Should Competition Law Apply to Markets where No Firm Dominates and there are No Illegal Agreements?

(by Bruce Lyons) The UK competition regime has a powerful weapon that is available to almost no other country.  It can investigate markets that appear not to be working competitively despite the lack of a dominant firm, then choose to impose remedies ranging from structural divestments to legally binding behavioural commitments.  Other regimes, including the European Commission, can choose to investigate markets, but none can impose such powerful remedies (except Israel, which recently replicated the UK model).  The UK government regards this as one of the key strengths of its competition regime.  Is it?  And would it benefit from major reform?

Nine markets have received the full weight of a Competition Commission investigation since 2004.  The average duration of investigation (including appeals) is just over three years.  Additional time is then necessary to adopt remedies, usually 4-10 months but it can take up to a further three years!  Many of the markets investigated in this way have related to consumer finance (e.g. store cards, home credit, NI personal banking, payment protection insurance) but they can also be a hangover from a problematic privatisation (e.g. BAA airports, rolling stock leasing) or a high profile consumer market (e.g. groceries).  The OFT has conducted a further 24 smaller market studies in the same period (in addition to the first phase of the market investigations referred to the CC).  These include a number of essentially consumer protection studies.  The OFT’s smaller studies take an average of 10.4 months but can only result in voluntary remedy agreements.

Some of these investigations have undoubtedly been greatly beneficial for competition.  For example, it would have been very difficult to challenge the London airport monopoly (including Heathrow, Gatwick and Stansted) under Article 102 (UK ch.2) abuse of dominance because the main problem was poor quality service and lack of innovation, not exclusionary conduct or obviously exploitative prices.  However, in other cases it has been difficult to identify remedies that address the identified competition problem.  For example, if consumers are apparently irrational in buying expensive payment protection insurance at the point of sale, careful evidence is required before a prohibition on such selling can be shown to improve welfare.

Where does this leave us?  The markets regime can indeed be an important weapon in the competition armoury, but like all weapons it should be used with great care and it works best as a deterrent.  The main focus should be on how better to identify markets suitable for investigation.  It is not obvious that the system needs more such inquiries.  However, that is the direction in which the current consultation appears to be heading.  For example, it introduces the possibility of:

  • Conducting in-depth investigations into practices that cut across different markets – but pricing practices almost always have market specific features that render generalisations fairly meaningless (e.g. ‘below cost selling’ may be a competitive consequence of a two-sided market, or it may be aimed discriminatingly at a new entrant).  An appropriate division of labour is for academic research or consultancy projects to develop and clarify the principles, and for competition authorities to gather the relevant evidence to apply the principles to particular markets under scrutiny.
  • Giving powers to report on public interest grounds in addition to identifying adverse effects on competition – however carefully couched in caveats, this opens the gates to a re-introduction of a public interest test which would be a retrograde step for a competition authority.  It could resurrect ‘industrial policy’ through the back door.
  • Allowing SME bodies to become ‘super-complainants’ such that they have the right to a reasoned response by the competition authority if they request a market inquiry – the super-complainants system was introduced to help consumer groups who feel their members are being ripped-off, but this extension could support disgruntled or inefficient competitors.

The regime would certainly benefit from streamlining, and there are some helpful recommendations in the consultation on how to ensure that remedies are proportionate and efficient.  However, a proposal to introduce more information gathering powers in phase one of a market inquiry is less obviously ‘streamlining’.  There are always several firms in each market and a heavy duty first phase could make the system more burdensome than necessary.  The purpose of this first phase is not properly discussed in the consultation document.  It should be a light-touch first filter, then the second phase should be used for substantive requests for data that firms have not previously volunteered. 

The markets regime has so far done more good than harm.  The first objective of any reform should be to keep it that way.  This leaves plenty of room for improving case selection and investigation procedures.

One Response to Should Competition Law Apply to Markets where No Firm Dominates and there are No Illegal Agreements?

  1. Hi Bruce,

    I would have thought the answer to this question is fairly obvious. To investigate markets where there might be competition concerns requires the eyes and ears of consumer watchdogs, government departments, local authorities, business bodies etc. etc. – users. This in turn requires that all these bodies across the economy are cognisant that they can approach a body like the OFT/CC to investigate an anti-competitive practice and sometimes that knowledge doesn’t exist (i.e. lack of joined-up thinking). The consumer watchdogs in the UK seem to be very knowledgeable in this regard and many of the market studies (such as the NI PCA and the PPI studies) had their genesis in super-compliants – good examples of the demand-side watchdogs (e.g. Which?) talking with the supply-side watchdogs (i.e. competition authorities). However, other bodies may not be aware of these channels so I guess the key challenge is to improve information so that the quantum of complaints may nessitate NCAs to prioritise where it should focus its efforts in market studies.

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