Economics Department

Economic Survey - United Kingdom 2004: Product market competition and economic performance


What is the scope for improving competition? 

Competitive pressures appear to be relatively strong in the United Kingdom, with economic and administrative regulations inhibiting competition and barriers to trade amongst the lowest in the OECD. Nevertheless, there is scope for improvement and the recent overhaul of competition legislation should lead to progress in this regard. Active enforcement, together with market investigations which help to identify competition problems in markets that are not due to infringements of the competition law, will help to ensure that markets are competitive. But the government will need to continue to limit the use of “public interest” intervention and ensure the enforcement agencies’ independence. More emphasis should be placed on enforcement of horizontal price fixing and the Office of Fair Trading (OFT) has already started investigations. To underpin the credibility of the enforcement programme, the OFT should apply the stronger sanctions that are now available against horizontal price fixing. In the longer term, attention needs to be paid to potential overlap between the OFT and the Competition Commission (CC). As the OFT’s range and capacity expand the extent of the CC’s distinct contribution may need to be reconsidered.

Indicators of product market regulation (1)

1. The regulatory stance is measured by a synthetic indicator ranging between 0 (least restrictive) and 6 (most restrictive).
2. Indicator of economy-wide product market regulations.
3. Includes barriers to competition and state control.
4. Includes trade and FDI restrictions.
5. Reports changes in the regulatory stance in seven non-manufacturing industries (gas, electricity, post, telecommunications, passenger air transport, railways and road freight) between 1978 and 1998.
Source: Nicoletti et al. (2001); Nicoletti and Scarpetta (2003).

Are market power and planning restrictions impeding the retail sector? 

In the retail sector, the recent Competition Commission enquiry concluded that in general the supermarket sector operates in a competitive environment and that price differentials with the European Union could mainly be explained by the strong exchange rate. However, market power, both buying and selling power on the part of large retailers, remains a problem. In particular, the enquiry found that retailers have used their market (buyer) power to the detriment of suppliers and competitors. In light of this, the OFT negotiated a code of practice to govern buyer-supplier relationships in this sector, although it is not clear that this will resolve the problems and the competition authorities will need to remain vigilant. As regards entry into the sector, the government’s recent approach to planning has made new large scale entry very difficult. Competition in the market is thus impeded both by inhibiting entry and by preventing firms from growing in size to achieve their full productivity potential. Over the 1990s, productivity growth of the UK’s retail sector has been particularly disappointing as compared to that of the United States. While the productivity gains arising from large scale entry are more difficult to realise in the United Kingdom due to land scarcity and overcrowding, the government is currently re-examining the appropriateness of the current planning restrictions. They could be relaxed without compromising social objectives. These restrictions have been fairly successful in achieving social objectives such as preserving town centres but come at a cost in terms of competition in the sector, thereby harming consumer interests.
Could more entry help pharmacies? 

There have been many reforms in the professional services sector in recent years. An important step is that the regulations of self-regulatory bodies are no longer exempt from competition legislation and professional bodies have undertaken a number of actions towards removing or easing restrictions that the OFT identified as inhibiting competition. In its response to the findings of a recent OFT enquiry into pharmacies calling for open entry in the sector, the government, citing concerns over the current shortage of pharmacists, has left in place entry restrictions that inhibit the development of competition. However, the OFT report found that consumers are currently well served geographically and that, in general, there was no shortage of pharmacies. The government should reconsider the recommendations of the OFT and allow open entry into pharmacies, subject only to demonstrated professional qualifications. The Government will review this area in 2006.

Could telephone prices fall further? 

The opening up of the electricity, gas and telecoms sectors has led to increased productivity, but international comparisons suggest that there is still scope for prices to fall, particularly in telecoms. Reforms in electricity and gas have led to benefits for consumers where prices are generally below the EU average, but household electricity prices remain comparatively high. Prices for mobile and business telephone charges also remain comparatively high with business telephone charges amongst the highest in the European Union, probably due to market power on the part of the incumbent. In all of these cases there is a need for the relevant industry regulator to remain active to prevent abuses of dominant position and ensure consumers reap the full benefits from liberalisation.

Average monthly telephone charges,

 August 2002

1. Composite basket includes international calls and calls to mobile networks.
2. Including tax.
3. Excluding VAT.
Source: OECD, Communications Outlook 2003.

Are railways in good shape now? 

Continuing problems in the rail sector need to be resolved. Recent actions, through tighter specification of outputs and guidance about planning and investment, show that the government is taking the lead in resolving some of these problems. The Strategic Rail Authority (SRA) is playing a stronger role in specifying franchises and a temporary role in assuring the operation of trains pending the award of competitive franchises. While these recent steps overcome the most serious weaknesses of the privatised rail system, problems regarding incentives and responsibilities remain to be resolved. In particular, there is still a need for an independent regulator, and the government should clearly define the lines of responsibility and reinforce and ensure the regulator’s independence. The SRA should consider granting longer term franchises, as the current policy of short franchises with tightly specified performance criteria is unlikely to provide incentives for necessary long term investments.


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