Yesterday saw the European Competition Network (ECN) of competition authorities put out a joint statement on the application of competition law during the Covid-19 crisis. The short version is:

– competition law already involves taking account of the market circumstances – so chill out, we’re on it;

– we’re not going after you for cooperating to avoid shortages (also, this kind of cooperation would be legal anyway – think Art. 101(3) efficiencies) – so chill out, and we’ll give you as much informal advice as you want;

– but we are coming for you if you exploit the situation and rip people off if you have an essential product in short supply – so don’t totally chill out, you also better watch it;

– and manufacturers, please go ahead and set maximum retail prices to keep distributors honest – erm, are you sure? Let’s come back to that one.

There are already some bolder calls out there too, on both sides of the fence:

– think tank Open Markets (endorsed by the former Chief Economist of DG Comp) has called for a temporary prohibition on all large mergers; and

– free marketeers have criticised the intervention on high prices – arguing that it will lead to shortages, rationing and will blunt incentives for getting more product into the market.

So what should competition policy look like in a crisis like this? Here are some initial thoughts from an economist’s point of view.

Should we press the pause button?

Open Markets wants a ban on any takeover by firms with more than $100 million in revenue. One reason they give is that authorities might struggle for capacity. DG Comp has already signalled that it wants firms not to notify new mergers at the moment for capacity reasons (including the capacity of third parties to respond properly to market investigations). Fair enough, we all need to make adjustments to what is possible at the moment.

But their call goes beyond that, asking not just for a delay, but a more fundamental policy shift:

“The history of the Panic of 2008 and the subsequent Great Recession instructs us that such a massive, uncontrolled consolidation will result in the unnecessary firing of millions of employees, the unnecessary bankrupting of innumerable independent businesses, a dramatic slowing of innovation in vital industries such as pharmaceuticals, and a further concentration of power and control dangerous both to our democracy and our open commercial systems”

Funny, isn’t it, how on so many fronts the best crisis policy coincidentally just happens to be whatever more extreme and unpalatable policy suggestion you already wanted but couldn’t get away with pre-crisis?

Major economic catastrophes can in theory be like forest fires. They are enormously damaging, but also present an opportunity for growth and renewal. This is sometimes referred to as the “cleansing effect” of recessions where lower productivity and less efficient firms exit the economy, replaced by their more efficient and more productive rivals. But that’s pretty high economic theory. In the real world, without proper economic support, perfectly good firms can go under through lack of credit or sheer bad luck. That’s why super-active macroeconomic policy like we’re seeing at the moment makes a lot of sense.

But one shouldn’t go overboard, and start throwing out what would be perfectly natural adjustments even in normal times. Firms fail or are inefficient. Allowing those firms, their people and their assets to be taken over by a survivor makes perfect sense – and it’s at least one way of stabilising the economy without leaving a massive cheque for the taxpayer to pick up.

Of course a crisis shouldn’t be an opportunity to allow unbridled concentration of economic power to take place. But competition authorities aren’t about to let that happen anyway. They are, by and large, staffed by those lucky folk who can do their work from home (European Commission IT infrastructure permitting).

But what about all that evidence gathering? Some of us believe that authority decisions are already too long, and already involve gathering too much data and documentation. Why not use the crisis as an opportunity for some sensible readjustment to take place in the name of pragmatism? That might be one Covid-19 inheritance (like a bit more home working) that we all decide to hang on to post-crisis.

Pragmatism on process might also be a good idea if the economic crisis deepens. Regulators who move too slowly might risk the viability of firms that are in serious financial distress. So perhaps authorities should also be saying more to the market about how they will deal with the failing firm test. It’s known for being a very hard standard to meet in normal times, almost always needing the extra time and cost Phase 2 investigation. Again, perhaps some greater pragmatism would make sense in 2020.

Should we punish high prices?

Yesterday, Andrea Coscelli, freshly re-appointed Chief Exec of the UK CMA said “our immediate priority is Covid-19 and we will be monitoring market developments to enable us to intervene as quickly as possible, if needed. Ultimately, consumers must be at the centre; people expect regulators to stand up for them and that’s exactly what we are going to do.”

The CMA, like the ECN, has issued a stark warning to firms trying to exploit a crisis with higher prices. Meanwhile, free market think tanks like the Cato Institute have railed against these measures as interfering with basic economic mechanisms:

“[W]hat we have here is good old supply and demand – the desire for these products is surging, while in the short‐term supply is relatively constrained. In this environment, price rises play a useful role in deterring over‐purchasing and hoarding, whilst encouraging more supply to be brought to market in future. Sharp, for example, has reoriented a TV factory to producing face masks. We’d get much more of this, or companies working overtime to meet the new demand, if there was clear profit signal to do so.”

Again the risk is that one allows high economic theory to get in the way of common sense. Yes, the price mechanism is important for making supply match demand. But get real. The opportunities to exploit shortages without making any meaningful contribution to the supply side are also huge. And where firms have shifted their production facilities to match shortages (e.g. a brewery in Germany has started mass producing hand sanitiser) these haven’t been a response to prices, they have been an act of humanity.

However, what should be made clear is that big price rises don’t automatically mean exploitation. In times of shortage, getting enough product to market by boosting supply will mean higher prices – costs will rise as less efficient means of supply are brought to market. I fear that encouraging manufacturers to impose maximum retail prices might put a squeeze on retailers just at a time when we all want open and fully stocked shops a lot more than we want a price freeze. Retailers too will have rising costs when they are working through the night to keep the nation fed.

Do competition authorities need emergency powers?

Regulators have been talking big about how they will crack down on exploitation during the crisis. The importance of this communications strategy shouldn’t be understated. I know from personal experience that the CMA’s message in the UK has already reached the local Facebook and Whatsapp groups covering our little corner of West London. Some locals are already gearing up to report their shops for doubling the price of eggs.

But the CMA and others are only talking about being proactive with their existing powers. Whilst threatening an investigation is a potentially powerful tool, is it enough? Equally, do we really want to spend a large chunk of the post-crisis period in lengthy investigations picking over the bones of who did what to whom? The OFT’s dairy investigation comes to mind.

Here is just one thought for consideration. A parallel emergency measure whereby:

– competition authorities were granted temporary powers to compel firms to cease and desist from certain conduct (for example, for the next six months only), where any conduct which was stopped would not later be subject to fines; and

– alongside this, a time-limited guarantee to firms that any conduct which they self-declare to their competition authority will also be immune from fines for the duration.

That way, firms would have the incentive to let their authority know what they were up to (to earn immunity) and authorities would have the powers they need to quickly put a stop to exploitation (or any other abuse) – without the prospect of needing to do a lengthy investigation down the track.

Overall, its important to find ways of adapting our system so that everyone can move quickly in a crisis. And, to use a phrase much deployed at the moment, ensure that no-one is punished for doing the right thing.