Competition policy

How the CMA controls mergers, cartels and dominant firms, the trade-off between market power and cost savings drawn step by step, and the remedies it can use.

Four mobile networks became three.

On 31 May 2025 Vodafone and Three completed their merger, creating VodafoneThree, the UK’s largest mobile network with about 27 million customers, ahead of O2 and EE. Four network operators became three. The Competition and Markets Authority (CMA) cleared the deal in December 2024, but only after the companies committed to invest about £11 billion in their network, to cap prices on some tariffs and data plans for three years, and to offer smaller networks that use them, such as Voxi and Smarty, fixed wholesale prices and terms for three years.

Why would a competition authority let four become three? And why attach conditions instead of simply saying yes or no?

Sources: Which? (2025); Clifford Chance (December 2024).

What competition policy does.

In the UK, competition law is enforced by the CMA. It has three main jobs:

1. Mergers. The CMA can investigate a merger where the firm being bought has UK turnover above £100 million, or the merged firm would supply 25% or more of a good or service in the UK. It asks whether the merger would cause a substantial lessening of competition, then clears it, clears it with remedies, or blocks it.
2. Anti-competitive behaviour. Under the Competition Act 1998, cartels and the abuse of a dominant position are illegal. Firms can be fined up to 10% of their worldwide turnover.
3. Digital markets. Since 2025 the CMA can give the biggest tech firms strategic market status and set rules for how they behave: Google in search, and Apple and Google in mobile platforms, in October 2025.

Sector regulators such as Ofcom, Ofgem and the ORR share the CMA’s competition powers in their own industries, and also cap prices in the network monopolies they oversee. Price caps are covered in the privatisation lesson.

The model behind a merger decision is a trade-off, and you can draw it.

Think first

Two firms merge, and the merged firm’s costs fall.

Before the merger there was plenty of competition. Afterwards one firm has much of the market.

What is most likely to happen to the price consumers pay?

Lower costs do not have to mean lower prices. A firm with market power sets price where MC = MR, not where price equals cost, so the price can rise even as costs fall. Whether the merger is good overall depends on weighing the two, which is exactly the judgement the CMA makes.

Step by step

1. Start before the merger. To keep it simple, assume firms’ costs are constant: MC1 = AC1. Competition pushes price down to cost.

2. Where demand meets MC1, price is Pc and output is Qc. Price equals marginal cost, so this outcome is allocatively efficient, and price equals average cost, so firms earn normal profit.

   Teacher tip: With constant costs, one horizontal line is both MC and AC. Label it MC1 = AC1 so the examiner can see you know why price equals cost here.

3. Now the merger. The merged firm has market power, so it faces the whole demand curve and has an MR curve twice as steep. Suppose combining networks also cuts its costs, to MC2 = AC2.

4. It maximises profit where MR = MC2, at Qm, and reads the price up to demand: Pm. Pm is above Pc. Costs fell, yet the price rose, because the firm no longer has to price at cost.

   Check: Where does the merged firm set its output?

   Like any profit maximiser, it produces where the last unit adds as much to revenue as to cost: MR = MC, using its new, lower cost.

5. The cost of the merger. Consumers who still buy pay Pm instead of Pc. And the units between Qm and Qc, which were worth more to consumers than they cost to make before the merger, are no longer produced: a deadweight welfare loss .

6. The benefit of the merger. Every unit up to Qm is now made for MC2 instead of MC1. That cost saving, the green rectangle, is a real gain: resources freed for other uses. The CMA has to weigh it against the deadweight loss.

   Check: What does the green rectangle measure?

   Each unit up to Qm now costs MC2 instead of MC1 to make. Those resources are freed for other uses: a gain to society.

7. So the CMA has three options. Block the merger. Clear it with a structural remedy, such as selling off part of the business to a rival. Or clear it with a behavioural remedy: promises about how the firm will act, such as VodafoneThree’s £11 billion investment, three years of price caps on some tariffs and fixed terms for smaller networks.

   Check: Mergers are weighed case by case, but price-fixing cartels are banned outright. Using the diagram, why?

   A cartel moves the market to the monopoly price and output, causing the same deadweight loss, but the firms stay separate, so there is no cost saving to weigh against it.

8. The same diagram explains why cartels are illegal. Firms that agree to fix prices act like a single monopolist, moving the market from Pc to the monopoly price, but with no cost saving at all to set against the deadweight loss. The CMA can fine them up to 10% of worldwide turnover, and the first member to confess can avoid a fine: a deliberate prisoners’ dilemma that makes every cartel member want to cheat.

   Check: A market has only three firms, but a new firm could enter cheaply and leave without losing much. What can you conclude?

   If entry and exit are cheap, the threat of new rivals can keep prices close to cost, so a market with few firms can still be competitive.

What your diagram must show

• Demand and a horizontal MC1 = AC1, with Pc and Qc where they meet
• MR starting with demand and twice as steep
• A lower horizontal MC2 = AC2 after the merger
• Pm and Qm at MR = MC2, read up to demand, with Pm above Pc
• Deadweight loss between demand and MC1, from Qm to Qc
• Cost saving between MC1 and MC2, from zero to Qm

A common mistake

They put the price where demand meets MC2, as if the merged firm passed all of its cost saving on. A firm with market power sets MR = MC2 and reads the price up to demand: higher than before.

Exam question

Explain why a competition authority might allow a merger that reduces competition.

Model answer

A merger between rivals gives the new firm market power. It maximises profit where MR = MC rather than pricing at cost, so its price rises above the competitive level and output falls. Units that consumers valued at more than they cost to make are no longer produced, which is a deadweight welfare loss.

But a merger can also lower costs. Combining two networks, for example, removes duplicated fixed costs and gives economies of scale, so every unit is made with fewer resources. That cost saving is a gain to society. If it is larger than the deadweight loss, total welfare can rise even though consumers pay more.

So the CMA weighs the two. It can block a merger that would substantially lessen competition, but it can also clear one with remedies that keep the benefits while limiting the harm. When it cleared Vodafone and Three in 2024, it required about £11 billion of network investment, three years of price caps on some tariffs and fixed wholesale terms for smaller networks.

**Evaluation:** the cost savings are forecasts made by the merging firms, who have every reason to overstate them, and they go to the firm rather than to consumers. Behavioural remedies also end: once VodafoneThree’s three-year caps expire, consumers depend on the three remaining networks competing hard.