Just Markets: Distributional Effects of Competition Policy & Economic Regulation
CCP 13th Annual Conference, 15-16 June 2017
Welcome to this year’s CCP Conference on ‘Just Markets: Distributional Effects of Competition Policy & Economic Regulation‘.
The CCP’s 13th Annual Conference on ‘Just Markets: Distributional Effects of CompetitionPolicy & Economic Regulation’ is taking place on UEA campus at the award-winning Enterprise Centre, the greenest building in the UK.
#ccp2017conf will go beyond the traditional emphasis on improving market efficiency for consumers by exploring issues around distributional effects in competition policy and in specific markets. With the line-up of legal, political science and economic perspectives, it is going to be two days full of insights. This year’s programme includes contributions by leading academics, policymakers, consultancies and regulators, as well as the first presentation of results from the CCP project on Equity and Justice in Energy Markets funded by the UK Energy Research Centre(UKERC). +
Session 1 | Setting the Scene and Macro Interactions
We heard from the authorities on the timely themes of the conference. First, Joe Perkins, Chief Economist and Partner for Analysis at the Office of Gas and Electricity Markets (Ofgem), highlighted the importance of considering both procedural and distributive justice in markets. It is potentially problematic when there are highly salient concerns about the ability of the market to deliver either. In particular, economic regulators need to consider whether they could do more regarding public expectations on the behaviour of firms. To fail to do this could have a significant impact on the regulatory compact when faith in the market is fraying at the edges.
Next, we heard from Daniel Gordon, Senior Director of Markets at the Competitionand Markets Authority, who reflected on the importance of engaging with the difficult questions of fair or just outcomes in competitive markets. There is the need to engage with the social side of competition law, incorporating considerations of not only the outcome of markets but how it becomes so. In particular, markets should not only be just but be seen to be so. This leads to some more challenging tasks such as looking at theories of harm and building up trust between markets and market participants.
Finally, Amelia Fletcher (@ameliafletecon), Professor of Competition Policy at the University of East Anglia (UEA), developed a theory of distinguishing between vertical and horizontal justice in markets. Horizontal concerns would focus on the traditional challenge of the distribution of benefits between different groups of consumers. Vertical justice in markets would instead focus on the distribution of benefits between firms and consumers. Regulatory interventions have taken place in consumer markets on both of these, but traditionally competition policy has focused on the latter. What is clear is that there needs to be considerations of both while remedies are developed to move towards more just markets.
Sean Ennis, Senior Economist in the Competition Division of the Organisation for Economic Co-operation and Development(OECD) talked about the positive relationship between market power and the distribution of wealth and income in eight OECD countries covering America, Europe and Asia.
His talk is based on a recent paper with co-authors, one being CCP alumni Chris Pike, in which they develop a dynamic model to investigate the impact of competition on reducing inequality. They show that higher prices and higher profits from market power would increase inequality in an economy. In particular, market power increases the wealth of the richest decile by between 12% and 21%, while it reduces the income of the poorest 20% by between 14% and 19%. The middle income group may, in some circumstances, suffer even more from market power than the very poor. +
Sean argued that competition by which policies are designed to eliminate excessive market power, may help to reduce economic inequality. Marginal reductions of mark-up could transfers income and wealth from the top 10% to the bottom 10%. He further suggested that future work may include the redistributional effect of limiting market power in developing countries.
Jon Stern, Honorary Visiting Professor at the Centrefor Competition and Regulatory Policy (CCRP) in the Department of Economics at City University, London, reflected on the economic history of there gulation of retail markets of network infrastructure industries.
These industries are particularly important because of the economies of scale and scope. He argued that focusing primarily on electricity, natural gas and telecoms/ICT is important as they have been at the forefront of pro-competitive infrastructure industry reforms over the last 30 years and are now the main focus of debates on how far ex ante regulation can be replaced by competition policy tools.
Further, these services have evolved from luxuries to goods deemed essential for lifeand health – bringing in affordability issues that can affect household consumers. The ability of low income households and areas to access these ‘necessities’ is a major concern for the welfare of all households. Jon concluded that affordability is the best predictor for government interventions. Effective deterrents need to be identified to avoid poorly designed and crude interventions.
Session 2 | Explicitly Including Distribution in Competition Policy
Andrew Leigh MP (@ALeighMP) of Australian Labour Party, delivered a video tribute to Sir Tony Atkinson, in which he reflected on Tony’s work on inequality and poverty, and his contribution in both academia and policy making.
Andrew also expressed his worries that excessive concentration has spread across different sectors in Australia. Profits earned by firms may only increase the wealth of the owners and managers (the rich) while it may not benefit the labours who work for them (the poor) if there is no strong labour union. Increasing concentration may also harm the economy with high prices and low product varieties.
Tembinkosi Bonakele (@TembinkosiB), Competition Commissioner of CompetitionCommission South Africa, spoke “from a practioner’s point of view”. He highlighted the “significant successes” of the South African Competition Commission (SACC) in its work to break up cartels in the food and agro-processing sectors, including a discussion of the Ab Inbev/SABmiller and Walmart/Massmart mergers.
Tembinkosi addressed the question of whether competition policy “has a role to play in addressing poverty, inequality and unemployment”. This is relevant to the South African competition policy framework and its movement over almost 20 years towards the promotion of competition and inclusive economic growth, in order to address issues arising at least in part from a historic “lack of competitive pressure” that continues to this date. Competition law policy was discussed as a “very important developmental tool” in assisting the economies of developing countries to grow, and to approach the issues of “inequality, unemployment and poverty”. Historical competition policy assumes that markets are competitive in their natural state, and therefore are self-correcting without the need of policy interventions; but the new presumption is that market power is a source of inequality and has particular implications for competition policy in developing countries such as South Africa, with the challenges of high concentration, inequality, poverty, persistent exclusion, low economic growth and unemployment. Market power, and competition policy, may therefore have important repercussions for development and stability. There have been “growing calls for a developmental perspective to the competition policy and regulation agenda”, and there is a need to “challenge beautiful and elegant but unfitting economic assumptions”. The SACC has important work ahead to build on its successes in regards to its aim to create a market “more encouraging of competition, innovation and inclusion of historically disadvantaged persons”, which should assist with alleviation of the inequality, unemployment and poverty currently affecting South Africa.
Severin Borenstein (@BorensteinS), Professor of Economics at the HaasBusiness School, University of California, highlighted how increasingly difficult it has become over the last two decades to achieve some good balance between equity and economic efficiency in utility pricing.
Although regulators now have much more information about customer consumptions, customers too have much more technology to help them optimise consumption against tariffs offered by regulators. Together with increasing competition in energy markets, this has undermined the regulator’s ability to engage in “sloppy ratemaking”.
Economists would suggest the most efficient price for a good is at its short-run societal marginal cost (SRSMC). However, as Severin explained, utility prices do not generally reflect SRSMC closely, and this may be because of the costs of bill volatility and cognitiveresponses, administrative costs, as well as equity concerns for the poor andover time. This has led to revenue shortfall in some markets. As technology changes are taking place, it has become increasingly difficult for a utility to recover costs even at a price equal to SRSMS. This creates the potential trade-off between efficiency and equity.
Severin then suggested, while standing charges may be a least-bad solution, it is not an obvious one as they may reduce economic efficiency if they exceed customer specific fixed costs. He briefly discussed two alternative tariffs, decreasing block pricing and increasing block pricing, before his final remark on vertical and horizontal equity
Session 3 | Equity and Justice in Energy Markets
The final session of day one
David Deller, Senior Research Associate at CCP, UEA, explored the percentage of household expenditure devoted to energy by UK households over the past 25 years. From this long run perspective, he argued that it is the low energy expenditure shares in the late 1990’s and early 2000s that are exceptional, rather than the recent high expenditure shares. Median energy expenditure shares post-2008 are around the same level as in 1992, but with consumption levels around 25% lower.
He reported that while the systematic relationship between lower incomes and higher energy expenditure shares drives the salience of energy, affordability support policies were introduced when energy expenditure shares were low, not high. He suggested that government interventions are linked as much to political ideology and the electoral cycle as they are to energy affordability. He also raised concerns that Warm Homes Discount may deter switching via disguised price discrimination.
David further identified a significant under-reporting issue with the Prepayment Meter (PPM) user data from the Living Costs and Food Survey (LFC). He argued that the ‘excessive zeros’ are missing data and should be corrected for through imputation. He highlighted that applying this correction has a large impact on the PPM data, so failing to do so can have potentially significant implications for earlier work utilising this dataset.
Michael Harker (@michaeltharker),Professor of Law at the Law School, and David Reader (@davidmreader), Senior Research Associate at CCP, UEA, started their talk by asking ‘Who is responsible for equity and justice in energy markets?’
Michael highlighted some of the difficult trade-offs that the regulator has to consider in the context of delivering equity and justice in the energy market. “Encouraging consumes to switch or protecting those who don’t switch” is considered alongside distributional concerns, where consumers who don’t switch are more likely to be ‘disadvantaged’.
With rising energy prices and large price discrepancies between supplier tariffs, he explained how the public salience of energy creates pressure on the Government to intervene. This in turn has caused the Government to exert threats to legislate and back-stop powers that undermine the transparency and independence of the regulator.
David presented a timeline depicting the evolution of the general statutory duties of the gas regulator since privatisation. He emphasised how the increasing array of statutory objectives, as well as the downgrading of ‘competition’ from a principal objective to a primary duty, has led to a rise in the incompatibility of objectives. This increases the difficulty for Ofgem to undertake optimal decision making and generate optimal outcomes for consumers (a finding of CMA Energy Market Investigation).
Elizabeth Errington (@EErrington1), Senior Research Associate at the School of Politics, Philosophy, Language andCommunication Studies and CCP, and Noel Longhurst (@noellonghurst), Senior Research Associate at the School of Environmental Sciences and CCP, UEA, discussed issues around “who is responsible for energy affordability.”
In her talk, Elizabeth broke down energy justice into three dimensions. Justice of distribution, procedure, and recognition. This provides a framework for asking ‘Who is, could or should be responsible for energy justice?’. She considered how various government schemes relating to procedural and distributional energy justice vary between each of the devolved administrations (England, Scotland, Wales and Northern Ireland). She then discussed the various public and private institutions that could be accountable for energy policy.
Noel found that the proportion of social housing tenants who report energy affordability difficulties is significantly higher than the proportion identified using the Low Income High Cost (LIHC) official fuel poverty metric. He explored this issue through interviews with social housing tenants and social landlords. He went on to present energy vulnerability as an assemblage, identifying the factors that influence energy vulnerability. These factors are grouped into four areas in which tenants or housing associations could intervene; energy technology, market participation, managing income, and managing consumption.
He then pointed out that housing associations focus on ‘energy technology’ by improving the thermal efficiency of their stock, while tenants focus on ‘managing consumption’ by limiting their use of energy, sometimes to the point of energy deprivation. He concluded by stating that low income families are often required to juggle energy with food, debt and other forms of consumption on a daily basis, challenging the common association between low income families and ‘inactive’ consumers.
Session 4 | Distributional Issues in Specific Markets
After an enthralling first day at #ccp2017conf, there was no sign of fatigue in the first session of Day 2. Speakers and delegates engaged in stimulating discussions on ‘Distributional Issues in Specific Markets’, masterfully chaired by Loughborough University’s Monica Giulietti.
Morten Hviid (CCP Director and Professor of Law at the University of East Anglia, @uealaw) opened the discussions on ‘Distributional Issues in Specific Markets’, using the on-going care home investigation in the UK to explore the viability of using collective purchasing to “achieve social ends” (a paper Morten has co-authored with Ruth Hancock, and talented RAs Ferran Espuny Pujol and Marcello Morciano). This paper questions when the purchasing of the government or an agent of a group of consumers will create negative externalities for some citizens. The CMA published its initial findings of its Care Homes Market Investigation on the 14th June 2017 (available here) and have opened a consumer protection case to further investigate the market (click here for Morten’s related blog post). This is an unusual market due to (i) its fragmented nature, (ii) its high level of single facility independent suppliers and unusual consumers with a low ability to switch, and (iii) the nature of the service as a distress purchase. The merits of this use of ‘buyer power’ were debated, including expected effects on consumers unable to join the collective, as well as the effects on distribution and market stability as a whole. It is a “precarious equilibrium” where buyer power must be exercised with care, with the local authority playing the role of “market maker” in the care home market. Solutions to these issues were presented, including methods to allocate fixed costs (such as direct provision by local authorities or recovery from privately-funded places). Where the public sector is purchasing on behalf of a group of consumers, surely consumer welfare is improved? In conclusion, the problem here is that, without distorting marginal incentives, the care home case provides an example of problems arising from collective purchasing – it has adverse effects on other groups who may be better at lobbying. In this case, there are two questions raised which may engage economics and competition policy in a broad sense: (1) can any incentives for fixed cost reductions be generated through the methods used to recover fixed costs?, and (2) what is the effect of these recovery methods on incentives to innovate within the market?
Eugenio Miravete (UEA School of Economics and University of Texas at Austin) presented a paper that identifies the distributional effects of a regulation on the retail distribution of alcoholic beverages in Pennsylvania. The regulation works through a single-markup rule which does not vary across products, regardless of consumers’ differences of willingness-to-pay. The paper empirically evaluates the rationale of this regulation by using an equilibrium model of wholesale liquor pricing and retail demand for horizontally differentiated products which allows for heterogeneity in consumer preferences across observable demographics. While the regulation achieves a 9% reduction in ethanol consumption, particularly for heavy-drinkers, this reduction comes at a substantial 10% revenue cost, amounting to $27.78 per bottle or $16.24 per litre of ethanol not consumed. The price distortion introduced by the single-markup rule benefits small local distilleries and benefits younger, minority, non-educated, and/or lower income individuals by not overpricing their favoured spirits as much as the rest. Finally, the single mark-up rule performs worse than product-level mark-ups in terms of tax revenues by 9.7%. Foregone tax revenues exceed the health care costs savings associated to the lower alcohol consumption.
Session 5 | Macro Perspectives
Following on from our session on specific markets, Session 5 was an opportunity to take a step back and consider the many macro perspectives that have been attributed to the concept of ‘just’ markets. We were delighted to welcome Jacqueline Minor (the former Head of Representation in the UK for the European Commission) to chair the session.
Michael Trebilcock (Professor of Law, University of Toronto) addressed the contemporary manifestations of political divides between nationalism vs. internationalism. Michael examined the case for a more flexible ‘multinational’ international trade architecture which mitigates the inflexibility ascribed to a ‘one-size-fits all’ or ‘all-or-nothing’ approach. There is a pressing need for institutional reforms to create a more flexible, plurilateral system of standard setting, in order to move away from the need for consensus governance, i.e. the need for all 160 WTO members to agree to everything. Although, Michael notes that it would be possible to move to majority voting or trade rating systems, he argues that subsets of states should be allowed to agree amongst themselves with other states free to join at any time. This creates a “multi-speed” system. Michael also addresses the case for re-thinking traditional social safety nets by mitigating for the labour market impacts of trade and technology, specifically in developed countries. New human capital policies are needed to create a more adaptive labour force through different skills and capability training. These two options, Michael argues, would resolve the problems of transition costs created by international trade.
Mattia Guidi (a post-doctoral fellow at LUISS Guido) explored the differences between Social Democratic Parties’ (SDPs) approaches to competition law. Given the increasing liberalisation in the economic policy of some SDPs, Mattia asks why SDPs differ in their sponsoring of competition policy as a solution to power-related market failures. The research (undertaken with Yannis Karagiannis) asks what influences a political party’s support for competition policy. Mattia analyses 114 manifestos of SDPs and their main right-wing opponents in Europe, America, Asia and Oceania to test the impact of ideology, the relationship with trade unions and the electoral system on the SDPs’ stance towards competition policy. The results show three things. First, ideology of a party matters, albeit weakly. Left-wing parties tend to be less supportive than right wing parties. Second, support for trade unions in a manifesto is associated with support for competition policy. This, Mattia points out, is surprising. Third, electoral systems are a strong indicator of support for competition policy, with those parties in countries operating a first-past-the-post system being more moderate in their support for competition policy.
Session 6 | Political and Economic Interactions
And so the final session creeps around, but we go out on a high with an exciting examination of the political and economic interactions at play in the pursuance of ‘just’ markets. Assuming chairing responsibilities was the CCP’s Director, Morten Hviid.
Shaun Hargreaves-Heap (King’s College London) returned to UEA to explain the reasoning behind a bold statement: that more market competition would promote equality in the world we now live in. This is based on Shaun’s hypothesis that we are currently living in a ‘Robber Baron’ era, i.e. a period of time where an extraordinary concentration of wealth is secured through monopoly advantage. The US Sherman Act was a response to one such Robber Baron period in the late-1800s, but there is evidence to suggest that history is repeating itself. Recent trends in concentration in US markets – as well as the rise of network industries– point to a lack of market competition which seems to have played asignificant role in the contemporary growth of inequality. This is in contrast to the common reasons that are often attributed to inequality, such as globalisation and technological change.
Along with Abhi Ramalingam (UEA School of Economics) and Brock Stoddard(University of South Dakota), Shaun utilises a novel experiment (involving ‘public good’ games between groups) that illustrate a political mechanism which links a lack of competition with the growth of inequality. For each game, the likelihood of a group ‘winning’ is the dependent on the relative size of each group’s contribution to the ‘collective good’ (a core determinant of equality). This experiment offers insights into the effect of competition on individuals’ tendencies to ‘care’ or act selfishly – and the results corroborate the assertion that increased competition in product markets has the effect of facilitating greater equality.
The session concluded with a panel of experts discussing the themes that have emerged over our two days at #ccp2017conf, and to ask the (not so straightforward) question “where next?”. We were delighted to be joined by Kate Collyer (Deputy Chief Economic Adviser at the CMA), Nigel Cornwall(Chairman of Cornwall Energy) and Alex Plant (Regulation Director at Anglian Water Services). The panel reflected on what had been articulated over the conference as a new wisdom (though not a consensus) – that there is a relationship between market power and inequality and that competition authorities and regulators have an important role to play in engaging with distributional issues.
The conference closed with wide-ranging and frank discussions of the challenges around fairness, market power and competition policy. What was clear was that the careful and transparent analysis of the trade-offs made when making decisions will play an important role in the increasingly political debates around consumer and competition policy, particularly in the markets for essential services such as energy. This will require engaging in more contemporary ways of considering consumers such as more engagement with consumer advocacy and ways of considering behavioural consumers.