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The next decade: ensuring that competitive markets continue to deliver good outcomes for UK consumers and the economy

On 8 March 2010, John Fingleton spoke at a conference in London, jointly organised by the Regulatory Policy Insitute and the Centre for Competition Policy of the University of East Anglia.


You can download a copy of the speech here.

Introduction

After 10 years of the current competition law regime, it is timely both to reflect on what has been achieved to date and to look towards the future – to consider whether we are satisfied with where we are, and what more needs to be done.

Whilst the focus of this speech is on competition policy, such an assessment must also involve a consideration of consumer policy – the two cannot, in my view, be separated.

So, what has been achieved?

Over the last 10 years, the UK has built one of the best competition regimes in the world – one that has demonstrated an ability to balance the flexibility to deal with changing economic outcomes alongside the need for a stable and consistent standards and approach to foster long-term investment. This has been key in delivering the benefits of open and competitive markets.

But we cannot be complacent. At a time when there is increasing pressure on the public purse and when the role of competition is more crucial than ever for the success of the UK economy, we need to focus on ways to build on this success, ensure that the benefits are widely recognised, and improve the efficiency and effectiveness of the regime. The next decade will be as critical as the last.

The aim

The UK sought to achieve its aim of establishing the world’s ‘best’ consumer and competition regime with a huge programme of legislative change.

The Competition Act 1998 introduced prohibitions modelled on Articles 81 and 82 of the EC Treaty (now Articles 101 and 102 of the TFEU). Anti-competitive agreements and abuses of dominance were prohibited unless a specific exemption or exception applied.

The Enterprise Act 2002 reformed the UK’s system for dealing with mergers and markets. Ministers were largely removed from the process and decision making powers were given to politically independent competition authorities – the OFT, the sectoral regulators and the Competition Commission. The criminal cartel offence was also introduced.

In 2004, the EC modernisation programme abolished the system of notification, which had been created in 1962 but had become unnecessarily bureaucratic; and Member States were required to apply Articles 101 and 102 when applying national competition law. This has enabled national courts and competition authorities to make a greater contribution to the enforcement of the European competition rules.

In addition, much legislation (some of which flows from EU law) exists to protect consumers. Measures include the Unfair Terms in Consumer Contracts Regulations, the Consumer Credit Act and the Distance Selling Regulations. The OFT also has powers under numerous other pieces of legislation – for example the Estate Agents Act, the Financial Services and Markets Act 2000, the Transport Acts and the Courts and Legal Services Act.

But what does ‘best’ mean when talking about the consumer and competition regime? And how can it be measured?

The 2001 Productivity and Enterprise White Paper would suggest that we should consider outcomes in the economy, with a focus on productivity. [1] So we must ask both how competition contributes to the economy and also how policy contributes to competition.

We must also consider the international dimension, whether the contribution of public policy in the UK has had a greater impact on outcomes in markets than in other countries.

We might hypothesise that the UK economy has benefited hugely from competition in the past decade, and that competition policy has had an enormously positive effect. But this is difficult to prove.

These are difficult questions to answer. But is it important that we do so before asking what has been learned and before talking about the future.

Two types of market

These questions can, perhaps, be best answered by considering the two types of market that, broadly speaking, can be identified in the economy.

Strongly competitive markets

The first set of markets is those in which there is potential for intense competition – where competition has delivered beneficial outcomes for consumers. Examples include markets for national, and especially internationally traded, goods such as food cars, clothes, computers, white goods, furniture, household goods and electronics.

Because competition drives down margins and costs, there is always a strong incentive to find extra profit. In strongly competitive markets, companies usually seek to do this through pro-competitive methods, such as innovation, increased volume, better quality and better service. But there is also the temptation for firms to avoid this strong competition by anti-competitive behaviour or hampering consumer choice.

Anticompetitive practices such as cartels or other forms of horizontal collusion enable all the firms in the market to raise their prices, unknown to the consumer, or an abuse of a dominant position. Companies can also undertake anti-competitive mergers that enable companies to take their competitive rivals out of the market and relax price pressure, or acquire monopoly power to the detriment of consumers.

In these markets it is usually the expectation that consumers can drive competition and that reputation will discipline businesses to deliver what consumers want. (In many circumstance, this means these markets have self healing properties.) There might, however, be harmful interaction with consumers if business can impede consumer’s ability to make informed choices and drive competition. This could be done by adding item charges that allow the firm to lock the consumer in. The classic example here is aftermarkets (for example, car servicing and repair), but this can be seen increasingly across many markets, such as airline and banking where firms try to use a series of often less visible charges. Alternatively, misleading advertising and unfair contract terms can give the seller a competitive advantage in the markets, not by improved value, but by giving the consumer less than rivals (or than it promised).

Thus the role of competition and consumer policy in strongly competitive markets is largely to ensure the maintenance of strong competition and the prevention of cartels or other anticompetitive behaviour or deceptive practices that limit consumer choice, both of which have the same source: the constant incentive to make extra profit in highly competitive markets.

Challenging markets

The second set of markets is where competition does not work so well and may not so obviously be relied upon to the same extent to deliver the best outcomes for consumers.

Markets where competition may be weaker include markets for experience or credence goods and local markets where services are produced close to where they are consumed, often resulting in fewer suppliers. Competition may not work as well in markets where reputation effects may sometimes make entry and switching more difficult. Because suppliers may be small, they may not have the incentive to invest in reputation (although this can, of course, work both ways – in local markets, reputation may require less investment because it is achieved by word of mouth).

Competition may also be weaker in markets where the cost of providing the service is not known in advance, so it is more difficult to shop around and pricing is less clear. In turn, this can enable price discrimination, which is not bad in itself, but can mean that savvy consumers who switch fail to protect the more inert who do not or the vulnerable who cannot.

We see these traits, for example, in markets for financial services, professions (for example, law and dentistry), lifestyle services (for example, ticketing, gyms and restaurants) estate agents, retirement homes, car servicing, plumbers, electricians and house builders.

Competition concerns in these markets are largely focused on barriers to entry, the availability of good consumer information (that is, transparency) and the level of consumer engagement. As the problems in these markets are often driven by limited ability for consumers to drive competition, interventions to empower consumers such as enabling greater switching can be just as important a tool as competition interventions for getting better market outcomes.

What has competition done for us?

Returning to my initial questions (how has competition contributed to the economy and how has policy contributed to competition?), I am tempted to ask ‘what has competition ever done for us?’

In Monty Python’s Life of Brian, a similar question about the Romans ends with something along the lines of, ‘all right…all right…but apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order…what have the Romans done for us?’. Xerxes replies: ‘brought peace!’

As regards the more serious competition question, economic theory tells us that benefits of competition, like the benefits of the Romans, should be plentiful. According to theory, competitive markets should allocate resources and deliver products and services efficiently and, in doing so, productivity is enhanced and innovation increased. [2, 3, 4] Empirical studies which examine the impact of competition on productivity tend to bear out the positive impact competition has at least on productivity. [5]

The theory also tells us that consumers will benefit from competition. In competing to attract consumers, business will pass on any efficiency savings via lower prices, offer innovative products and generally compete to please them.

These fruits of competition are perhaps more obvious in the first type of markets. We can see that UK consumers and businesses have reaped huge benefits in terms of price, quality and innovation generated by the efficiencies that arise from globalised international trade. The delivery of these benefits to UK consumers depends critically on strong competition in domestic distribution and retail markets: that products are internationally traded is not sufficient in itself.

In the second, more challenging, type of market there may also have been improvements, but as the issues and interventions are more bespoke, I cover them under policy below.

What has policy done?

Demonstrating the contribution of competition policy is more difficult. There is limited cross country or even UK specific empirical evidence and it is difficult to demonstrate the effect of competition policy from other economic policies.

But Buccirossi et al have attempted to do at a macro level. [6, 7] Using data for 12 OECD countries and 22 industries (1995-2005) they examined the impact of competition policy on total factor productivity growth. To do so they created an index for the strength of competition policy. [8] They found good competition policy has a strong impact on total productivity growth and that at a disaggregated level it was antitrust activities and institutional set-up which had the strongest impacts. [9]

Although macro level evidence on the effectiveness of competition policy such as this is fairly scarce, there is no shortage of evidence for the benefits brought about by competition policy under specific policy initiatives and within industries.

Liberalisation, for example, has enabled competition to deliver strong outcomes. I will give two significant examples. In the telecoms market, prices for international telephone calls from the UK, following de-regulation, fell by 90 per cent between 1992 and 2002. Over the same period, the increased liberalisation of the European aviation market saw flight frequency increase by 78 per cent and lowered the lowest non-sale far by 66 per cent.

Both of these examples resulted directly from government de-regulation of markets, in the face of opposition from strong vested interests. And in both cases, it was not just consumers but also businesses that benefited.

We also know a little more about the contribution of competition enforcement, thanks in part to the evaluation work that the OFT has undertaken. Our mergers and cartels work has saved hundreds of millions for UK consumers and businesses. For example, we recently took action under the Competition Act, imposing fines totalling £129.5 million on 103 construction firms because bidding processes designed to ensure clients and taxpayers receive the best possible choice and price were distorted; and because there was a real risk of price increases.

Although it is difficult to measure the benefits of Article 102/Chapter II cases in the same way, it should be noted that, on one measure, our Napp decision saved the NHS around £2 million a year.

Our market studies work also brings significant benefits. An independent evaluation of our work on new car warranties suggests that we saved car owners and fleet operators between £120 million and £170 million over two years.

A report commissioned by the OFT in 2007 highlighted the deterrent effect of competition enforcement. [10] As part of the report, Deloitte carried out a legal survey which found that the order of perceived importance of sanctions was as follows: criminal penalties, fines, disqualification of directors, adverse publicity and private damages actions. (A company survey carried out at the same time found the following order of impact: criminal penalties, director disqualification, adverse publicity, fines, private damages actions. The results of both surveys highlighted for the OFT the importance of sanctions which operate at the individual level.)

Using the results of the legal survey, the report calculated ratios of agreements and initiatives abandoned or significantly modified to those which resulted in a Competition Act investigation for the period 2000-2006. The ratios were five to one for cartels, seven to one for commercial agreements and four to one for abuses.

For mergers, the results suggested that at least five proposed mergers were abandoned or modified on competition grounds before the OFT became aware of them for each merger blocked or modified following intervention by the OFT.
Responses from the company survey showed even higher deterrence ratios: 16 to one for cartels, 29 to one for commercial arrangements and 10 to one for abuses.

It is difficult to know the footprint of those findings on the economy, but the OFT has seen the development of different business practices as the effects of its investigations have matured, driven by the rising costs of non-compliance.

Generally, we have seen greater business awareness and interest in compliance.

Our contribution is not limited to competition work. Our work on airline pricing has saved consumers around £100 million. We have made it easier for consumers to access the information they need when booking low cost flights. Hidden charges in airline pricing play to the vulnerability of consumers and we have worked to improve clarity and transparency so consumers are made aware of any fixed non-optional costs early in the booking process. This has facilitated comparison shopping.

Our Save Xmas campaign reached 40,000 consumers in face to face session. Nine in 10 people knew more about their savings options by the end of the session and, months later, 38 per cent had changed the way they saved for important events and 71 per cent felt more confident about deciding how to save more generally. Users of the OFT’s ‘Skilled to Go’ consumer education initiative demonstrated a 13 per cent increase in their knowledge of their consumer rights.

Across the board, our most recent Positive Impact Estimates show a benefit/cost ratio of eight to one (that is: a direct financial benefit to consumers of eight times our cost to the tax payer). According to estimates for 2006-09, the benefits for consumers for our competition work were in 2008-09: £68 million for consumer protection; £78 million for competition enforcement; £87 million for market studies and £132 million for mergers.

Any such estimates will not take into account our competition advocacy work, which can also have a substantial economic impact.
One example is our work on the legal profession. Our 2001 report on ‘Competition in the Professions’ made several recommendations for the reform of the legal services market. The OFT was also involved in the processes that eventually led to the Legal Services Act 2007, which prescribes fundamental structural changes to supply, for example, allowing lawyers to work in Alternative Business Structures.

The OFT’s Government in Markets work is another example of the importance and benefits of effective advocacy. We will develop this further in our forthcoming work on Choice and Public Services.

And we must not forget the indirect benefits that come to consumers and business from influencing EU policy. We have seen, over recent years, the reform of the Merger Regulation (the SIEC test and efficiencies) and the review of the Article 82 guidelines, which the OFT was instrumental in securing. Working with others, we have also achieved an economic approach to analysing Article 82 cases; reviews of Block Exemption Regulations (Horizontal, Vertical, Motor Vehicle and Insurance) and we have seen OFT influence in relation to the development of the EC leniency policy.

The contribution of policy in the two types of market

In the first type of market I mentioned, where there is strong competition, it can be argued that intense competition is supported and maintained by active enforcement against cartels on the competition side and by active consumer protection to prevent barriers to switching or other forms of capture. Indeed, many of the OFT’s consumer and competition cases have been in these markets.

The OFT is, of course, aware of the potential chilling effect that this approach might have, and of the potential burden on business. We are, therefore, keeping our policy under review. In addition, our current Drivers of Compliance project is seeking to tap into the positive, ethical culture within business where it exists, which will remove the fear of falling foul of the competition rules and allow businesses to embrace new opportunities.

The second type of market where competition is weaker also relies on general competition enforcement and consumer protection. But because competition in these markets may be less intense, market studies (and occasionally Market Investigation References to the Competition Commission) are a more appropriate tool to use.

In these markets, competition and consumer issues tend to be intrinsically linked. It may be that a measure on the consumer side (for example, increased transparency) can unlock competition, or that a measure that stimulates competition causes firms to compete in providing better information to consumers. These markets generally require bespoke analysis to examine whether barriers to competition are on the supply side or the demand side, whether they are remediable and whether the remedies will have any unintended consequences.

One role of competition policy is to recognise which markets are which so that appropriate solutions can be applied within markets and so that and work can focus on those areas where consumer detriment is most likely to occur.

Ten years of experience

All of the above leads me to conclude that we cannot reject the twin hypothesis that UK consumers and the economy have benefited from strong competition and that UK consumer and competition policy have contributed actively to this.
But whilst we have achieved a lot, and whilst we are in a better position than we were ten years ago, there is still more to do.
So looking back, what have we learned for the future?

Some positives

I have already talked about outcomes. We have been able to achieve these because we have a good framework in place. The positives are numerous.

First, we have a wide ranging set of tools (mergers, markets studies, MIRs, criminal and civil enforcement) and exercise flexibility around when to use them. Reasoned decisions and guidance set transparent and consistent standards to drive pro-competitive and innovative behaviour by business, and to avoid chilling effects, with resulting benefits from consumers.

Second, competition and consumer policy implementation are increasingly joined up and effects-based. Well-informed, confident and effective consumers play a key role in activating vigorous competition between firms. Vigorous competition provides firms with incentives to deliver what consumers want as efficiently and innovatively as possible.

It is worth mentioning at this stage, the crucial role played by market studies. They allow for a holistic analysis of markets – both from a competition and consumer angle. They are a non-intrusive and efficient instrument for diagnosis, cure or both. They ensure that issues are not left unexamined. And where the examination does not reveal a problem there is value in a clean bill of health; this should not be portrayed as a bad use of public resource. They also have value as a means of informed technical advice, including making recommendations to government for regulatory or policy change to reduce unnecessary state restrictions on competition.

Third, we have continued to make improvements to the regime following external (for example, National Audit Office) and internal review. As example of the latter, following a review in 2008, our market studies are run more efficiently than ever. Delivery is faster and more transparent; and we have seen good stakeholder engagement and better implementation.

Our merger regime also shows how the system has evolved over time. As the set of cases has grown, and have learned from appeals, it has been possible to clear more and bigger mergers at Phase 1, delivering consistent protection from consumer harm, a lower burden on business, and better value for the taxpayer.

Fourth, politically independent competition authorities create clarity for business and reduce rent-seeking and capture. This is important for the prioritisation of cases since it avoids either populist or captured interventions that would perversely restrict competition; and it means that a consistent line can be taken in decision making. It is important to be able to assess objectively which markets are subject to investigation.

Fifth, the UK, as noted above, has played a leading role in the EU and internationally. More joined-up international enforcement and advocacy delivers better results for UK consumers, and greater consistency for business across national boundaries reduces unnecessary burdens, with resulting cost savings that are passed on to consumers.

Generally, there has been a process of gradual improvement and evaluation. The OFT is self-critical, constantly thinking about how it can improve. This is helped by our Board structure, which enables helpful internal critical challenge from our Non-Executive Directors.

Selected lessons

So, what are the key lessons that we have learned for the future?

We have learned that our discretion to prioritise cases and markets to investigate cannot be taken for granted. We have seen parties try to use the system by challenging decisions to close cases at an early stage; and we have seen populist motives.

Our biggest concern in relation to civil competition cases relates to level of output. We are keen to do more – and our horizon scanning work means that we have more cases in the pipeline.

We are aware that some of our cases have taken too long (some MIRS and some Competition Act cases). Sometimes this has been for reasons out of our control; but sometimes this has been because we took on too much. With regard to speed, we are learning by doing, we have several initiatives looking at improving efficiency in order to ensure a greater throughput of cases and we are improving.

Our portfolio could be more balanced. We would like, for example, to do more rule of reason cases, more Article 102/Chapter II cases and more cases in small markets. But we are also aware that our portfolio needs to be looked at over a longer period and in the context of concurrency and the work of DG Comp.

We have seen an increasing trend of procedural challenge (and threats of procedural challenge) including during our Competition Act cases. Each initiative raises new opportunities for judicial review. The ones that people are aware of outside the OFT are the tip of the iceberg. As we continue to increase transparency, this creates further risk around delivery.

MIRs now are very different from MIRs pre-2000. The expectation in the 2001 White Paper was based on pre-Competition Act experience. But things have turned out differently in practice. Some may argue that MIRs are capable of tackling all problems, or see them as an instrument for tweaking markets. In my view, as the MIR regime develops, there appear to be three key areas in which MIRs can play a role: where restructuring is needed (for example, BAA); where there is bad competitive Nash equilibrium (for example, PPI, bank charges); or where there is tacit collusion.

We may, however, need to consider how prevalent, harmful and remediable these issues are in a world where we have full Competition Act powers. We need to question whether an MIR is always the best instrument. And we need to remember that MIRs can involve enormous remedy powers, sometimes in circumstances where nobody has broken the law.

Over the last few years, we have learned important lessons as regards our relationship with business. When we began to take on higher impact cases, we did not anticipate how the issues would be picked up by the media. And we have not done enough to get business buy-in for the ‘low-probability of detection, high fine if detected’ method of deterrence. Companies feel fines are too high, but Government does not think that more cases should be brought. This leaves us with a policy dilemma.

There are, nevertheless, important areas where the OFT and business are usually aligned in their thinking – for example in relation to competitive neutrality, the private sector in public markets, government policies which inappropriately or disproportionately interfere in markets, our international work, and poor or excessive regulation.

But we recognise that we need to be better at explaining what we are doing and at communicating our policy objectives. And we need to be better at expectation management – to be circumspect in promising criminal convictions, for example.

Looking forward

Looking to the future, it is important that we do not lose what is good about the regime – politically independent, effects based enforcement; strong consumer and competition enforcement (more cases and a balanced portfolio); a holistic approach (joining consumer and competition analysis and remedies); discretion about what to examine and flexibility about which tools to use; strong competition advocacy and international influence; and a focus on outcomes with demonstrable benefits.

But we will need to address some challenges.

There will likely be less resource, at least for the next three to five years, and a far greater emphasis on value for money. The OFT has taken a 15% budget reduction and kept up delivery, but we may now be in less-for-less rather than more-for-less territory. And it may be that the taxpayer funded part of the regime is further disadvantaged relative to the industry funded part.

There are issues around speed of delivery. The OFT has a number of initiatives in place aimed at ensuring a greater throughput of cases. In particular, new cases will be well scoped and shorter. An ex-post enforcement system that achieves compliance through deterrence and positive guidance should not attempt to solve every issue, but instead to lay down road-markings for businesses to follow in the future. In this regard, the UK experience with moving to a self-assessment system is largely positive.

The OFT is also actively considering the use of innovative tools. For example, we have reviewed our approach to competition law opinions in response to concerns raised by business and other stakeholders that some forms of beneficial collaboration are currently not going ahead for fear of infringing competition law. At the same time we are looking at how to make better use of existing tools – for example we have a project which is looking at how to facilitate the use of Competition Disqualification Orders.

The UK system is fragmented and complex. Although we have worked hard with the Competition Commission and sector regulators to achieve consistent outcomes, there remain issues around expertise, critical mass in exploiting learning-by-doing effects, consistency in setting standards for business, and prioritisation. It is not clear that pressure to resolve these issues will go away; and they will be even more challenging when combined with funding issues. Nor is it clear that regime change will not be seen as a way of saving money.

We must deal effectively with a portfolio shift and changing work load. For example, there will be a great deal of work to do on the future structure of the banking market (especially as and when Government steps out of ownership of banks) and on advocacy (for example, health, transport).

Finally, it will be crucial to maintain political, business and consumer support for competition policy. This support cannot be taken for granted, particularly in a climate where consumers might want more populist interventions. But what we do know is that restrictions on competition are rarely useful to achieve other policy objectives.

Over the past decade, competition in the UK economy has delivered clear benefits to consumers through lower prices and more responsive supply and competition in distribution and retail has ensured that the UK economy has captured gains from global competition. While it is difficult to show the exact contribution of competition policy to that success, there are clear indicators of its positive role. Competition law enforcement has kept the most competitive markets competitive. In those markets where competition needs greater stimulus, market studies and other interventions have led to the removal of regulatory barriers to competition and strengthened the competitive process. In both cases, competition has stimulated greater efficiency and innovation, thus contributing to higher productivity growth for the UK economy. Looking forward, strong competition policy will continue to be an important contributor the performance of the UK economy and the welfare of its people.


[1] Productivity and Enterprise: A World Class Competition Regime
[2] OFT (2007) ‘Productivity and competition An OFT perspective on the productivity debate.
[3] Competition is indentified as one of the five drivers of productivity, alongside, skills, enterprise, investment and innovation. HM Treasury (2000), ‘Productivity in the UK 1: the evidence and the Government’s approach’, HM Stationary Office.
[4] The relationship between innovation and competition is more complex and in some circumstances (and in some models) too much competition could harm innovation. OFT (2007) ‘Productivity and competition An OFT perspective on the productivity debate.
[5] OFT (2007) ‘Productivity and competition An OFT perspective on the productivity debate’
[6] Buccirossi, P., L. Ciari, T. Duso, G. Spagnolo and C. Vitale (2009), ‘Competition Policy and Productivity Growth: An Empirical Assessment,’ CEPR Discussion Papers No. 7470.
[7] The role of consumer policy is not captured in this analysis.
[8] Authors included in the index those features which they believed would have the strongest impact on the level of deterrence of anti-competitive behaviours. These included things such as the degree of independence, separation of powers between the adjudicator and prosecutor, powers during investigation, how well the law captures social welfare (that is quality of the laws it is enforcing), level of activity and size of sanctions and finally resources.
[9] Although these findings on competition policy are not universally held, there are papers which suggest that competition policy is ineffective.
[10] The deterrent effect of competition enforcement by the OFT, A report prepared for the OFT by Deloitte. November 2007 (OFT 962)