Evaluation of Competition Policy

The Competition Act (1998) and Enterprise Act (2002) gave UK regulators more power to act against abuses of monopoly power.

However:

Very few mergers are actually investigated each year. Indeed, during the immediate five-year period after the Enterprise Act (2002) came into force, not a single major cartel was investigated by the OFT.

Despite heavy fines, covert collusion is difficult to prove. New powers have been given to the regulators to undertake covert surveillance of firms to establish whether collusion is taking place.

Tacit collusion is almost impossible to prove. Statistical techniques could be used to establish correlations between price movements in ‘theory’ and in practice.

The problem of ‘cheating’ or ‘finding loopholes’, such as getting round the regulations by moving into an adjacent market. For example, a large grocery retailer moving into the ‘convenience’ store market could be seen as a way of circumventing competition policy.

A major criticism is that ‘single’ markets are inadequately defined. For ex­ample, in 2004 the OFT allowed Tesco to purchase Adminstore (the owners of Cullens, Europa and Harts) because it regarded ‘convenience stores’ to be a separate market from grocery stores. This gave Tesco 6% of the convenience food market as well as 26% of the grocery market. While Tesco argued that the two markets are quite distinct, critics, like the Forum for Private Business, argued that the markets are almost indistinguishable and that Tesco should not have been allowed to enter the convenience food market.

The problem of regulatory capture

One particular criticism of regulation in general is that it is subject to regulatory capture – where the regulator is captured or hijacked by the regulated. This occurs because the regulated subject regulators to intense pressure, often through the lobbying system. Two processes increase the likelihood of regulatory capture – firstly, the increased exposure of regulators to the regulated encourages them to ‘see things from their perspective’ and develop an understanding of and empathy towards the regulated. This removes their impartiality and weakens their ability to regulate. Secondly, the regulated develop a deep understand of the details of the regulation and can learn how to ‘play the system’. Large corporations can allocate vast sums to developing strategies to deal with the regulators. In wider terms, regulatory capture is seen as a form of government failure, and is often seen as evidence that government regulation is not the most effective method of achieving competition and efficiency.

Two examples in the UK have been frequently cited. Firstly, it is claimed that banking regulators, including the FSA and the Bank of England have been perpetual victims of regulatory capture by the banking industry, and that, furthermore, having ‘got out of control’ the banks wayward behaviour has played a large part in the recent financial crisis. Even the former Governor of the Bank of England, Sir Mervin King, accepted that the complexity and weight of regulation makes it difficult for regulators to operate effectively. The second more recent example is the alleged capture of the tax authorities (HMRC) by the UK’s mobile phone giant, Vodafone, who apparently negotiated a £6b tax reduction, reducing their tax bill for 2009-10 from £7b to £1b.

See also:

EU Competition Policy

Contestable market theory

Banking regulation

Financial crisis

Transfer pricing