Putting consumer welfare at the heart of competition policy and market regulation

Oct 18, 2019

 

The UK competition authorities, having for years been behind the curve in taking competition and consumer welfare issues with the seriousness that they deserve, are now upping their game significantly. The CMA is demonstrating much greater vim and rigour in applying its competition powers. It is making greater use of its existing powers, by for example exploring a wider range of markets, from residential care homes to holiday bookings and funerals. In reviewing the market consequences of proposed company mergers, the CMA is exhibiting an audacious approach and a more astringent criterion when assessing the potential impact of a proposal, with regards to the consumer and competition law.

A UK political climate that supports active competition policies

Competition authorities can only go at a pace that is consistent with the prevailing political mood. The CMA’s powers, remit and resources are for all practical purposes set by Parliament. The novel vigour of the CMA can therefore be attributed to a recognition that the UK competition authorities in the past have been reticent in prioritising the welfare of consumers when applying competition policy. The result is that the sponsoring economic departments in the Government, such as HM Treasury and BEIS, are encouraging the CMA to consider how its powers and remit can be modified to strengthen competition policy. This new focus among UK policy makers is in contrast to their European counterparts. Ministers and politicians in France and Germany are in fact exploring ideas about relaxing EU competition law, in order to create business conglomerates that can contest the perceived threat arising from large Chinese competitors. This is a significant reversal of roles, as historically EU and German competition policy was more active and ambitious than that in the UK.

The intellectual corruption that has led to the perversion of UK competition policy

As highlighted above, the CMA is now proposing that the consumer should be put at the heart of competition policy, which represents a fundamental change. Although in principle competition policy is about securing economic welfare for consumers, in practice the complex legal tests surrounding policy have had the counter-intuitive result of protecting market incumbents, with consumer welfare being a secondary matter. This is partly because understanding the competitive structure of markets is a bit like getting a purchase on quicksilver. The result has been that over many years in the UK, the ultimate objective of competition policy, the protection of the consumer, has been vitiated and producer lobbies have been protected. The result in the judgement of the CMA is that markets have become more concentrated, operating margins have increased and economic rents have been entrenched. The fact that the UK competition authorities recognise this is hugely significant. For years the competition authorities were part of the problem. They appeared wilfully oblivious to the consumer. That has now changed.

Placing the interest of the consumer at the heart of competition policy

The change in the approach of the CMA is not simply a clearer focus on the ultimate objective of competition policy, but an interesting new appraisal of what is needed. It starts by recognising that simply promoting competition will not deliver effective results for the consumer. Drawing on his experience chairing the Banking Commission, the chair of the CMA, Lord Tyrie, takes the view that a simple linear growth in competition will achieve little for consumers in a fundamentally distorted market structure.

Giving competition policy a demand as well as a supply side dimension

The CMA has an interesting new intellectual approach. In the past, the focus of competition policy has been to improve the economy’s supply side by ensuring that there is a wide range of firms producing and competing in a sector. The CMA now recognises that as well as strengthening the supply side, they have to ensure that both the demand side of the equation and consumers are strengthened. The conclusion is that for effective competitive markets, the interests of consumers have to be made central to policy, because a policy simply focused on the structure of competition among providers of goods and services will not on its own secure consumer welfare.

The UK competition authorities need proper data on market concentration, operating margins and monopolistic rents

What the UK competition authorities need is better data on levels of market concentration, firms’ operating margins, profits and returns to capital and how these have changed over time. The CMA  believe that profit margins have risen from 20 to 60 percent and the turnover share of the UK’s largest businesses has risen from 21 to 28 per cent. However, the US economics profession and work done for the US Council of Economic Advisers is significantly further ahead of what has been done in the UK. In some respects, it is not an exaggeration to suggest that the HM Treasury has attempted to be a ‘free rider’ on this work carried out by the Council of Economic Advisers, showing that in the US markets have become more concentrated and operating margins have increased. Indeed, the Treasury invited the former chair of the Council to carry out a review of digital markets in the UK. For more extensive research, the CMA must now be given the analytical resources to examine these issues properly in relation to the UK.

Expedited action to remedy monopolistic damage

Past competition policy in the UK was disfigured by a failure to see a problem and when one was identified, by a tardy response. Identifying a monopoly or competition issue that is malign for the consumers often involves complex and contested judgements. Furthermore, the beneficiaries of monopolistic rent often have a final formidable defence to hinder effective policy remedies. This is a variation on the principle of the unripe time doctrine. There are short term, medium term  and long term consumer interests. Malign damage todayshould, it is argued, be tolerated, because in the medium and longer term the present monopolistic market structure may create benefits for consumers. However, this is a potent invitation to policy inertia.

When the potential time inconsistency of consumers’ welfare has been raised, Lord Tyrie has suggested subjecting the proposition to the helpful guidance offered by the principle discounted value. In general, harm today is more expensive than potential future benefits, and economists have an established technique of using discount factors to assess the relative costs and benefits involved that should be used to cut through these issues. His starting point is that identifiable harm or damage being done today should be stopped swiftly. Expedition in applying remedies to mitigate harm to consumers is therefore a central part of the CMA’s revised policy agenda.

Recalibrating the regulated sector to ensure the consumer takes centre stage

The CMA’s agenda is exactly where competition authorities in the UK should be heading. There is, however, a further big question that the Government and Parliament need to think about. The so-called regulated sector, essentially the utilities and former nationalised industries subject to specific regulators, accounts for around 25 per cent of GDP. These apply to water, telecoms and electricity and gas. They have developed overcomplicated and inexplicable approaches to the industries they are supervising. There is a suspicion that they have been subject to an element of capture by the companies they are regulating and there appears to be an indifference to the consumer experience of being unfairly treated in the event of sales by default, poor service and unfair billing.

They appear to apply complex methodologies to regulation yet offer little to prevent customers from turning to Money Box Live for redress. The regulators each work to separate legislation and do not approach their task in a consistent fashion. While the CMA has some role in relation to them in terms of the system of appeals, it is not in a position to systematically oversee their work or secure consumer interests when regulators fail to do so. Not least, leaving aside the questions of function and powers, the CMA is dependent on the regulators for market information and analysis. In terms of securing the welfare of consumers, this is a serious lacuna. There is a need for a debate about the future regulation of utilities and the promotion of the consumer interest. Just as the UK competition authorities need to up their game and are doing so, the Government and Parliament should consider thinking about how the regulated sector could be improved, with the consumer placed at the heart of its agenda.

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