This policy brief, which you can find here, discusses how competition policy can help address the immediate challenges raised by the COVID-19 crisis, whilst looking to the post-pandemic future. It describes competition principles that governments can follow when designing support measures for the economy, and outlines actions competition authorities can take to address the challenges of the current crisis. Section A focuses on state interventions, while Section B focuses on competition enforcement actions in the short and medium term.
A first section concern as regards state intervention is maintaining competitive neutrality.
In times of extraordinary, and temporary, demand and supply shocks, governments can support consumers, workers and firms to weather the storm while ensuring readiness to resume economic activity once the crisis passes. This may take the form of grants, subsidies, bank guarantees or other state support. Nonetheless, there is a danger that state support may distort the playing field between companies that receive aid and their competitors that do not. General aid based on objective criteria and clear rules applicable to all business (e.g. deferring taxes, or subsidising short-time work across all sectors) should not raise any issues from a competitive neutrality perspective. Support for specific companies may prove more problematic from a competition viewpoint, and may require clearer rules to ensure that it does not affect the level playing field.
Competition policy can inform the development of exit strategies from state support schemes that will preserve market mechanisms while avoiding unnecessary distortions. Exit strategies may include introducing incentives for exit from state support as soon as market circumstances permit (e.g. high remuneration for the government recapitalisation or requiring a strict dividend remuneration policy), and easing markets back toward normality in a manner that promotes competition. It is very important that support measures should be limited in time, and governments should stop providing support as soon as conditions allow.
A second topic related to state intervention focuses on industrial policy and protectionism.
As governments switch focus from urgent short-term measures to longer-term efforts, there may be a temptation to engage in industrial policy, and in particular to protect and favour certain industries or companies. In the last few years, there has been an emphasis on selective industrial policy tools such as clustering, place-based and mission-oriented innovation policies. These policies, which focus on addressing specific market failures, should continue to be favoured over more traditional selective policies, e.g. more lenient merger control. Shielding companies from competition can reduce their efficiency and their contribution to the economic recovery. Markets should be kept open and policies should respect competitive neutrality principles.
The paper then moves onto enforcement, and in particular onto short-term impacts of the pandemic on firm behaviour.
The COVID-19 crisis caused both supply and demand shocks. In particular, COVID-19 led to a sharp increase in the demand for certain products while also creating difficulties in the production or distribution of goods as a direct consequence of the confinement measures applied to many workers.
In such circumstances, some firms might strategically exploit consumers by increasing their prices suddenly and substantially. While price spikes may be a legitimate reaction to market circumstances caused by an exogenous shock, such as shortages of products in high demand or disruptions in international supply chains, they may also be deemed unlawful under price gouging rules, consumer law and, at least in some jurisdictions, prohibitions of abuses of dominance. Bringing exploitative pricing cases is challenging in all these cases. Under competition law, authorities will first have to establish the existence of a dominant position. While other regulatory approaches do not have to overcome this obstacle, in all cases enforcers must distinguish between behaviour that is abusive or unfair from lawful responses to temporary shortages resulting from the emergency at issue. Given these difficulties, price controls implemented by the government may be considered instead. While such policies may protect consumers from price gouging in the short-run, they risk distorting price signals that would otherwise encourage greater production and swift market entry to address shortages.
Another area of concern is collaboration between competitors. Such arrangements may be necessary during crises to increase the production of a certain product or co-ordinate an essential service, and may even be promoted by governments. However, competition authorities should ensure that such co-operation does not spill over into hard-core cartels, and that any short-term co-operation does not extend any longer than necessary to address the crisis. In particular, some firms may be tempted to enter into so-called “crisis cartels”, i.e. agreements among most or all competitors to restrict output and/or reduce capacity, so as to increase profitability and prevent market exit in times of crisis. In the past, similar agreements have been permitted and even fostered by governments themselves, but evidence shows that such arrangements are extremely harmful and should be actively cracked down.
Another area where competition authorities may wish to act or provide input to governments concerns conduct directed at, or undertaken by workers during the crisis, particularly workers faced with monopsony power (such as in digital platforms). [Note: a good example this is the joint memorandum issued today by the FTC and the DoJ regarding the enforcement of antitrust laws against anticompetitive agreements that seeks to take advantage of the COVID-19 pandemic to harm essential workers in the labour market].
A last section, also on enforcement, considers the medium-term implications of the crisis.
A structural consequence of the economic crisis triggered by the COVID-19 pandemic will probably be an increased level of market concentration, as financial and economic difficulties will force some firms to exit the market in the aftermath of the crisis. These difficulties should lead to increased M&A activity driven by companies seeking to improve their condition by merging with healthier competitors. It is likely that competition authorities will be called to scrutinise a number of urgent and critical mergers in the aftermath of the crisis, including alleged “rescue mergers”. Merger review might become particularly challenging for so-called rescue mergers in which the parties claim that the target firm would exit the market but for the merger (“failing firm defence”), and request authorisation for transactions that would have otherwise restricted competition. Competition authorities will have to analyse such mergers carefully to ensure that the parties meet the standard of proof to demonstrate that the failing firm defence should indeed apply, in order to avoid long-lasting structural damage to a number of markets.
On the other hand, competition authorities will likely come under pressure to clear certain mergers for the sake of public policy objectives. These may include the preservation of employment, the rescue of national champions and ensuring the production of certain products in their territory. The crisis may further call into question some elements of the traditional analytical framework of competition policy, and require it to take into account supply chains, social cohesion and environmental considerations. This, in turn, may trigger a debate about the role of public interest exceptions in competition law, and the allocation of competences between competition authorities and other decision-makers.
For obvious reasons I will not comment on the contents of this note, which broadly reflect orthodox competition thinking. It is worth emphasising a couple of points, though: (i) each section not only provide examples, but also contain a list of recommendations for governments and competition authorities that synthetize the argument; (ii) the OECD is currently preparing slightly longer notes for a number of these topics that will not only be more detailed, but also a bit more forward-looking.