Competition Regulation and Functioning Competitive Markets - Essay Example

Consumer Protection, Competition Regulation, and Functioning Competitive Markets Introduction Competition regulation and policy are based on the principles of perfect and free competition, as well as the free determination of prices by market mechanisms. As a result, competition regulations seek to identify and enforce necessary mechanisms meant to enhance efficiency in the market while also promoting and protecting competition1. Some countries expand the scope of competition regulations to cover all aspects of commerce, production, and provision of services, along with external activities that influence the domestic economy. These are all activities that have direct and indirect influences on the consumer. Thus, to understand how competition regulation benefits the consumer, it is critical to also first appreciate how competition regulation is related to the consumer protection regime2. This paper will begin my discussing the major completion regulations in the UK, before discussing the effect of competition regulation on the functioning of a competitive market. This will lead on to a discussion on how competition regulation’s effect on market functioning strengthens the consumer protection regulatory regime. Competition Regulation Competition regulation policy in the UK, as well as the EU, is based on four fundamental pillars. The first pillar involves cartels and anti-trust, including the elimination of agreements that act to restrict competition, such as price-fixing by dominant market players3. The second pillar involves market liberalization that seeks to introduce renewed competition in sectors enjoying monopolistic tendencies, including postal services, energy supply, aviation, and telecommunications. A third pillar is state aid control, through which competition regulation policy analyses measures of state aid to ensure they do not distort market competition. The final pillar is merger control, through which governments investigate take-overs and mergers to avoid domination of the market by large business groups. UK competition regulation is anchored in legislation and there have been sustained attempts to enhance competition regulation since 1948. The Monopolies and Restrictive Practices Act 1948 was the UK government’s first legislative attempt to regulate competitive practices, specifically by setting up the Competition Commission to block mergers that would threaten public interest4. The Monopolies and Mergers Act 1965, in turn, empowered this commission to investigate possible and actual mergers, especially where there was a risk of increased monopoly power. In the meantime, the UK government got the Restrictive Trade Practices Act 1956 passed, which illegalised collusion between manufacturers to set retail prices while also requiring manufacturers to register competition-related agreements with the Restrictive Practices Registrar5. Both aspects were consolidated through the Restrictive practices Act 1976 that provided the Registrar of Restrictive Practices with the means to investigate commercial agreements and their impact on competition. The Fair Trading Act of 1973 had previously defined monopoly as ownership of more than 25% of market share, while setting up the Office of Fair trading that governed mergers and made inquiries into complex, large scale monopoly situations6. While the Competition Act 1980 broadly defined anti-competitive activity and allowed the Minister to investigate monopoly practices, the Telecommunications Act 1984 gave independence to the Competition Commission from the government, offering it the power to pursue anti-competitive practitioners7. Since the UK joined the EU, its competition regulation policy has come into line with competition regulation policy in the EU. Regulations under the Competition Act 1998 prohibited cartel formation and operation. In addition, it also prohibited firms from abusing dominant positions at local or national level and concerted practices through anti-competitive collusion8. These concerted practices include price fixing through fixing output and minimum retail prices, fixing business terms, and carving up markets where firms between them to reduce competition. The Enterprise Act 2002 amended the former Act, strengthening regulator power in relation to the detection and punishment of market dominance abuse and cartel activities. This Act’s main provisions were reduced influence in merger assessment by politicians and increased independence for the regulator, including new powers to investigate markets using more sophisticated instruments like covert surveillance. It also criminalised cartels and provided means to disqualify directors for competition rules breaches, along with enabling consumer groups to make complaints on uncompetitive activity9. Finally, the Enterprise and Regulatory reform Act 2013 established the CMA, which combined the consumer protection and competition functions carried out by the Competition Commission and the office of Fair Trading. Effect of Competition Regulation on Market Competition From the discussion above, it emerges that the CMA is responsible for both competition regulation reform and consumer protection policy. From current research, it can be argued that competition regulation reform has enabled markets to work more efficiently by enhancing competition, which has had significant benefits for the consumer10. Three main insights can be gleaned from this literature, including the fact that greater competition in the market enhances productivity and drives economic growth. In addition, competition regulation helps to remove anti-competitive agreements and open up markets, in turn promoting competition. Moreover, enforcement of competition regulations has a significant impact on competition policies, compared to the mere presence of competition legislation. Competition regulations are mainly designed to eliminate or reduce impediments to well-functioning, competitive markets, especially those arising from restrictive business practices like anti-competitive mergers and cartel agreements, as well as public interventions like price controls and statutory monopolies11. Effective competition regulations normally involve pro-competition industry-specific policies, coupled with economy-wide enforcement of cartel and anti-trust measures aimed at hindering anti-competitive practices. In combination, these measures improve both international competitiveness and domestic economic performance. Addressing anti-trust and cartel behaviour is a fundamental aspect of competition regulation enforcement, especially since cartels significantly distort market competition, especially where there are unusual price increments12. Besides a hike in the price of services and goods, cartels also result in low productivity of labour, as well as low innovation incentives. Tough enforcement of cartel regulations acts as an effective instrument in reducing anti-competitive behaviour and its adverse effects. Therefore, eliminating anti-competitive agreements, such as cartels, portends significant impacts on the affected markets. Indeed, research shows that the breaking up of cartels during the 1990s resulted in a price drop of 20-40%, indicating that overcharges by cartels distort market competition13. Moreover, when competition regulation is weak enough to allow cartels operate for a longer time, these cartels are more successful in distorting market competition by imposing higher prices through manipulation of supply. In addition, competition regulation aimed at preventing cartels and other anti-competition practices enhance labour productivity in the market, especially where there is collusion between dominant players14. Competition regulation measures also help in reducing the impact of cartels and anti-competitive agreements15. Leniency programs used in tandem with competition regulation, which work to reduce punishment if colluding firms cooperate with the regulator to detect cartel behaviour, are a good example of how regulatory policy can improve functioning of competitive markets. For instance, a leniency program in the US reduced formation of cartels by almost 60%, while also increasing the rate of detection for cartels by ~62%16. In turn, these results led to a decline in prices and increased market labour productivity by improving competition in the markets. Moreover, effective competition regulation measures, especially those targeting merger controls, are also effective in preventing transactions that may significantly harm competition in the market. Indeed, the Department of Justice in the US found that increased merger control through enforcement of competition regulations resulted in significant consumer savings of almost $1 billon, showing the importance of competition regulations on market competition and efficiencies17. Tougher competition regulations, particularly those aimed at hindering existing firms from engaging in predatory behaviour, are mainly designed to ensure that markets are more competitive and contestable. In turn, contestable markets resulting from competition regulation exert downward price pressures, especially where present monopolists are producing at excessive prices and supernormal profits for new businesses to consider market entry18. As a result, competition regulation allows new entrants to undercut the monopolist, competing away some of the abnormal profits. Thus, competition regulation lowers entry and exit barriers, allowing new businesses to enter the markets and provide more competition. Perfectly competitive markets ensure that market exits and entries are costless, although achieving a perfect market is impossible. However, all markets can at least be considered contestable at some level even where it seems that the position of the monopolist is unassailable as the dominant seller. Functioning competitive and contestable markets have direct implications on existing firms and their conduct, while also influencing the market’s performance in relation to dynamic, productive, and allocative efficiency19. Hence, the achievement of functioning competitive and contestable markets is clearly a significant aim of competition regulation by deterring anti-competitive behaviour and encouraging efficiency. Convergence of Competition Regulation and Consumer protection From the section above, it appears that competition regulation has a critical role to play in ensuring that markets are functioning competitively. Today’s consumers are out for specialised services and products, particularly those that cater to niche, often new markets, which has meant that consumers are increasingly discerning and discriminating when making purchases and expect the best value and service quality20. The result of these trends has been growing interaction and convergence between different regulatory fields, including consumer protection and competition regulations. Competition regulations refer to measures and legislations that seek to govern the ability and extent to which companies can compete fairly and economically. By extension, competition regulations seek to prevent anti-competitive practices and promote fair competition. These regulations, as noted, prohibit anti-competitive conduct, such as tied selling, predatory pricing, exclusive dealing, excessive pricing, and collusion, which enhance efficient capital and labour resource allocation in the market21. Competition regulation, through this mobilisation and allocation of resources and its ability to prevent artificial market barriers and facilitate market access, promotes market competition. Consumer protection, on the other hand, refers to measures taken to protect consumer interests, while ensuring that consumer have all the relevant information related to the services and products they use22. Consumer protection’s main goal is to shield the consumer from fraudulent, deceptive, and unfair practices by business firms. Essentially, consumer protection attempts to ensure that the market is equitable, fair, and safe for the consumer. These goals, which seek to balance the consumer’s rights with those of the business, are required for markets to function effectively. This, as already seen, is also a goal of competition regulation. Competition regulation and consumer protection also converge in relation to their design, which is to enhance effective consumer choices and sovereignty. This means that both are focused on improving the choice of the consumer, as well as the choices at the consumer’s discretion in making purchasing decisions23. Consumer protection and competition policy also seek to address market failure resulting from market outcomes and transactions, which may reduce consumer choice. Finally, Consumer protection and competition regulation are also both aimed at achieving increased economic competitiveness, productivity, and efficiency for the domestic market. These crucial and important synergies point to the fact that increased market choice and competition enhances information available to the consumer, which means that the consumer can make known their preferences and demands to suppliers, thus stimulating more product choice due to greater competition24. The objectives of consumer protection and competition policy differ in one major way. Whereas competition regulation intends to enhance the market’s ability to offer customers competitive service and product options by tackling external market failures like price fixing, consumer protection is intended to provide all relevant information to the consumer by tackling market failures arising from misleading advertising and other limitations on the consumer’s perception. However, as is evident, the difference in the objectives of both concepts is only about policy application with the outcomes being similar; to accrue benefits to and protect the consumer25. Therefore, competition regulation and consumer protection portend a significant impact on how markets function. Competition regulations and laws act to enhance and preserve the market’s competitive structure for services and goods, seeking to achieve perfect competition so as to ensure that consumers looking to buy a specific product can purchase it at prices that are reflective of actual cost26. Protection of competition refers to preventing and striking restrictive practices by businesses that threaten competition, particularly those that take the form of unilateral market power abuses and anti-competitive cooperation between players in the market. Thus, competition regulation’s major objective overlaps with and supplements that of consumer protection, which is to ensure that the consumer is protected from unscrupulous and negative business practices. This becomes especially important in sectors like transportation, public procurement, and telecommunications, which have direct, observable, and immediate impacts on the consumers’ lives. Bid rigging and cartel arrangements, which are the main targets for competition regulation, have the ability to significantly raise the costs of constructing hospitals and roads. Thus, the price paid for such services and products increases with some cartel overcharges accounting for price rises of almost 10% of total procurement value27. Competition regulation creates conducive and competitive business environments by preventing anti-competitive conduct and enhancing functioning of competitive markets, leading to additional safeguards for the consumer’s interests and improving consumer welfare by enhancing economic efficiency28. Competition regulation, through enhancement of functioning market competition, also ensures that resources are well allocated, which assures the consumer of better quality services and products, adequate supplies, lower price, and wider choice. The removal of artificial entry barriers by competition regulation also enhances market competition by allowing for small enterprises to expand and for new entrepreneurs to enter the market, portending specifically significant consumer benefits. Decreasing anti-competitive conduct through competition regulation also provides the opportunity to reduce exploitation of the consumer by market players. For instance, curtailing of collusion and monopolies through competition regulation benefits the consumer by making markets more contestable and exerting downward pressure on prices29. Hence, the biggest winners from increasingly competitive markets are the consumers purchasing products from these markets. Consumer protection is also an essential complementary policy for competition regulation, especially as the latter cannot safeguard the interests of the consumer fully. This is because having products selling at the lowest possible prices is useless where the products may actually be unsafe for use by the consumer30. Moreover, providing a wide choice range for the consumer may be insufficient to protect the consumer from unsavoury market practices if they do not possess relevant information, such as lack of sufficient labelling information, misleading ads, and inaccurate pricing information. These failures may result in consumers making the wrong purchasing decisions. In this case, the most valuable contribution that programs aimed at consumer protection can make is to prevent serious misconduct and fraud in the market. The major objective of any consumer protection strategy or programme is to prevent businesses from bumping their sales and revenues through unfair market practices31. Therefore, competition regulation measures are needed to ensure that such businesses are punished and have little incentive to partake in these practices. Taking these issues into consideration, highly efficient, competitive, and contestable markets provide a good environment for the use of consumer protection policies, specifically as businesses have to improve product quality to compete in such a market, which provides the basis on which consumer protection policies can guarantee safe and secure products for the consumer32. However, it is also essential to consider how consumers in different sectors define as beneficial products since one definition may not be agreeable across all market sectors. Indeed, there are some consumer protection measures that may detrimentally impact on competition, while still improving customer outcomes. For instance, collusion and price fixing, which competition regulation seeks to control, will influence market completion even where the regulator sets prices, although, in this case, the regulator may be more interested in protecting consumer interests than enhancing competition33. What is most important for the consumer is that the market provides price and quality benefits, hence consumer protection, which is achievable through competition regulation that incentivizes firms to produce high quality products to remain competitive. Conclusion In conclusion, competition regulation acts to complement consumer protection measures, which are mainly aimed at enhancing consumer welfare, sovereignty, and choice. Competition regulation addresses market failure situations that are external to the consumer, especially where the consumer may incur higher prices for their products due to economic inefficiencies wrought by a highly anti-competitive market. Enforced competition in the market through competition regulation will subsequently result in improved consumer choices and information, as well as a more demanding and informed consumer who makes their preferences known to the producers and firms, stimulating more product choice and greater competition. Thus, it is evident that lack of competition in a specific market provides justification for regulators to intervene in enhancing the consumer’s welfare. Hence, competition regulation, by enhancing competition in previously uncompetitive markets, supports efforts aimed at increasing consumer protection by necessitating improvements in quality and reductions in price through increased competition. References Armstrong, M., and J. Vickers, ‘Consumer protection and contingent charges’, Journal of Economic Literature, vol. 50, no.2, 2012, p. 482 Baldwin, R., M. Cave, and M. Lodge, Understanding regulation: theory, strategy, and practice, Oxford, Oxford University Press, 2011 Buccirossi, P., ‘Measuring the deterrence properties of competition policy: the Competition Policy Indexes’, Journal of Competition Law and Economics, vol.7, no.1, 2011, p. 178 Buccirossi, P., L. Ciari, T. Duso, G. Spagnolo, and C. Vitale, ‘Competition policy and productivity growth: an empirical assessment’, Review of Economics and Statistics, vol. 95, no. 4, 2013, p. 1329 Buttigieg, E., Competition Law: Safeguarding the Consumer Interest: a Comparative Analysis of Us Antitrust Law and EC Competition Law, Austin, Wolters Kluwer, 2009 Cooper, J., and W. Kovacic, ‘Behavioral economics: implications for regulatory behaviour’, Journal of Regulatory Economics, vol. 41, p.1, 2012, p. 49 Drexl, J., More Common Ground for International Competition Law? Cheltenham, Edward Elgar, 2011 Graham, C., ‘The Reform of UK Competition Policy’, European Competition Journal, vol. 8, no. 3, 2012, p. 547 Mateus, A., and T. Moreira, Competition Law and Economics: Advances in Competition Policy Enforcement in the EU and North America, Cheltenham: Edward Elgar, 2010 Norbäck, P., and L. Persson., ‘Entrepreneurial innovations, competition and competition policy’, European Economic Review, vol. 56, no. 3, 2012, p. 494 Pappalardo, J., ‘Product Literacy and the Economics of Consumer Protection Policy’, Journal of Consumer Affairs, vol. 46, no.2, 2012, p. 323 Parnes, L., and E. Holman, ‘Role of Competition in Analysing a Consumer Protection Remedy: Should Regulators Consider Competition Law in Urging a Do Not Track Solution?’ Competition L. Intl, vol.7, no. 1, 2011, p. 72 Rodger, B.J., and A. MacCulloch, Competition Law and Policy in the EU and UK, London, Cavendish, 2012 Rodger, B.J., and A. MacCulloch, Competition Law and Policy in the EU and UK, London, Routledge, 2015 Vanberg, V., ‘Consumer welfare, total welfare and economic freedom: on the normative foundations of competition policy’, Competition Policy and the Economic Approach, Cheltenham: Elgar, vol.5, no.2, 2011, p. 50 Whish, R., and D. Bailey, Competition law, Oxford, Oxford University Press, 2012 Read More