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Good government for free
markets
Remarks to the Competition Policy conference
of the Regulatory Policy Institute, Oxford
By John Vickers
Chairman, Office of Fair Trading
15 September 2004
Beyond competition law
The point discussed in these remarks is that
good competition policy extends well beyond competition law −
i.e. beyond the law dealing with anti-competitive agreements, abuse of
dominance, and mergers.
It is well known that competition law in the UK has changed
fundamentally in the past few years thanks to the Competition Act 1998
and the Enterprise Act 2002. The law is now clearly focused on
competition. It has teeth where it should, for example against cartels.
And it is applied transparently by independent bodies −
principally the OFT, the Competition Commission, and the Competition
Appeal Tribunal − with Ministers out of the process.
That is all well and good. But there is much
more to good competition policy than good competition law, well
applied. So what are the key elements of competition Office of Fair
Trading policy beyond competition law? Who is responsible for them? How
is UK policy in this area developing? And what are the challenges ahead?
Regulatory
reform and competition
Perhaps the most important element of
competition policy beyond competition law is competition scrutiny of
regulation. Competition policy is a potentially important ally for all
those who think that there is too much regulation. Sometimes it points
simply to deregulation – the removal of restrictions so that
existing and would-be market participants have more freedom to compete
for the business of customers. Sometimes it points to smarter
regulation – so that the aims of policy are achieved more
effectively, and at lower cost, when there is more freedom to compete.
Regulatory reform is the responsibility of
Government and Parliament − and the European Commission and
Council − not the competition authorities. It has not
traditionally been a role of the competition authorities even to carry
out competition scrutiny of regulation. But this is changing.
A striking example is the Fiammiferi case.
The Italian competition authority challenged a national regulatory
framework governing the production, distribution and sales of matches,
which included an anti-competitive quota system. The matter was
referred by the Italian court to the European Court of Justice, which
ruled a year ago that national legislation must be disapplied if it
requires or facilitates conduct contrary to EC law against
anti-competitive agreements, legitimising or reinforcing the effects of
the conduct, specifically with regard to price-fixing or
market-sharing.2 While legal proceedings by competition authorities
against anti-competitive laws might be rare, this case is an
interesting one to take note of. Office of Fair Trading 2 (2 Judgment
of 9 September 2003, Consorzio Industrie Fiammiferi (CIF) v. Autorita
Garante della Concuurenza e del Mercato, case C-198/01).
More commonly, competition scrutiny by
competition authorities of laws and regulations results in advice to
Government. This advice, and the analysis on which it is based, are
carried out with the same independence as the authorities' competition
law enforcement work, though whether or not to accept the advice is of
course for others to decide.
Deregulatory initiatives
There are two main kinds of competition
scrutiny of regulation − that of existing regulation and that of
proposals for new or different regulation. Here are some examples of
both.
Professions: The OFT's 2001 report
Competition in professions4 challenged a number of anti-competitive
restrictions in the regulation − including self-regulation
− of professional services including law. Some deregulatory steps
have since been taken and more are in prospect. Following the report,
the exclusion of professional rules from the scope of competition law
was removed. The OFT's 2003 market
study of the private dentistry, as well as addressing lack of market
transparency, recommended removal of certain regulatory restrictions on
how dentistry services can be supplied.
Pharmacies: Since 1987 regulatory
restrictions on entry have impeded the development of new pharmacy
businesses in the UK. On the basis of a detailed Though not primarily
competition scrutiny, the CC's role in relation to the regulated
industries (e.g. energy and water) should also be noted here. 4 The
report, and updates, on competition in professional services is at
www.oft.gov.uk/News/Publications (in 'Reports/Professional bodies').
Office of Fair Trading (The report on private dentistry is at
www.oft.gov.uk/Business/Market+studies/dentistry.htm). The Government's
response of June 2004 is at
www.dti.gov.uk/ccp/topics2/dentists.htm.study, (the OFT recommended
liberalisation to enhance competition and consumer choice, and to open
new ways of getting medicines to the public). The Government has
however decided, for the time being, only to relax the rules for new
pharmacies open more than 100 hours a week, located in large
out-of-town shopping centres, or based on the internet or mail order.
Taxis: The OFT's 2003 report on taxi services found that restrictions
on taxi numbers, which apply across about half the UK, block
competition and mean fewer taxis on the roads, longer waiting times,
less choice for the public, and risks to public safety. The OFT
recommended that the legislation allowing local authorities to limit
taxi numbers should be repealed. Rather than securing de-restriction
for all, the Government is encouraging it locally.
Financial services: The OFT advised in 1999
(and again in 2002)9 that the 'polarisation' regulation on those who
advise on and sell packaged investment products was restrictive of
competition and not beneficial for consumers. Supported further by its
own extensive analysis the FSA is proceeding with
de-polarisation.10Betting: The OFT advised Government on the transfer
of the Tote to the private sector. The Tote has an exclusive licence to
supply pool betting. The OFT advised against maintaining this exclusive
right in order to allow business freedom and promote competition to the benefit of
consumers. The Government decided to lift the exclusive right after
seven years. (The report
on pharmacy entry controls is at
www.oft.gov.uk/Business/Market+studies/pharmacies.htm. The Government's
response of August 2004 is at
www.dti.gov.uk/ccp/topics2/pharmacy.htm Further, the system for
approving new pharmacies will be modernised so that NHS Primary Care
Trusts can take account of the benefits of competition and choice in
its assessments of applications for new pharmacies. The OFT's
2003 report on taxi services is at
www.oft.gov.uk/Business/Market+studies/taxis.htm. The OFT's 1999
report on polarisation and its 2002 paper are at
www.oft.gov.uk/News/Publications (in 'Reports/Financial products and
services'). Office of Fair Trading See, for example, the FSA's 2004
consultation document at www.fsa.gov.uk/pubs/cp/04_03/)
In all these cases, the OFT recommendation
was to remove regulatory restrictions on business freedom to serve
customers. This brought vocal protests from vested interests for the
retention of restrictions on the freedom of other, potentially
competing businesses. That is natural. Perhaps the best restrictions on
competition from the point of view of incumbent businesses are those
imposed by public regulation. Which underlines the importance of
independent competition scrutiny on behalf of the wider public.
The removal of restrictions on business
freedom to serve customers has also been a feature of steps taken by
the OFT, under competition law, against privately-imposed restrictions
on competition. Examples include the ending of resale price maintenance
− and hence the creation of retailer pricing freedom − on
books and over-the-counter medicines; and the greater freedom and
choice being established in horse-racing. Similarly, some
privately-imposed restrictions on the supply of professional services
have been eased − e.g. the scope for direct access to barristers
has been widened − and after
the Clementi review further liberalisation of legal services might well
be on the cards.
Competition and the public
interest
Defenders of anti-competitive restrictions
often say that liberalisation of regulation, though it would lead to
more competition, would be detrimental to the 'wider public interest'.
Since competition is but a means to ends, defences on these lines
cannot and should not be dismissed out of hand. But they should not
hold sway unless certain conditions are shown to hold. (Office of Fair Trading 5 11 The OFT's
response in June 2004 to the consultation of the Clementi review is at
www.oft.gov.uk/news/press+releases/2004/91-04.htm)
An important point to keep in mind is that
competition − through its incentive properties and otherwise
− is a valuable means towards a great range of ends, public as
well as private. It simply isn't a question of competition on the one
hand, and the public interest on the other. Competition and the public
interest generally go hand in hand.
That is not to say that 'more competition' is
always for the good. How, then, to distinguish justified regulatory
restrictions on competition from the rest? A natural test is suggested
by the competition law treatment of anti-competitive agreements. For an
agreement − or part of an agreement − that appreciably
prevents, restricts or distorts competition, the questions are:
• does it bring benefits
• of which consumers get a fair share
• and for which the anti-competitive agreement is indispensable
• and without eliminating competition?
Likewise, a good test for a regulation shown
to be anti-competitive is whether it achieves, and is indispensable to
the achievement of, identified public interest benefits that outweigh
the detriment from restricted competition.
Embedding competition scrutiny
Important steps have recently been taken to
make competition scrutiny of regulation in the UK more systematic.
First, the Enterprise Act has strengthened
the powers of the OFT and the CC to examine and make recommendations to
Government on regulatory restrictions and Office of Fair Trading Article 81 of the EC Treaty, which is
mirrored by Chapter I of the UK Competition Act 1998. distortions of
competition.13 The OFT proposes to amend its guidance on market
investigation references in order to enhance further the potential role
of the CC in this regard.14
Second,
since 2002 competition scrutiny has been built into the regulatory
impact assessment of legislative proposals. The assessment is primarily
done by Government departments. The OFT provided guidance15 to
Government departments on when and how to carry out competition
assessment, and assists on cases as necessary.
Third, this summer the Competition Forum was
established. This is a cross-government forum for discussion of
relationships between market competition and government bodies. The
work of the Forum will include helping to identify markets where
competition appears not to be working well.
Conclusion
The comments above have mainly concerned
pro-competitive regulatory reform. Of course Government interacts with
markets not only as regulator but also as producer, subsidiser and
purchaser. Publicly-owned producers engaged in economic activity are
subject to competition law just as private firms. Section 7 of the Act gives the OFT a
function of making proposals to Ministers or public authorities, such
as the recommendations we make following a market study. Section 131
enables the OFT to refer markets to the Competition Commission for
investigation when it has reasonable grounds to suspect that a feature
of a market − which can include regulation − prevents,
restricts or distorts competition. If the CC finds an adverse effect on
competition, it has a range of remedial powers, as well as the power to
recommend changes to regulations. The OFT proposes to amend paragraph
2.31 of the Market Investigation Reference Guidance to remove the
statement that 'where the OFT is satisfied that adverse effects on
competition arise primarily from laws, regulations, or government
policies it will not normally make a reference when it considers that
the CC will not be able directly to remedy such adverse effects.'
Available at www.oft.gov.uk/Business/regulations. Office of Fair
Trading 7 Publicly-owned producers that have been subject to
inquiry under the Competition Act 1998 include the North & West
Belfast Health & Social Services Trust and Companies House.
Office of Fair Trading 8 Government subsidies
and procurement are currently the subjects of preliminary OFT studies
that will be published in the autumn.
In all these respects Government activities
can help or hinder competition, and markets can work more or less well
− not only for consumers but also for Government policy
objectives. Good competition policy therefore extends well beyond
competition law. Where regulation or other state intervention unduly
restricts competition, good government frees markets.
See
www.oft.gov.uk/Business/Market+studies/subsidies.htm and
www.oft.gov.uk/Business/Market+studies/procurement.htm. Some subsidies
fall for competition scrutiny under the EC Treaty rules on state aids.
With our compliments.
Nationwide Poles & Jim Foot
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