Competition and regulation policy - (25.05.02)

Should competition and regulation policy be based on consumer interest or industrial structure? Historically in the UK much of competition policy has been based on how a potential merger would affect industrial structure, for instance the market power that the new entity would have over the sector. This was always seen as being to the benefit of the consumer in terms of monopoly and oligopoly power to increase prices above what might otherwise been available. Regulation, particularly of utilities, has mainly been focussed on introducting competition to the end consumer part. Gas and electricity liberalisation has allowed the supply part of the industry to remain a monopoly, with regulation used to ensure that cross subsidisation did not distort the consumer end of the market. Once competition is seen to have a root hold in the consumer market, the regulation tends to be removed over time.

However, this is not completely an analysis of what is in the consumer interest but an assumption that when an industry reaches a particular type of structure it can be left to deal with the consumer however it likes. For instance, it can be argued that competition in gas and electricity markets are starting to work against the consumer interest, relying on confusing price structures that make it difficult to compare between companies. Price discrimination against poorer consumers and small businesses also has resulted as they are less attractive to compete over than rich consumers and large firms.

The EU approach to competition policy has changed matters slightly. Whilst this looks at the unfair domination of a market, the penalty approach set at 10% of turnover has a more significant effect on company behaviour. It allows isolation of the end consumer market from the industry structure, for instance with the vitamin investigation recently. Big companies who operate a cartel with smaller suppliers face a penalty on their total turnover, an indication that they should have known better. In the past there penalty may have merely been the disposal of a certain segment of their overall firm, a remedy to which delying tactics could be easily employed.

Some more structured analysis of the effects of this type of policy on consumer end markets would certainly be welcome, as an expansion of this ability to focus on the end consumer for takeover and regulation policy would be preferable to a more limited focus on market structure.