Competition policy - physician heal thyself

Next year, the Office of Fair Trading (OFT) and the former Competition Commission (CC) will be unified. The old joke ‘why is there only one monopolies commission?’ will ring true from April. Perhaps this is time for a reconsideration of competition policy.

Competition authorities’ interventions often disrupt business plans to no good effect. When it comes to competition, the most crucial characteristic of a market is that it is open to entry - to creative destruction by new technologies and new ideas. Making proposals to remove artificial barriers to entry should become a key function of the competition authorities with new powers being granted if necessary.

A recent example of disrupting business plans came with the Barr-Britvic merger proposal. This was referred to the Competition Commission and the deal collapsed because of the delay. The argument was that there would have been too few big players in the UK soft drinks market if the merger went ahead. However, this ignores the fact that the market for soft drinks is an international market and the barriers to entry are low. Furthermore, if supermarkets are dissatisfied with the pricing and performance of their suppliers, their scale is such that it would be relatively easy for them to promote their own brands, seek overseas suppliers and so on. Good business policy was undermined by micro-meddling.

The recurring investigations into supermarkets themselves provide further examples of where competition authorities often cannot see the wood for the trees. The sector has been under continual investigation, or threat of investigation, for nearly 15 years. When W. M. Morrison made a bid to take over Safeway in 2003, there was an investigation into alternative proposals. Arguably, this was not unreasonable. However, the authorities then tried to redesign the market, requiring store disposals and trading according to their view of competition in particular towns and regions.

As in any competitive market, the fortunes of supermarkets wax and wane. Sainsbury has recently come through a bad patch and Tesco’s figures suggest it might be beginning to struggle. All the incumbent businesses are under threat from niche providers such as Waitrose at one end of the scale and new low-price foreign entrants at the other end.

Nevertheless, many still feel that there is insufficient competition. But, what is the major impediment to competition in supermarkets? There are at least six chains with the capital to build new stores at will. The problem is that the planning system restricts meaningful competition. On a recent visit to Germany, I could choose between four supermarkets in the small town in which we stayed; in the town in which we live in the south of England, there is just one supermarket - and the population is three times the size.

So, government is often the most important impediment to competition. Planning controls and the high fixed costs of regulation impede competition and reduce productivity. When it comes to promoting competition, the authorities should look at the beam in the government’s eye before removing the speck from the industry’s eye.

A potentially more radical action would be to give the new Competition and Markets Authority (CMA) the power to turn its attention to the promotion of competition in public services such as health, education and large areas of BBC broadcasting provision. The first and least controversial power should be one of investigation into government impediments to competition in the provision of services where competition is part of the government’s explicit policy. For example, anecdotal evidence suggests that obstructions through local authority planning systems and other bureaucratic processes are making it more difficult than the government intends for free schools to be set up. This should be a perfectly legitimate area of investigation for the CMA. It should also be uncontroversial - the CMA would merely be ascertaining whether the government’s own policy and the will of parliament were being subverted.

Indeed, we should go further. The CMA should be given powers to investigate government-provided services in their entirety. Its findings would not be binding, but the government may often wish to refer itself in order to create a momentum for reform or to acquire a body of evidence.

Interestingly, I was once told by a senior competition authority executive that EU state-aid rules might be helpful in this respect. If a French-owned school, for example, set up near a local authority school but the French-owned school charged fees and the local authority school was subsidised by the state, then the French-owned school might be able to take the UK government to the European Court of Justice on unfair state-aid grounds. The same rules would not apply to a British-owned school. The fact that the French school could now become a free school may have made that example obsolete, but there are other similar examples.

There are other areas where there should be a reconsideration of policy. Perhaps we should review whether patent laws undermine competition. In some innovation-driven industries intellectual property cases just get stuck in the courts with claims and counter claims being made and reform could end these negative-sum games. Also in relation to such industries, perhaps we worry too much about short-lived monopolies of firms such as intel and Microsoft which, in fact, are often beneficial and are open to destruction by new technological discoveries.

David Currie has become chairman of the CMA which will assume full authority on 1st April. Lord Currie is a slayer of sacred cows. He is also a friend of markets and competition. He does not accept sloppy AS-level economics ‘market failure’ arguments for government intervention as was demonstrated by his approach as chairman of communications regulator Ofcom. Ofcom tried to open broadcasting and telecommunications markets whilst, by contrast, the Financial Services Authority tried to micro-regulate the financial industry to remove any so-called market failures. Of course, the FSA saw the financial system implode on its watch.

The CMA could make a real difference if it is given powers by the government to investigate the government itself. Mrs Thatcher gave the Monopolies and Mergers Commission powers to investigate nationalised industries under the recently deceased Godfray Le Quesne. Those surrounding David Cameron do want radical change in the delivery of government-financed services. Do they have the imagination to get the competition authorities on their side?

An edited version of this article appeared in the Daily Telegraph.

 

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