15 Oct 2010

(by Catherine Waddams) Markets need active consumers to work well, and abolishing Consumer Focus and merging the Office of Fair Trading with the Competition Commission weakens the very support they need to be a vigorous force to discipline markets. Research from the Centre for Competition Policy (CCP) shows that some consumers are inactive across all markets, and they need support to gain the best benefits and keep companies on their toes. The strongest indication of whether a consumer will switch supplier in one market is whether they have done so in other markets. And they do not always choose the best deal for themselves, which itself reduces the competitive pressure on suppliers. Consumers need both to be attentive to potential improvements in the deals which they are getting, and confident in their own ability to identify the best deals, and that the market will deliver them. A new CCP survey will explore these factors further.

For individual consumer complaints, Citizens Advice Bureaux and Trading Standards Offices will be overstretched to advise and defend individual consumers, who are likely to lose confidence, become less active and remove pressure from companies to give them the best deal. At a market level, companies will have fewer incentives to compete vigorously with each other, particularly with the loss of Consumer Focus’s advocacy role

While it may be possible to transfer the protective role of Consumer Focus to another organisation, it has played a valuable role in advocacy of the consumer perspective and in encouraging consumers to be active in the market. Without it, not only might individuals find themselves without advice for the best outcome for them, but all consumers will be the losers if lack of alertness and confidence leads to more apathy and less action in the marketplace. Although the job of consumer bodies is “making markets work well for consumers” (the motto of the Office of Fair Trading), their success depends on consumers themselves playing an active role in the process.

The merger of the OFT and the Competition Commission, both consistently rated amongst the world’s most effective competition authorities, can only save significant amounts of money if they cut back on their monitoring and investigation of mergers and markets, which would have severe adverse effects on competition, consumers and Britain’s competitiveness. Undoubtedly there is room for some improvement in terms of the time taken for investigations, particularly market inquiries. But much of the delay in high profile cases like BAA and supermarkets has arisen from appeals against the CC’s findings, after the initial inquiries are completed. Companies are unlikely to want a system which delivers faster certainty at the expense of their rights of appeal, and natural justice demands that there is an appeal route to challenge the findings of competition decisions. The current first call for such an appeal, the Competition Appeal Tribunal, is itself retained under the present review, but may be transferred to the Ministry of Justice tribunal service. As with the merger of the CC and the OFT, economies are only likely to be realised at the expense of the Tribunal’s expert analysis. Competition cases often raise complex issues which cannot be adequately assessed without specialists, as the large amounts paid by companies to economic consultancies and specialist legal advisers demonstrate.

Britain is unique in having separate bodies for different stages of inquiries, with the OFT referring cases where there may be problems for more in-depth study by the Competition Commission; but all jurisdictions have an initial sifting process to identify those mergers and markets which may be problematic in competition terms, and then a second stage to investigate these in more detail. It is difficult to see how savings could be squeezed from the merger of the institutions without threatening the quality of the investigations (whoever conducts them) and independence of the second stage. The process of reform itself costs money, and the net effect of the reorganisation is unlikely to help in cutting the budget deficit. If the ability of the merged organisation to review and challenge market power is cut, the result will be increases in market power and potential abuse which will harm both consumers and the competitiveness of the UK. And the voice of bodies like Consumer Focus, which might have encouraged consumers to shop around for the best deals, will have been silenced.

Gain or Pain: Does Consumer Activity Reflect Utility Maximisation? Yoonhee Tina Chang and Catherine Waddams Price, February 2008, CCP Working Paper

Do consumers switch to the best supplier? Chris M. Wilson and Catherine Waddams Price, Oxf. Econ. Pap. 2010 : gpq006v1-gpq006

Global Competition Review Rating Enforcement 2010