Introduction

Good evening, everyone, it is a pleasure to be speaking with you today.

In recent weeks, a number of commentators have suggested that the CMA fails to pay sufficient attention to the impact of our work on innovation and growth. Some have also suggested that the prospective new powers under the Digital Markets, Competition and Consumers Bill – which will enable the CMA to take action to tackle sustained and entrenched market power in digital markets – could further undermine innovation and growth across the UK economy. Respectfully, I fundamentally disagree. And what better audience than the Centre for Competition Policy for a discussion on how vital competition is to an innovative and growing economy.

Competition is key to innovation and growth

Both economic theory and history have taught us that the best way to sustain innovation is through open, competitive markets. Competitive markets spur firms to operate efficiently, to invest, and to innovate, so that they can maintain and build their market share by providing consumers with better or lower cost products. Conversely, where markets are not contestable and incumbents have enduring monopolies, incentives to innovate are dulled.

Innovation benefits the wider economy, driving improvements in productivity and growth. We know that in sectors and countries where competition is stronger, productivity and wage growth tend to be higher. The CMA has a crucial role in promoting competition to maximise our contribution to the UK’s economic growth.

This is reflected in the government’s draft strategic steer to the CMA published last month, which encourages the CMA to “support investment, innovation and growth by promoting competitive markets, taking steps to increase the strength of competition across the UK economy, and focusing on markets that have a significant, economy-wide impact”.

I couldn’t agree more. But this is not a new focus for the CMA. It’s been central to the CMA’s work since we were first established in 2014. When Marcus Bokkerink and I took up our roles as Chair and Chief Executive last year, we gave this even greater priority by incorporating it explicitly into our new strategy set out in our annual plan. That strategy, set by the CMA Board ahead of the government’s strategic steer being published, made clear that “the CMA’s work to promote competitive markets and tackle unfair behaviour should support productivity, innovation and growth across the whole of the UK economy” and highlighted as a medium-term priority, work in “sectors that offer the biggest potential for impact on innovation and productivity”. We therefore welcome the government’s draft strategic steer which is entirely aligned with our own priorities.

Notably, the government’s draft strategic steer also highlights, drawing on the CMA’s own state of competition report, that “one mechanism to help tackle the UK’s weak productivity is boosting competition” and that “competition is particularly weak in some parts of the digital economy”.

We know that, particularly in fast-growing markets, market leaders can consolidate power, by acquiring potential future competitors or taking actions to raise rivals’ costs, making it more difficult for emerging, innovative challengers. Dominant businesses can distort incentives for smaller firms in the same ecosystem, and their own incentives to innovate may be reduced.

Debate about the role of regulation and regulators in innovation is not new, but nor is the CMA’s dedication to innovation and growth. Competition, as a key driver of innovation and growth, has always sat at the heart of what we do. And the argument that enforcing open and fair competition is bad for innovation, is like saying football can only flourish without referees.

I’d like to spend the remainder of this speech highlighting five examples across our current and future work where the interaction between competition and innovation is key.

Example 1: merger control

The whole purpose of merger control is to ensure open and effective competition can continue unencumbered, safeguarding the conditions that allow growth and innovation to thrive.

Out of thousands of merger transactions impacting on the UK every year, the CMA steps in to prevent just a handful of problematic deals. We continue to clear the vast majority of mergers, including many carried out by the major tech firms such as Meta’s acquisition of Kustomer and Microsoft’s acquisition of Nuance. Most recently, we cleared Amazon’s acquisition of iRobot which makes the Roomba vacuum cleaner. But where, after careful consideration of all the evidence, we conclude that a merger will substantially lessen competition, including in dynamic and innovative sectors, it’s right that we step in.

For example, in the proposed merger of Illumina and PacBio, we were concerned about the impact that the merger would have on innovation in DNA sequencing. The parties submitted that PacBio was a failing firm, though our provisional conclusions did not accept this counterfactual. Since the merger was abandoned PacBio has performed strongly with a market capitalisation today of over $3.3 billion, almost four times the size of its cap at the time the merger was abandoned. In the case of Meta/Giphy, we found Giphy’s advertising services had the potential to encourage greater innovation from Meta and other market players as a separate firm.

But innovation can also form the basis for clearing deals. For example, following an in-depth review, we recently cleared the global merger of Viasat and Inmarsat. In that case we found that the satellite communications sector was evolving at rapid pace, with new companies entering the market, more satellites being launched into space, and firms exploring and entering into new commercial deals. All the evidence showed that the sector would continue to grow as the demand for satellite connectivity increases and therefore that the merged entity would continue to face strong competition.

Example 2: Action to unlock more competitive and innovative markets

The relationship between competition and innovation also features heavily in our non-merger work to promote competitive markets. For instance, our market study into mobile ecosystems indicated that weaker competition in search and social media was leading to higher prices and reduced innovation. And in our current Competition Act investigations relating to Google’s Play Store and Apple’s App Store we have been investigating behaviours that may block or restrict innovation.

But we also want to make sure that unfounded concerns about competition law compliance don’t deter legitimate and beneficial collaboration between businesses to drive greater innovation. And nowhere is this more important than in the transition to Net Zero where industry collaboration to drive game-changing innovation has a vital role to play. That’s why, earlier this year, we put out guidance for businesses making it even clearer when they can work together to innovate without breaking the law.

Example 3: Development of the CMA’s Microeconomics Unit

The CMA’s focus on the link between competition, innovation and growth isn’t limited to our cases. Indeed, our newly established Microeconomics Unit is a testament to just how dedicated the CMA is to ensuring that competition is working well to improve productivity and growth.

Many of you may be familiar with the Microeconomics Unit, but for those who aren’t, the Unit was established to lead and expand the CMA’s economic research function. This reflects in part a recommendation from John Penrose MP’s report, “Power to the People”, which recommended that the CMA’s unit should become a microeconomic sibling to the Bank of England’s macroeconomic research role. The unit will have 25 people, with a remit covering competition, consumer and regulatory economics, but will also stretch more widely into related areas of innovation, productivity and economic growth. The new Microeconomics Unit combines with our established Data, Technology and Analytics Unit, and the Digital Markets Unit to ensure we have a wealth of specialist skills in economics, data, technology and behavioural insights to keep pace with fast-moving digital markets, rapidly developing business models and the growing use of data and algorithms.

The Microeconomics Unit will provide economic expertise to inform public debate and policy. Locating the unit at the cross-government Darlington Economic Campus supports this collaboration and contributes to the Government’s Places for Growth ambition to move civil service jobs out of London and closer to more of the people we serve.

The unit’s research will also ensure that the CMA remains abreast of emerging economic issues and contributes independent research to broader debates across the global competition policy and economics community. As part of this, the unit is collaborating with academic and other researchers, building relationships in areas of mutual interest at the intersection of policy and research. The unit’s research strategy, published at the end of last year, sets out our broad areas of interest.

These include deepening our understanding of:

• trends and causes behind falling UK investment and innovation and the productivity puzzle;
• the causes and consequences of market power in the economy as a whole;
• the implications of platform structures and ecosystems for competition and the economics of privacy and the value of data;
• competition in supply chains and input or labour markets, moving beyond competition authorities’ traditional focus on product market competition;
• the wider effects of market power, such as the role of competition policy in the transition to net zero, and corporate lobbying;
• corporate ownership structures –including common shareholdings and directorships in the UK, and their implications;
• and enhancing our evaluation of competition policy, so that we ensure the CMA is as effective as possible.

The unit will also produce the CMA’s next State of Competition report in Spring 2024, deepening even further our understanding of market power, market structure, business dynamism, innovation and productivity across the UK economy.

I don’t need to tell an audience like this that, in the long run, economic growth is almost all about productivity. Or as Paul Krugman put it, “productivity isn’t everything, but in the long run, it is almost everything”.

We know broadly that competition drives productivity in three main ways:

• by acting as a disciplining device for firms to become more efficient;
• by ensuring that more productive firms increase their market share at the expense of the less productive; and
• perhaps most importantly, by pushing firms to innovate, developing new products and processes which can lead to step-changes in efficiency.

Given the important role that innovation plays in improving productivity and economic growth, it shouldn’t be a surprise that the link between innovation and competition is a key focus for the Microeconomics Unit.

You will all know that this is a widely researched and complex topic, and neither theoretical models nor empirical evidence provide a conclusive explanation for the relationship between market structure and innovation. But it isn’t controversial to note that while the prospect of future profits motivates firms to innovate, established incumbents have less incentive to innovate in existing markets because doing so cannibalises their current profits. And much empirical literature highlights the argument that greater competition tends to spur innovation in concentrated market structures. There is also some very interesting recent work providing direct evidence of the positive effect of competition policy interventions on innovation.[1]

We know that 3 sectors make up a large part of business R&D expenditure in the UK:

• professional
• scientific and technical activities, and
• information and communication, and manufacturing.

Our 2022 state of competition report showed some increases in concentration in these sectors, though as this is at a highly aggregated level, it does not in itself imply a competition issue. A recent OECD Working Paper has found that rising concentration is strongly associated with investment in intangibles – particularly innovative assets, software and data.

Underlying these general trends is significant variation between markets, driven by industry structures and firm traits. The Microeconomics Unit is planning to publish work in July that will examine this variation. We will use firm-level data to examine patterns in innovation and investment, and their links to concentration and other characteristics. This is our first piece of work in this area, intended to describe and illustrate trends, distributions and relationships. It will also identify areas for further research, which could include more in-depth examination of particular sectors, types of firm or aspects of the relationship between competition and innovation.

Example 4: The Digital Markets Unit within the CMA

The work of our Digital Market Unit is another key pillar for promoting and protecting innovation, ensuring that these increasingly transformative markets are open and competitive.

Innovative tech products and services offer immense value for people, businesses and the economy. Digital markets have provided revolutionary new practices, and a huge range of choice for consumers.

The focus of the Digital Markets Competition and Consumers Bill, which has recently been introduced to Parliament, is to protect that innovation – to ensure that markets dominated by incumbents who have entrenched and enduring market power are not closed to innovators. Indeed, as the preeminent expert and key adviser on the UK’s digital regime Professor Furman noted himself this week, innovation is “far and away the most important benefit” that the Bill is set up to deliver – the legislation was designed with innovation at its core.

We know from our conversations with tech companies large and small that firms are holding back on making investments because of the behaviour of a few powerful firms – and the Bill will help unlock this.

Our new digital market regime will allow the CMA to work in collaboration with firms to tackle issues in a faster, clearer and more proportionate way to ensure we all continue to enjoy the benefits that digital markets provide.

The regime will have three core pillars:

• First, conduct requirements that clearly set out how firms designated as having strategic market status (substantial and entrenched market power) are expected to behave;
• Second, it will allow us to introduce pro-competitive interventions which address factors that underpin these firms’ market power in a particular activity, for instance data mobility, interoperability and data access.
• And third, it will introduce new merger reporting requirements which would require these designated SMS firms to report mergers where they have a value of at least £25m and a connection to the UK.

Overall, these reforms will help to deliver and maintain a level playing field, where innovation can be rewarded and where the most powerful firms don’t act in a way that excludes innovative competitors.

Our conduct requirements and pro-competitive interventions will be tailored to specific companies and particular digital activities, and we will be able to adapt requirements over time as technology develops.

The new digital markets regime will also allow for active dialogue with designated firms, as well as challenger firms, thought-leading academics and consumer groups. We think it’s right that all companies, large and small, who have a stake in the new regulatory regime have an opportunity to contribute to it. This will also help us to ensure our regulation remains up to date, and will help us to resolve issues without the need for costly formal enforcement.

Example 5: Initial review of AI foundation models

Our new annual plan outlined the CMA’s ambition to help ensure the UK economy grows productively and sustainability. We have committed to prioritising sectors that offer the biggest potential for improvement in innovation and productivity, including markets at an early stage of development but with the potential for significant growth.

Generative AI is undoubtedly one such area. It is increasingly clear that AI has the potential to transform the way businesses compete and act as a driver for substantive economic growth. And we know it has huge potential to offer enormous benefits to consumers.

Our review will look at:

• How the competitive markets for foundation models and their use could evolve,
• What opportunities and risks these scenarios could bring for competition and consumer protection, and
• Which principles can best guide the ongoing development of these markets so that the vibrant innovation that has characterised the current emerging phase is sustained, and the resulting benefits continue to flow for people, businesses and the economy.

Our goal is to help this new, rapidly scaling technology develop in ways that ensure open, competitive markets and effective consumer protection and we will be publishing an initial report in September this year.

Conclusion

There is no doubt in my mind that the fundamental connection between competition, innovation and growth is at the heart of the CMA’s work that and the outcomes we seek to achieve. The CMA plays a crucial role in protecting and promoting competition and innovation. This is reflected in the priority we have given to innovation and growth in our Annual Plan and in the strategic steer from the government. It is fundamental to the purpose of merger control review and our action to keep markets open and competitive. And it is foundational to the new Digital Markets regime.

Moving forward, we will continue to do all we can to promote open and competitive markets, creating the best conditions for businesses to innovate and thrive in ways that benefit people as consumers and the UK economy as a whole.

I would like to thank again the Centre for Competition Policy for inviting me to speak today.

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[1] Watzinger & Schnitzer (2022, ‘The Breakup of the Bell System and its Impact on US Innovation’) analyse the effects of the breakup of the Bell System, and find the scale and diversity of telecommunications innovation increased. Poege (2022, ‘Competition and Innovation: The Breakup of IG Farben’) examines the breakup of IG Farben, finding that patenting increased strongly in technology areas where the breakup reduced concentration.