How should Decisions be made in a Competition Authority?

(by Bruce Lyons) The proposed merger of the OFT and Competition Commission is a great opportunity to review how decisions should best be made in a competition authority.  There are plenty of alternative models and most countries seem to have their own distinctive styles.  Much of the reputation of different agencies results from the expertise of its staff, including economists, lawyers and administrators.  This can sometimes paper over the cracks of a fragile formal decision-making structure.  In the long term, however, a robust institution is one that provides a well-informed challenge to both firms and its own staff.  Unfortunately, there is a serious danger that the UK’s proposed Competition and Markets Authority (CMA) will be given a hotch-potch of superficially targeted, but in practice incompatible, decision processes by which different bits of competition law are enforced by a divided institution.

How different are the skills required to gather and interpret evidence in different elements of competition law (e.g. mergers, agreements, abuse of dominance, market inquiries)?  The answer is ‘very little’.  The essence of competition law, appropriately interpreted through the lens of economic effects, is that it requires a blend of law and economics skills to implement.  This is true of assessing the likely effect of a merger or rebate scheme or exclusive contract on price or investment or innovation incentives.  The UK system, despite its common law roots, falls firmly in the European tradition of agency-led inquisitorial cases.  The courts are for appeal against agency decisions (unlike in the adversarial US system).  There is also almost no private action in prosecuting competition cases in the UK.  In both the OFT and CC, staff with economic and legal skills gather the evidence.  A similar blend of skills, augmented by additional experience, is necessary to decide a case.

Given that similar skills are required by decision makers for most categories of competition case, who should make those decisions?  The current UK system has two institutions with very different processes for making decisions based on a staff investigation.  As I said in an earlier post: ‘The OFT has a model of decision making based on the European Commission (DG Comp).  Case teams investigate and this is followed by an executive decision.  In contrast, the CC arose out of the Royal Commission model of decision making.  This has a panel of non-executive experts brought together to advise the staff case team and then decide each case.’  Recall that the OFT decides on anticompetitive agreements, abuse of a dominant position, and first phase mergers and market inquiries.  The CC decides second phase mergers and markets.

Can this mix be justified? No, but spurious arguments are sometimes wheeled out to justify this historical accident.  For example, ‘mergers are different because they are prospective, so require skills to predict likely effects’, but current practices (e.g. restrictive contracts) also need an assessment of what would happen in their absence.  Another argument is that ‘anticompetitive agreements and abuse of market power are illegal, so subject to fines while proposed anticompetitive mergers or uncompetitive markets are not’, but this is an Alice-in-Wonderland justification for having the illegal activity decided by a single executive while mergers and markets are decided by a panel of independent experts!

If there is to be a unified decision making structure, what should it be?  Executive decisions are speedy and usually reliable when implementing relatively straightforward rules.  In cases where issues must be balanced and nuanced, however, there is value in widening the decision-making base.  Also, when the decision is based on evidence provided by their own staff, an executive can quite naturally be influenced by staff management and support issues.  A panel’s strength is in the diversity of experience it brings to a judgment, and the ability to debate key issues between equals.  A non-executive panel will also be less influenced by organisational priorities or career concerns, though it may be a little slower to reach its decision.  It is shriekingly obvious to me that executive decisions are perfect for phase one decisions, including whether to open a serious antitrust investigation; and decisions by a non-executive panel have exactly the right qualities for deciding second phase cases, including antitrust.  The latter require impeccable credentials not least because they can involve the transfer of private property (e.g. a fine or preventing the sale of business).

The clinching issue for a unified structure of decision making, with non-executive panels deciding all phase two cases (including antitrust), is that we need a coherent appeals system.   Currently, natural justice and the Human Rights Act mean that decisions taken by a panel (i.e. the CC) are subject to judicial review (i.e. the court can require the CC to investigate certain points more carefully and to reconsider its decision), while executive decisions (i.e. OFT antitrust) are appealed ‘on their merits’ (i.e. the court can replace the OFT’s decision with its own decision).  Judicial review is consistent with the inquisitorial approach of agency decisions.  Indeed, it is used by the European Court in relation to all European Commission decisions.  JR keeps the agency on its mettle but does not unbalance decision making. 

Unfortunately, ‘merits’ appeals completely unbalance an inquisitorial competition case.  Agency staff in the OFT (and, indeed, Brussels) search for unbiased evidence on which to present the basis for a decision.  If such a decision is appealed ‘on its merits’, the firms involved have every incentive to present one-sided evidence to the court.  In a full-blown adversarial system (as in the USA), the agency might respond by selectively emphasising its most powerful evidence of anticompetitive behaviour, but that cuts against the grain of an inquisitorial system where the agency is itself in search of the truth.  Furthermore, the court (i.e. CAT) does not have a full complement of staff to investigate cases, even though it does have a panel of independent experts to decide them.  It can then face technical expert evidence from, possibly, half a dozen well-funded defendants plus one modestly funded OFT expert trying to support the middle ground.  In such circumstances, a ‘merits’ appeal system cannot be expected to work effectively.  It is far better to have cases decided by an independent panel and subject to appeal on grounds of judicial review.

If the arguments are so clear, why am I so worried that the proposed CMA will fail to have a rational structure?  History has a powerful hold on institutions, particularly those with fine international reputations.  The status quo is more aggressively defended than attacked, especially between collegial institutions that have no wish to undermine each other.  Meanwhile, law-makers in government pay more attention to accountability to parliament than they do to the nitty-gritty of how individual decisions are made.  The complex set of options set out in the current consultation might easily muddle into place.

2 Responses to How should Decisions be made in a Competition Authority?

  1. […] wider views in relation to the reform of antitrust enforcement can be found in an earlier post and in the CCP’s evidence to the BIS consultation.] Like this:LikeBe the first to like this […]

  2. […] leaves us with how decisions will be made in the CMA.  I have already written about the dangers of simply welding together two organisations with very different cultures and decision making […]

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