Category: Economics 10e: Ch 07

Like most other sectors of the economy, private schools have been significantly affected by the coronavirus pandemic. As with all schools, they have been restricted to providing their pupils with online instruction. In addition, some parents are likely to have seen their ability to pay the high fees private schools charge restricted. As a result of both of these factors, private schools have been forced to look into providing discounts or refunds on their fees. However, the UK competition authority have received evidence that these schools may have been communicating with each other over how they will set these fee reductions. The authority is concerned that this will allow the schools to restrict the discounts and keep their fees higher.

In other markets (see here and here) the competition authorities have been prepared to relax certain elements of competition law in light of the coronavirus situation. However, price fixing is the severest breach of competition law and the Competition and Markets Authority (CMA) has been clear that this continues to be the case in the current climate. A CMA spokesperson said:

Where cooperation amongst businesses or other organisations is necessary to protect consumers in the coronavirus outbreak, the CMA will not take enforcement action. But we will not tolerate organisations agreeing prices or exchanging commercially sensitive information on future pricing or business strategies with their competitors, where this is not necessary to meet the needs of the current situation.

Therefore, the CMA has written to the Independent Schools Council and other bodies representing the private school sector. This letter made clear that communicating over the fee reductions would be very likely to breach competition law and could result in fines being imposed.

This warning is important since the sector has a history of illegal communication between schools. In 2006 the Office of Fair Trading (OFT) (one of the predecessors to the CMA) imposed fines when it discovered that 50 of them, including Eton and Harrow, had for a number of years shared information on the fees they intended to charge. The OFT discovered that this had taken place following evidence obtained by a student who hacked into their school’s computer system. Here the student found information on the intended fees of competitor schools and leaked this information to the press. It is clear that the CMA will keep a close eye on private schools as they react to the ongoing pandemic.

Articles

Questions

  1. What are the key features of the private school sector? Is this a market where you would expect competition to be intense?
  2. Why is price fixing the severest breach of competition law?
  3. Assuming communication between the private schools is eradicated, how would you expect the sector to be affected by the coronavirus pandemic?

As the Coronavirus pandemic continues to escalate in the UK, the government has been forced to introduce a range of drastic measures, including severe restrictions on movement of people to ensure social distancing. Supermarkets have also been forced to act as they experienced panic buying and struggled to keep up with supply. They responded by starting to impose limits on the number of certain items an individual consumer could purchase and by reducing the range of products they made available. In addition, supermarkets contacted the government to suggest that competition law should be relaxed to allow the rival chains to coordinate their response to the ongoing situation.

WM Morrison, the forth largest supermarket retailer in the UK, was one of the key players lobbying for this change. Their chief executive, David Potts, argued that “There will be legislation that works perfectly in peacetime and not so well in wartime.”

The supermarket industry is in fact a market where the UK competition authorities have expressed considerable concerns in the past regarding a lack of competition (see for example the 2008 market investigation and the recent decision to block the merger between Sainsbury’s and Asda). The supermarkets also previously made similar demands for a relaxation of competition law in the event of a no-deal Brexit.

Despite this, the government has agreed to temporarily relax elements of competition law to help supermarkets respond to the Coronavirus crisis with the Environment Secretary, George Eustice, stating that:

By relaxing elements of competition laws temporarily, our retailers can work together on their contingency plans and share the resources they need with each other during these unprecedented circumstances.

In moves supported by the Competition and Markets Authority, laws enabling them to do so will soon be passed through Parliament. Supermarkets will be allowed to:

  • share data with each other on stock levels
  • cooperate to keep shops open
  • share distribution depots and delivery vans
  • pool staff with one another to help meet demand.

It is also expected that the Groceries Code Adjudicator will take a pragmatic approach to rules previously in place to prevent the big supermarket chains abusing their power over suppliers. These rules previously prevented supermarkets from stopping orders from a given supplier without reasonable warning. However, it is now accepted that they may need to do so in order to focus on supplying a restricted range of essential products.

Such relaxation of competition laws has been rare, with previous examples being measures taken in 2006 for the maintenance and repair of warships and in 2012 during the fuel crisis. In contrast, typically competition law is extremely hot on preventing agreements between firms. This is due to the fact that they distort competition and prevent the considerable benefits that can arise for consumers when firms compete to offer the best deals.

In the extreme situation the UK is currently in, the government’s stance appears to be that there are sufficient other benefits from restricting competition between supermarkets and allowing some degree of cooperation. It is then important that the form of cooperation between the supermarkets is restricted to narrow areas that will help to ensure the continuity of supply. In particular, it would be worrying if the supermarkets started discussing the prices they charge. Already food prices may rise due to increased demand and a potential shortage of supply. Furthermore, many consumers will see their income reduced. Therefore, it is important that coordination between supermarkets doesn’t result in further increases in prices.

It is therefore reassuring that the Government made clear that the relaxation of competition law:

will be a specific, temporary relaxation to enable retailers to work together for the sole purpose of feeding the nation during these unprecedented circumstances. It will not allow any activity that does not meet this requirement.

The Competition and Markets Authority has also stressed that they will not:

tolerate unscrupulous businesses exploiting the crisis as a ‘cover’ for non-essential collusion. This includes exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation.

Once the current crisis is over, it will also be important that the competition authority closely monitors the supermarket sector to ensure that cooperation between the supermarkets ends and normal competitive conduct is resumed.

Articles

Questions

  1. Outline the effects agreements between firms to raiser prices have on economic welfare.
  2. What are the pros and cons of allowing cooperation between the supermarkets in response to the Coronavirus crisis?

In the last few years there have been growing concerns (see here for example) that markets in the USA are becoming increasingly dominated by a small number of firms. It is feared that the result of this will be a reduction in competition. Consistent with this, evidence suggests that the profits these firms make have increased. Last month The Economist and the Resolution Foundation published evidence (see references below) suggesting a similar picture may be emerging in Britain.

The Economist divided the British economy into 600 sub-sectors and found that in 58% of these the share of total revenue accruing to the 4 biggest firms had increased since 2008. The Resolution Foundation found a similar picture, especially in manufacturing industries where from 2004-16 the top five firms’ share of total revenue increased by over 10%.

Economic theory would suggest that as markets become more concentrated prices are likely to rise and The Economist cites research showing that mark-ups charged by firms in Britain have indeed risen. In addition to consumers facing higher prices, there is also concern that the lack of competition both in the USA and the UK is leading to lower wages being paid to workers. On the other hand, unlike in the USA, the evidence from the UK does not so far suggest there has also been an increase in corporate profits. Instead, it appears that the more successful firms’ profits have increased at the expense of their rivals.

This evidence on profits is line with a number of arguments that suggest we should perhaps be less concerned when markets are dominated by a small number of firms. Large firms may benefit from economies of scale and, being sufficiently large may be necessary for firms to innovate in new products and processes. Furthermore, high market shares may result from the competitive process as a reward for a firm developing a unique product or being more efficient than its rivals.

The Economist cites the supermarket industry as an example where concentrated is high, but competition is intense. Interestingly, this is a market where the British competition authorities have previously been concerned about the level of competition and spent considerable amounts of time investigating.

Despite these two opposing viewpoints, overall, The Economist argues strongly that we should be concerned about the situation in Britain. Not only are prices too high and wages too low, but growth in productivity is slow, even for the leading firms. Furthermore, they make clear that the situation may worsen following Brexit. It is argued that:

leaving the EU’s single market and customs union would reduce trade, easing competitive pressure from abroad.

This is consistent with evidence that joining the EC in the mid 1970s increased foreign competition in the UK and helped to end the low productivity growth that had plagued the economy since the 1930s.

Furthermore, it is suggested that:

to attract investment the government might look more favourably on proposed mergers—and loosening regulations would be easier outside the EU’s competition regime.

Therefore, it is clear that in the future there will be a vital role for the UK’s competition authority to remain independent of political objectives and aim to promote competition. In particular, they must prevent mergers that raise concentration and harm competition and intervene if they believe firms are abusing their dominant positions. Of course, following Brexit the case load of the competition authority in the UK will increase dramatically as they have to take on cases previously dealt with by the European Commission. One estimate is that it will need to look at around 40% more merger cases. It will certainly be interesting to see how competition in markets in Britain evolves over the next few years and the role competition policy plays in regulating this process.

Articles

Questions

  1. Outline the ways in which concentration in a market is usually measured.
  2. Explain the different price levels that arise under the alternative models of market structure.
  3. Why do you think competition is currently so intense in the supermarket industry?

The term ‘Google it’ is now part of everyday language. If there is ever something you don’t know, the quickest, easiest, most cost-effective and often the best way to find the answer is to go to Google. While there are many other search engines that provide similar functions and similar results, Google was revolutionary as a search engine and as a business model.

This article by Tim Harford, writing for BBC News, looks at the development of Google as a business and as a search engine. One of the reasons why Google is so effective for individuals and businesses is the speed with which information can be obtained. It is therefore used extensively to search key terms and this is one of the ways Google was able to raise advertising revenue. The business model developed to raise finance has therefore been a contributing factor to the decline in newspaper advertising revenue.

Google began the revolution in terms of search of engines and, while others do exist, Google is a classic example of a dominant firm and that raises certain problems. The article looks at many aspects of Google.

Just google it: The student project that changed the world BBC News, Tim Harford (27/03/17)

Questions

  1. Is Google a natural monopoly? What are the characteristics of a natural monopoly and how does this differ from a monopoly?
  2. Are there barriers to entry in the market in which Google operates?
  3. What are the key determinants of demand for Google from businesses and individuals?
  4. Why do companies want to advertise via Google? How might the reasons differ from advertising in newspapers?
  5. Why has there been a decline in advertising in newspapers? How do you think this has affected newspapers’ revenue and profits?

Price fixing agreements between firms are one of the most serious breaches of competition law. Therefore, if detected, the firms involved face substantial fines (see here for an example), plus there is also the potential for jail sentences and director disqualification for participants. However, due to their secretive nature and the need for hard evidence of communication between firms, it is difficult for competition authorities to detect cartel activity.

In order to assist detection, competition authorities offer leniency programmes that guarantee full immunity from fines to the first participant to come forward and blow the whistle on the cartel. This has become a key way in which competition authorities detect cartels. Recently, competition authorities have introduced a number of new tools to try to enhance cartel detection.

First, the European Commission launched an online tool to make it easier for cartels to be reported to them. This tool allows anonymous two-way communication in the form of text messages between a whistle blower and the Commission. The Commissioner in charge of competition policy, Margrethe Vestager, stated that:

If people are concerned by business practices that they think are wrong, they can help put things right. Inside knowledge can be a powerful tool to help the Commission uncover cartels and other anti-competitive practices. With our new tool it is possible to provide information, while maintaining anonymity. Information can contribute to the success of our investigations quickly and more efficiently to the benefit of consumers and the EU’s economy as a whole.

Second, the UK Competition and Markets Authority (CMA) has launched an online and social media campaign to raise awareness of what is illegal under competition law and to encourage illegal activity to be reported to them. The CMA stated that:

Cartels are both harmful and illegal, and the consequences of breaking the law are extremely serious. That is why we are launching this campaign – to help people understand what cartel activity looks like and how to report it so we can take action.

This campaign is on the back of the CMA’s own research which found that less that 25% of the businesses they surveyed believed that they knew competition law well. Furthermore, the CMA is now offering a reward of up to £100,000 and guaranteed anonymity to individuals who provide them with information.

It will be fascinating to see the extent to which these new tools are used and whether they aid the competition authorities in detecting and prosecuting cartel behaviour.

Articles

CMA launches crackdown on cartels as illegal activity rises The Telegraph, Bradley Gerrard (20/03/17)
European Commission launches new anonymous whistleblower tool, but who would use it? Competition Policy Blog, Andreas Stephan (21/03/17)
CMA launches campaign to crackdown on cartels Insider Media Limited, Karishma Patel (21/03/17)

Questions

  1. Why do you think leniency programmes are a key way in which competition authorities detect cartels?
  2. Who do you think is most likely to blow the whistle on a cartel (see the article above by A.Stephan)?
  3. Why is it worrying that so few businesses appear to know competition law well?
  4. Which of the two tools do you think is most likely to enhance cartel detection? Explain why.