Government in Markets: Why competition matters

1. Government in Markets: Why competition matters John Fingleton Chief Executive, UK Office of Fair Trading January 2010

2. Outline • Why competition matters • Role of competition policy • Government involvement in markets

3. Competition, consumers and productivity • Competition delivers benefits for consumers • prices, quality, choice, entry • airlines in the EU - lowest non-sale fare fell by 66% between 1992 and 2002 • cost of international telephone calls from the UK fell by 90% between 1992 and 2002. • Competition also drives productivity, innovation and growth • …and international competitiveness • But, hard to predict benefits in advance

4. Competition and wider policy objectives • Delivering benefits of globalisation in domestic markets • Link between competition and innovation • e.g. disruptive entry in airlines market • Competition as enabler of other government policies • e.g. infrastructure investment

5. How to increase competition in markets • Two strands – tackling private restrictions and public restrictions • Private restrictions • anti-competitive mergers • cartels • abuse of monopoly • Public restrictions – government / public sector barriers to competition

6. Progress in tackling private restrictions • Tackling private restrictions is at the core of competition policy • e.g. Recent AAI working paper by John M. Connor found that the total known affected sales by international cartels between1990 and 2008 is $16 trillion. • Significant progress globally • Proliferation of competition law worldwide and increased international cooperation • growth in ICN membership from 16 agencies in 2001 to over 100 today • But challenges remain

7. Challenges for competition enforcement • Markets are global, but enforcement is largely national • ‘Patchwork’ approach can lead to • failure to address private restrictions on competition • inconsistent standards – risk of chilling competition • inconsistent procedures – burdens on business • Huge strides in recent years through e.g. International Competition Network (ICN) • e.g. strong influence on reforms of merger procedures in Brazil, India and China

8. Public restrictions on competition: The context • Shift in focus of competition policy over past 10-15 years • political shifts • economic globalisation • Increasingly established role for competition advocacy • ‘the mandate of the competition office extends beyond merely enforcing competition law. It must also participate more broadly in the formulation of its country's economic policies, which may adversely affect competitive market structure, business conduct, and economic performance.’ (World Bank, 'OECD: A Framework for the Design and Implementation of Competition Law and Policy, Chapter 6, at 93, 1998)

9. Government’s role in markets • Government and markets closely linked • Contract enforcement and rule of law • Intervention is frequently required • Market failures – market power, externalities, information asymmetry • Outcomes • Key question = effective design and trying to anticipate unintended consequences

10. How Government intervenes

11. How is Government’s approach changing? • Long term trend – from direct state ownership to regulation and indirect control • Effects of the economic downturn and financial crisis • Softer intervention – alternatives to direct regulation • Burden of proof – from justifying government intervention to justifying markets?

12. Some areas to look out for • Quantity restrictions and entry barriers – e.g. taxis, professional services • Government fixing prices – e.g. bans on below cost selling, minimum prices • National champions and national ownership • Economies of scale arguments • Statutory exemptions from competition law – e.g. for certain utilities industries

13. Regulation case study: pharmacies • Control of entry regulations were introduced in 1987 to reduce costs to the NHS. This: • restricted consumer choice and convenience • restricted competition on ‘over the counter’ drugs • The regulation of entry costs consumers £25-30 mn per year more for over the counter drugs, businesses £16mn per year in compliance costs, and the NHS approximately £10mn per year in administrative costs

14. Principles for effective intervention • Entry and exit • Alternative instruments • Consumer and producer interests, and evidential bias

15. Competition advocacy role • Most competition authorities have some power to challenge government restrictions • e.g. Mexico • Competition assessments • Focusing policymakers on potential competition concerns at early stage • OECD guidance • Market studies and advice to government • e.g. In recent ICN survey of 38 member competition authorities, greatest consensus around use of market studies was as a preparation for intervention in the legislative process.

16. Conclusions • Competition crucial for consumers, economic growth and wider policy delivery • Role of competition policy in tackling private and public restrictions • “Government in Markets” • http://www.oft.gov.uk/shared_oft/business_leaflets/general/OFT1113.pdf

17. Government in Markets: Why competition matters John Fingleton Chief Executive, UK Office of Fair Trading