Economic Policy for Competition and Consumers

By Vickers, John | Teaching Business & Economics, Summer 2001 | Go to article overview

Economic Policy for Competition and Consumers


Vickers, John, Teaching Business & Economics


This article looks at economic policy towards competition and consumers, discussing the economic principles and who does what in policy terms, illustrating these by way of some recent cases and topical issues.

MAKING MARKETS WORK WELL

The role of the Office of Fair Trading (OFT) is to help make markets work well, which ultimately means markets working well for the consumer. A market will not work well for consumers unless it also works well for businesses that are good at giving consumers what they want. Unlike the specific sectoral regulators (e.g. OFTEL for telecommunications; OFGEM for electricity and gas; ORR for railways), the OFT has a very wide remit to tackle competition problems and consumer detriment throughout the economy. In everyday life, the public deals with many businesses and markets where OFT policy has played a role - for example supermarkets, beer, consumer credit, travel, the professions, and health.

A well functioning market has two aspects: competition and fair trading. It is a competitive market that gives consumers real choices between business suppliers. An essential form of consumer protection is that kind of consumer choice. Competition is not separate from consumer protection; it is very much at the heart of it. Fair trading firms seek business in ways that are not detrimental to consumers; for instance, by avoiding unfair contract terms and by not publishing misleading advertisements. Competition is a necessary, but not a sufficient condition for a well working market. Consumer protection also matters and comes through general law, and through the actions of agencies such as the OFT.

ECONOMIC PRINCIPLES

In investigating competition and consumer problems, the economics that lies behind the analysis is crucial. It is very important that the authorities are clear on the economic and legal principles in reaching decisions if they are to be robust. The principles that underpin decisions should be clear so that the reasoning is apparent to the business community and to consumers.

First of all, it is worth stating positively why competition is good. By competition we do not mean textbook perfect competition, but reasonably effective competition in a real world sense.

Competition gives cost reflective pricing - not necessarily low prices but prices in line with costs. In a reasonably competitive situation, that would be something approximate to marginal costs. Cost reflective pricing is generally optimal for consumers. Resources will be allocated efficiently around the economy and price signals can be relied upon to direct resources to their most effective uses. Competition also means that there is greater consumer choice as there are greater incentives on producers to make better goods and services. The greater rewards will go to those who are better than their rivals at giving consumers what they want. It is also worth noting that by providing incentives to get costs down, to be efficient, and to innovate, competition is generally good for productivity. Competition is a key part of the policy agenda being taken forward by the Government to address the productivity gap between the UK and its main competitors.

It is natural and useful to think about the economic principles in terms of market failures. With competition policy, it is problems or possible problems arising from the exercise of market power. In the extreme case, a monopolist as the only seller in a market can make sure that potential competitors cannot enter the market by erecting or enhancing entry barriers. The monopolist can therefore exploit consumers by pricing well above marginal and average cost. Such exploitation of market power is an issue public policy has for decades sought to address. However, the extreme pure monopoly case arises very rarely. Competition investigations also look at other firms that are not pure monopolists, but do have very strong market positions. …

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