dismissed in its investigation.Footnote 18

The Meta/GIPHY decision is an example of the increased awareness among competition authorities of the need for careful scrutiny of acquisitions by large players in the digital sector.Footnote 19 As such acquisitions often relate to developing markets and innovative services, effective merger control will require authorities to address competition problems—including prohibiting mergers—in cases where there is considerable uncertainty about future market developments.

However, many mergers that involve powerful digital firms are likely to be competitively benign and will often have significant benefits for consumers.Footnote 20 The CMA has recently cleared acquisitions of start-up companies by Google, Amazon and Facebook.Footnote 21

While the concept of dynamic competition is by no means limited to the digital sector, it is perhaps particularly likely to be an important line of inquiry for investigating future mergers in this sector. As the Guidelines note, digital platforms provide an example of where key aspects of the competitive offering are set during the investment phase given the cost, time, and uncertainty that are involved in building up a user base and achieving network effects. These are precisely the circumstances in which losses of dynamic competition are likely to be more relevant.Footnote 22 Moreover, partly due to these high entry costs, the digital sector is marked by the presence of large and powerful firms, and dynamic competition from potential entrants is particularly likely to be important in such cases.

3 The Road Fuels Market Study

The CMA recently completed a market study into the road fuels sector, which was published on 3rd July 2023. In this section, we explain the context for the market study, and then summarise the main findings. We present two pieces of analysis: The first focuses on how supermarket pricing has changed over time; the second addresses “rockets and feathers” dynamic pricing behaviour.

3.1 The Context for the Market Study

On 11th June 2022, the Secretary of State for Business, Energy and Industrial Strategy asked the CMA to carry out an urgent review of the fuel market. This was due to concerns around increases in the price of both petrol and diesel of over 60p per litre between 2021 and 2022. The CMA published its initial report on 8th July 2022 and published its final report on 3rd July 2023.

The Business Secretary requested that the CMA explore whether the road fuel market had adversely affected consumer interests, including whether a 5p per litre reduction in fuel duty was passed on. Additionally, the CMA examined the general state of competition in the market and whether prices varied locally. The CMA found that following the cut in duty, supermarkets immediately cut pump prices by just over 5p. Other retailers also cut their prices—but by a smaller amount. However, these changes were hard for consumers to observe, as the changes occurred at a time when the wholesale price of fuel was increasing.

The CMA also found that the supply of retail fuel in the UK appeared to be relatively competitive: The difference between wholesale and retail prices was relatively small (around 10p per litre [ppl]); there were local variations in price, including generally between urban and rural areas, with prices higher in rural areas; the principal drivers of increasing fuel prices in the UK in 2021 and 2022 were increases in the crude oil price, the depreciation of sterling, and an increase in the refining spread.

The CMA decided to launch a market study into road fuels so as to develop a more detailed understanding of how the market works and any actions that might be necessary to improve outcomes for consumers.

3.2 Summary of Findings of Market Study

Although we did not identify any concerns in the retail sector during our rapid review, more in-depth analysis suggested that there were issues, and our market study focused on the retail sector. We did not find any competition issues at the wholesale or refining levels of the supply chain.

In retail we found that the average annual fuel marginFootnote 23 had increased year-on-year from 4.4% (4.6ppl) in 2019 to 7.6% (10.8ppl) in 2022. We estimate that in 2022 supermarket petrol and diesel prices were around 5ppl more expensive than they would have been if percentage margins had remained at 2019 levels.

We found that this increase in margins had been driven by a change in approach by some supermarkets and a lack of response from other retailers. Asda—but also Morrisons to some extent—took a less aggressive approach to pricing by significantly increasing its internal margin targets since 2021; while the other retailers, including the two other supermarket fuel retailers (Sainsbury’s and Tesco), maintained largely passive pricing policies: pricing by reference to local competitors (in many cases Asda and Morrisons) rather than responding promptly to cost movements and/or trying to win market share. As a result, Asda’s ppl target in 2023 was more than three times what it had been for 2019, while Morrisons doubled its ppl target over this period. Additionally, following the volatility in diesel wholesale prices in 2022 Asda saw an opportunity in 2023 to grow its margin on diesel, by cutting its retail price slowly in response to a fall in the wholesale price. As is noted below, Asda has historically been the cheapest supermarket and has been a leader in making price cut announcements. When it chose not to cut its prices quickly in response to a fall in the wholesale price, other retailers chose to follow suit.

Given our assessment of the market we recommended two remedies: an open data fuel finder scheme, and an ongoing fuel monitor function. A fuel finder scheme will allow consumers better access to data to allow them to compare prices and find the cheapest fuel station. We expect that this will increase the competitive pressure that is faced by all fuel stations, as it will reduce search costs. Moreover, a fuel monitoring function will act as a deterrent to individual firms’ taking actions that would further weaken competition in this market. Furthermore, as the transport market transitions away from internal combustion engines, demand for traditional road fuels will decline. The monitoring function will be able to monitor how competition is performing as the market declines and indicate if further intervention is needed.

The remainder of this section is focussed on our findings in relation to supermarkets and rocket and feather pricing.

3.3 Analysis of Supermarket Pricing

In the UK, supermarkets account for around 50% of all petrol sales.Footnote 24 We found that supermarkets are, on average, cheaper than other types of retailers. This is driven by a number of factors, including: the halo effect (fuel sales can be used to bring customers into the grocery store) and economies of scale.Footnote 25 This means that supermarket prices are often a benchmark for the rest of the market.

There are four large supermarket chains in the UK that also operate fuel stations: Asda, Morrisons, Sainsbury’s, and Tesco. Amongst these, Asda has historically acted as the price leader in road fuels, and our analysis showed that it has consistently been ranked as the cheapest supermarket on average. We have previously foundFootnote 26 that Asda has been a leader in making price announcements which are perceived as generating supermarket price wars, whereby the other supermarkets respond to Asda’s price cuts.

We discuss here two pieces of analysis of supermarket pricing, which illustrated how behaviour had changed over time:

3.4 Analysis of Ranking Changes Over Time

We found that Asda and Morrisons have what we termed as “active pricing strategies”. By this we mean that they set a margin target at the beginning of a period and then adjust their pump prices (to the extent possible) to try to meet that target. In contrast Sainsbury’s and Tesco forecast the margin that they expect to achieve on fuel, but do not adjust their pricing approach if they are not going to achieve this.

We used data from Experian Catalyst to analyse how the average prices charged by each supermarket changed over time, to see if changes in the margin targets of Asda and Morrisons were altering the relative competitiveness of each supermarket.

Our data consisted of twice weekly pump prices from Experian for petrol and diesel from January 2019 to May 2023. Experian data were collected from transactions that were made by Allstar fuel card customers and cover around 85% of fuel stations in the UK. For each week, we calculated the average price across all forecourts that were operated by each of the supermarkets. We then assigned a ranking (lowest to highest) based on this average price. From this we then calculated the percentage of weeks that each supermarket was at each rank.

This analysis does not control for geographical factors, so differences in the average prices could be driven by supermarket location characteristics. As such, the fact that in the first period Asda was the cheapest supermarket does not tell us anything particularly useful, as it could be because Asda stores are located in areas that are cheaper to serve or have demand characteristics that result in lower prices. However, since location-specific factors are largely fixed over time, changes in the patterns of rankings tell us how relative competitiveness has changed over time.

Set out in Fig. 1 is the percentage of weeks that each supermarket was at each ranking for petrol, split by pre-2022 and 2022 onwards.Footnote 27 We chose this split as we found that at some point in 2021 Asda and Morrisons increased their margin targets.

Fig. 1
figure 1

Source: CMA analysis based on Experian data

Percentage of weeks at each rank, petrol.

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Our analysis showed that Asda is, on average, the cheapest supermarket in the UK and has been since at least January 2019. However, this position has been less consistent since the beginning of 2022. While Asda had been the cheapest supermarket in 89% of weeks for petrol and 94% of weeks for diesel between January 2019 and December 2021, this declined to 76% and 70%, respectively, between January 2022 and May 2023.

Of the other supermarkets, Morrisons’ competitive position in the market had weakened: Prior to 2022, it had typically been the second or third cheapest supermarket; but from 2022 onwards it was more often in fourth place: the most expensive supermarket.

Additionally, there has been some increase in the frequency with which Sainsbury’s and Tesco are ranked number one. For Sainsbury’s this increased from 6 to 18% for diesel and 7 to 13% for petrol and Tesco from 0 to 8% for diesel and 0% to 8% for petrol from pre-2022 to 2022 onwards.

3.5 Probability Model of Price Announcements

On 16th February 2021 Bellis (set up by TDR Capital and the Issa Brothers for the purposes of the merger) purchased Asda. TDR Capital is an investment management firm, and the Issa Brothers own Eurogarages: a chain of petrol-filling stations (PFSs).

During its investigation of this acquisition, the CMA found that Asda acts as the price leader in road fuel and that other supermarkets tend to follow when Asda triggers price reductions in road fuel. These price reductions were often in the form of national announcements that Asda was reducing its prices, which we term price announcements. Although in Asda/Bellis the CMA found that Asda often instigated this form of price cutting, other supermarkets also made similar announcements.

Figure 2 shows the pattern of price announcements for petrol over time. Each individual circle represents a price cut announcement; the larger is the circle, the greater is the size of the price cut.Footnote 28 Companies only announce price cuts and not increases. Therefore, price increases have not been included in the empirical analysis.

Fig. 2
figure 2

Source: Asda, Sainsbury’s, Tesco and Morrisons data and CMA analysis. Note: The amount of the price cut was not available for 10 dates: These are represented by dots and cover eight dates for Morrisons and two dates for Asda

Price announcements over time, petrol.

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This analysis suggested that Asda was the most active supermarket in making price cut announcements prior to the middle of 2020; since then the frequency of price cut announcements by all supermarkets has dropped significantly, and Asda has made only three announcements.

The reduction in the frequency of Asda price announcements over the past two years could be explained by changes in the patterns of underlying cost reductions (which might be linked to external factors such as Covid or the war in Ukraine), or alternatively by changes in Asda’s approach to pricing—how Asda responds to patterns of wholesale price changes—or some combination of the two. To shed more light on these two hypotheses, the CMA modelled the probability of a price announcement’s occurring based on changes in the Platts CIF (wholesale) price. We modelled this over the 2017–2020 period, and then used these results to predict the probabilities of price announcements over the 2021–2023 period.

This analysis asked the question: If Asda had responded to underlying cost changes over 2021–2023 in the same way as it had in 2017–2020, how likely would price announcements have been in that later period? We found that over the period 2017–2020, price announcements occur on days where the predicted probability of a price cut announcement is between 0.07 and 0.25, and when there were only modest reductions in the Platts CIF price.

By contrast, over the period 2021–2023, there are a number of occasions where the Platts CIF price decreased and the daily probabilities of a predicted price announcement were high (reaching or surpassing the range that was estimated over the period 2017–2020), and we would therefore expect a price cut announcement, but one was not made—see Fig. 3. Vertical lines represent actual price cut announcements. This suggests that the observed reduction in the frequency of price cut announcements was due to a change in Asda’s approach to pricing rather than a change in patterns of underlying cost changes.

Fig. 3
figure 3

Source: CMA analysis of Platts and Asda’s price announcement data

Asda’s price announcements, probability of price announcement, and Platts CIF price, 2020–2023.

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3.6 Analysis of Rockets and Feathers Pricing

Another focus of the market study was whether increases in the wholesale price of fuel are passed on to consumers faster than decreases via changes in the pump price. Concerns with respect to this type of ‘rockets and feathers’ pricing strategy have been raised for a number of years by numerous parties that are interested in the UK road fuel sector. Although rockets-and-feathers pricing is not necessarily indicative of a competition problem, it is a pricing strategy that can be used to increase margins in a way that is less visible to consumers than simply raising pump prices when wholesale prices are static.

We analysed the time that is taken for cost changes at the wholesale level to be reflected in the retail prices and the degree to which positive and negative changes are symmetric: We sought to estimate the share, and the speed, with which positive and negative cost shocks are passed through to retail prices. By examining the speed with which a 1p increase, or decrease, in wholesale prices is passed on we were able to plot the ‘impulse response functions’ (IRFs). We could then test whether the IRFs were different for positive and negative cost shocks.

The methodology we used is described in detail in Appendix B of the initial update report,Footnote 29 but in summary we formulated an error correction model that relates the change in retail prices for a given period to three groups of explanatory factors: changes in retail prices in the previous periods; changes in wholesale prices in that period as well as previous periods; and an ‘error correction term’ that is the difference between retail prices and their equilibrium level observed in the previous period.

We began by estimating this model with the use of data on the national average retail prices that are published by the Department of Business, Energy and Industrial Strategy (BEIS) and wholesale prices that we constructed with the use of data from Platts.Footnote 30 We estimated the model with the use of data on a weekly basis from January 2015 to August 2022. We noted that the Russian invasion of Ukraine in February 2022 could have changed the relationship between wholesale and retail prices; consequently, we estimated the model for both the full period, and a truncated period that ended in January 2022 (Fig. 4).

Fig. 4
figure 4

Source: BEIS, Platts, Bloomberg and Bank of England data, and CMA analysis. Note: The solid black and grey lines correspond to pass-through rates for a positive and negative cost shock, respectively. The dotted black and grey lines are confidence intervals (at 95%) that correspond to the given pass-through line. In general, when the confidence intervals do not interact, we detect the presence of “rockets and feathers”.c

Impulse response functions for national model.

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When analysing the truncated dataset—excluding data from February 2022 onwards—we found no evidence of asymmetry in the patterns of pass-through. However, when we extended the data set to include data up to August 2022, we found some evidence of rockets-and-feathers pricing.

In our final report we presented the results of a local model that used data on prices at individual PFS stations from Experian, rather than national average prices. We used this to test whether the patterns of rockets-and-feathers pricing that we began to observe in early 2022 persisted. We focused our analysis on the four supermarket retailers.

Since we did not have sufficient data to estimate the model for 2023 alone, we estimated it both including and excluding the 2023 data.

For diesel, there was a clear difference between the speed of pass-through—particularly for diesel when the 2023 data are included. For instance, for Asda, the analysis shows that the inclusion of the 2023 data leads to a faster pass-through of positive cost shocks and a slower pass-through of negative cost shocks.

Each supermarket retailer’s positive and negative response function is asymmetric when the 2023 data are included, which indicates that they have followed the same pricing pattern: rockets and feathers, albeit to different degrees. For petrol, the inclusion of the 2023 data did not make a substantial difference.

3.7 Conclusion

The analysis, set out above, formed an important part of our market study of road fuels. The analysis of supermarket pricing strategies and performance over time showed that competition was generally led by certain low-cost supermarkets’ setting the pace at which other retailers (supermarkets and non-supermarkets) follow. However, the historic price leaders—primarily Asda but also Morrisons to some extent—have been taking a less aggressive approach to pricing. This has led to a weakening of competitive forces in the market.

As a result, we found that drivers have been paying more than would otherwise have been the case. We estimated that the financial impact of the 6 pence per litre increase in average supermarket fuel margin from 2019 to 2022 results in a combined additional cost of around £900m for customers of the four supermarket fuel retailers in 2022 alone, which is equivalent to approximately £75m a month for this period. Given our assessment of the market, we recommended two remedies, as we noted above: an open data fuel finder scheme, and an ongoing fuel monitor function,

4 The CMA Microeconomics Unit

4.1 History and Purpose

Prompted by the Penrose report “Power to the People”,Footnote 31 the CMA this year also established an economic research unit: the Microeconomics Unit. The Microeconomics Unit is tasked with leading existing CMA research work—such as the regular State of UK Competition report and the annual Positive Impact Assessment—as well as expand the CMA’s research capabilities on the topics of competition, innovation, and productivity.

The Microeconomics Unit is based at a new cross-government campus that houses government departments with an economic focus, which reflects its role in providing advice beyond the CMA. Other departments with a significant presence at the Darlington Economic Campus are HM Treasury, the Department for Business and Trade, and the Office for National Statistics. The creation of a new, separate unit demonstrates the CMA’s belief in the importance of independent, open-access, collaborative research in informing evidence-based policy.

There are three reasons to do economic research in the CMA. First, competition, innovation, and productivity are vitally important to the work of the CMA and wider government, and are critical to UK economic growth. The Microeconomics Unit’s goal is to provide economic expertise on these issues.Footnote 32

Second, economic research ensures that the CMA is abreast of emerging issues in industrial economics and is as effective as possible in helping people, businesses, and the UK economy by promoting competitive markets and tackling unfair behaviour. For instance, issues of common ownership, labour market monopsony, killer acquisitions, and the link between market concentration and political lobbying are active areas of academic debate and could have significant implications for the types of cases that the CMA pursues, and how it builds a theory of harm. An active research function improves the analysis that is conducted in the core casework of the CMA by exposing colleagues throughout the organisation to cutting-edge thinking and methods, attracting high-quality staff, and providing the organisation with a deep pool of knowledge to draw on as required. It also enables us to access resources and funding outside the organisation, which will allow the CMA to provide better value for public money.

Third, an active economic research function allows the CMA to engage in the wider regulatory debate and to influence competition policy in the UK and globally. By anticipating emerging competition issues and leading innovative thinking on remedies, the CMA can leverage its resources to play an important role in global competition economics.

The CMA already has a small economic research function; to date the research has been conducted within the Office of the Chief Economic Advisor. This includes:

  • The State of UK Competition Report: our regular assessment of how well competition is working in the UK and what this means for people and businesses.Footnote 33

  • The Annual Positive Impact Assessment: our report on the expected direct financial benefits to consumers of the CMA’s work, and our assessment against our target of delivering benefits at least ten times our relevant costs to the taxpayer.Footnote 34

  • Ex-post studies of interventions: e.g., the Lear Report on merger control decisions in digital marketsFootnote 35; the impact of BAA divestments.Footnote 36

  • Ad-hoc research studies: e.g., a 2015 study on the effect of competition policy on productivityFootnote 37; a study of the effects of algorithms on pricing.Footnote 38

These regular outputs will continue to be part of the CMA’s published work. The State of UK Competition report in particular has already proved to be an important part of the public debate, and we aim to build on it.

However, the ambition for the Microeconomics Unit is to collaborate with partners across government and the wider research community to deliver a broad, consistent, and high-quality stream of relevant research to support the competition and other work of the CMA and wider government work on topics that involve investment, innovation, competition, and productivity.

4.2 The New CMA Economic Research Strategy

In March this year, the CMA for the first time published an economic research strategy. The document is tied to the establishment of the Microeconomics Unit and sets out why it is essential that the CMA should engage in economic research, what areas of research are of particular interest in the medium term, and how the CMA will initiate, conduct, and disseminate research to ensure maximum benefit to the organisation, wider government, and the public.

The research strategy covers the CMA’s novel, explorative analysis to be published externally and aimed at contributing to the academic, policy, and public debate of open issues that are related to competition and productivity. The CMA has published this economic research strategy to ensure transparency about our research interests, practices, and outputs, and to enable stakeholders and potential collaborators to understand how best to work with us and how to access CMA research outputs.

The areas of research interest that are identified in the research strategy aim to guide work of CMA staff and to inform potential collaborators. The CMA will review and revise its areas of interest regularly to ensure its economic research function still serves the goals outlined in this strategy. The current research strategy lists seven distinct themes:

Innovation, investment, and productivity. The UK productivity puzzle in recent decades is well documented, as is the degree to which investment and innovation activity has fallen since at least 2008. The causes that underlie these trends are, however, less well understood. In this area, the CMA is particularly interested in improved measurement of innovation inputs, outputs, and outcomes beyond patents; theoretical and empirical research on the link between competition and productivity; and research on the drivers of investment—especially in intangibles—including market structure.

Understanding markets and market power in the aggregate. A primary aim of the new CMA Microeconomics Unit and this research strategy is to understand better the causes and consequences of market power in the economy as a whole. This requires better data on market and substitution patterns, and a better understanding of the relationship between market structure, technological fundamentals, and market power. Particularly relevant topics in this area for the CMA include new data or methods to measure markets and substitution patterns; improved data or methods for production function estimation; and research on drivers of economy-wide trends in market power.

Data, platforms, and digital markets. Digital markets and platforms sit at the heart of the modern intangible-heavy service economy. Data have the potential to drive both consumer-serving innovation and to entrench market incumbents. Competition authorities are grappling with the implications of these competing forces for policy. For the next few years, topics of particular interest are: the implications of platform structure and contractual arrangements for welfare; theoretical and empirical research into digital platform ecosystems; and the economics of privacy regulation and the value of data for firms and consumers.

Supply chains, monopsony, and labour markets. Traditionally, competition authorities have focused on horizontal product market competition. Market structure may also influence supply chains, including their resilience in the face of unanticipated shocks. Market power may also take the form of monopsony in labour or other input markets, which distorts employment and investment choices and harms consumer welfare. The CMA is seeking to understand better the structure of supply chains, monopsony power in input markets, and resilience to shocks; to measure labour markets, measure search frictions, and estimate labour market power; and to advance theoretical and empirical research on the role of labour unions and other institutions.

Non-market effects of market power. Market power may interact with other market failures in ways that are hard to predict. Decarbonisation for instance is a key topic for economic policy, and one that is potentially fraught with market failures. The CMA is keen to explore if and how competition policy and regulation might play a beneficial role in the structural transformation towards “Net Zero”, alongside other policies. Similarly, market power may affect: externalities vis-a-vis consumers in markets with addictive goods; insurance markets with pooling and separating equilibria; and the process whereby companies attempt to translate market power into political influence via lobbying. The CMA hopes to make progress in research on: regulatory policies in support of decarbonisation; optimal pricing and advertising of addictive goods or with habit formation; and corporate behaviour with non-market influence, for instance through lobbying.

Corporate ownership and firm organisation. Corporate ownership structures and the organisation of the firm are active areas of research both in antitrust economics and for wider productivity concerns. Within competition economics, common ownership and vertical mergers have received increasing attention. More widely, managerial incentives, organisational, practices and the boundaries of the firm may underlie major trends for productivity, wages, and investment. The CMA is particularly interested in the importance and effect of: common ownership and interlocking directorates; efficiency and anticompetitive explanations of vertical mergers; and outsourcing, organisational practices, and within- versus between-firm wage inequality.

Evaluating competition policy. A large and growing literature evaluates individual mergers ex post, but less is known about the ex-ante desirability of specific antitrust rules or competition policies. These practical rules are not always rigorously founded in scholarly work. Even less is known about the desirability of entire competition regimes over many cases, yet this question is crucial for competition authorities. In this area, the CMA is particularly expecting to pursue theoretical and empirical work on: merger decision rules, including deterrence effects; empirical cross-country comparisons of competition regimes; and theoretical and empirical research into novel issues that arise from competition casework.

In addition to these topics of interest, the research strategy outlines the legal, ethical, and confidentiality principles that the CMA will follow when conducting economic research. Among others, the Government Analysis Function—which includes economists at the CMA—has signed on to the Concordat to Support Research IntegrityFootnote 39 and is therefore committed to upholding rigour and integrity in all aspects of its research.

In line with similar policy institutions, the CMA will draw clear distinctions between three different types of research output: (i) outputs that represent the institutional view of the CMA and feature CMA branding; (ii) outputs that are produced by CMA staff as part of their work time that do not represent the settled view of the organisation; and (iii) outputs that are produced by CMA staff on their own time without the use of CMA resources.

Regardless of the type of output, CMA research will follow best practices in disseminating research in a way that increases public trust. Where possible, methods and data will be shared with others, and research outputs should be openly accessible to all users.

4.3 Ongoing Projects, Outreach and Next Steps

The Microeconomics Unit is working on three larger pieces of research at the time of writing; they are all tied to the themes of the research strategy: A first piece uses microdata on innovation spending from the UK Office for National Statistics to investigate within and between industry changes in UK innovative activity, the relationship between firm and market characteristics (such as firm size, age, and changes in market structure) and innovation. It aims to address the ongoing debates with respect to: superstar firms; the rise of the intangible economy; and the UK’s flagging productivity and innovation performance.

A second report will provide an overview of labour market power in the UK over the last 20 years; this will be similar to the product-market focused State of UK Competition report. This piece of research will include estimates of firm-level labour markdowns, measures of labour market concentration and the concentration-wage relationship and novel evidence on a range of policy-relevant labour market topics. In particular, the report will feature both worker- and firm-level evidence on the prevalence of restrictive covenants in the UK, and the role of the gig economy in either supplementing or replacing full-time employment.

Finally, in the spring of 2024, the CMA will publish the next iteration of its State of UK Competition report. The report will build on the previous two editions, which were published in 2020 and 2022, and will feature new data and an updated methodology.

In addition to these bigger projects, the Microeconomics Unit is working on several initiatives to improve the UK data landscape in relation to competition, innovation, and market power. In collaboration with the CMA Data, Technology, and Analytics (DaTA) unit, work is underway to construct ownership networks for the UK company population. With the support of the Office for National Statistics, several ongoing projects aim to improve our measures of market boundaries in ways that can be scaled up to the aggregate economy with the use of novel survey and financial transactions data.

The Microeconomics Unit is engaging the academic community in a variety of ways: We have established a regular CMA economic seminar series, and we are organising workshops and conferences on topics from digital platforms to innovation. With the recruitment of the new academic panel and participation in the UK Research and Innovation (UKRI) Policy Fellowship scheme, the CMA expects this dialogue with the academic community to intensify in the coming years.

The creation of the Microeconomics Unit represents a first step towards a bigger contribution by the CMA to the public debate with respect to competition, innovation, and productivity: in the UK and abroad. We encourage interested readers to reach out to the Microeconomics Unit and hope to report back on our research work soon.

5 Conclusion

This article has highlighted three major pieces of work that the CMA undertook in the last 12 months: First, it discussed the Meta/GIPHY merger case: the first Big Tech merger blocked by any regulatory agency. From an economic point of view, the case highlighted several interesting issues with respect to dynamic competition concerns in merger casework.

Second, the road fuels market study examined pricing behaviour in an important consumer-facing market. Two novel pieces of analysis highlighted that competition had weakened because historic price leaders have been taking a less aggressive approach to pricing.

Finally, the establishment of the new Microeconomics Unit creates new capabilities for engaging with relevant academic research, building the empirical evidence base for competition policy, and ensuring that the CMA is “on the front foot” as technologies, competitive strategies, and regulatory frameworks evolve.