Championing competition

An Office of Fair Trading case study

We live in an economic system that is generally good at channelling scarce resources towards meeting consumers’ needs. One reason for this is that markets are efficient at processing data. Every day, the preferences of millions of consumers are fed into the market e.g. when we buy biscuit B rather than biscuit A and book holiday D in preference to holiday C.

Our spending preferences act as signals to producers; manufacturers and suppliers respond to consumer choices by seeking to supply those goods and services that consumers most want.

This is a key feature of a mixed-market economy compared to a planned economy, such as Russia pre 1990, where the government decided what to produce.

However, just how well consumers’ buying decisions translate into producers’ responses largely depends on how competitive a market is.

In a competitive environment, producers will usually do whatever they can within the law to win orders from customers. In healthy markets, firms compete for business by developing better products and/or by offering more attractive terms than their rivals. So, in many instances, increased competition will lead to greater consumer choice and lower prices, which is why many governments favour it.

Markets work well when fair-dealing businesses are in open, vigorous competition with each other. If a market is uncompetitive, producers within it will be in control and may not always do their best for customers. As Adam Smith observed, the food on our dinner plate reaches us not out of the goodwill of butchers and bakers but from their pursuit of their own interests. Left entirely to their own devices, some businesses may act against consumers’ best interests, either on their own or in collaboration with other producers. Because of this risk, governments set up regulatory bodies to monitor what is taking place.

When there is competition within a market, consumers have a genuine power of choice. It is important that this choice is informed and that consumers are not misled by deceptive or unfair practices. Again, a regulatory body is needed to ensure that businesses supply consumers with adequate, accurate information.

In the UK, the Office of Fair Trading (OFT) has the job of ensuring that markets are competitive, that firms conduct their business fairly, and that consumers’ wishes and interests are properly considered.

The OFT is an independent organisation. Its powers come from consumer and competition legislation, including the Competition Act 1998. It is currently headed by the Director General of Fair Trading (DGFT) and has a permanent staff of officials. The Director General is appointed by the Secretary of State for Trade & Industry (Rt Hon Patricia Hewitt MP) and takes overall responsibility for creating a climate of competition in the UK. The OFT is accountable under the law for its actions and always endeavours to be open, fair and transparent in its decisions. However, under the Enterprise Act 2002 these arrangements change, and the powers of the DGFT will be transferred to the OFT Board, of which the DGFT will become the first Chairman.

The primary aim of the OFT is to ‘make markets work well for consumers’. It is involved in three key areas of activity:

1. Investigating
2. Enforcing
3. Communicating

This work includes:

1. investigating complaints from consumer bodies
2. researching how markets work
3. examining the impact on markets of new and existing legislation.

The OFT investigates whether markets are working well for consumers e.g. are consumers well served by a system under which local authorities control the number of taxis licenced to operate in their area?

In particular, the OFT advises the government and other regulatory authorities on proposed new legislation covering markets. It publishes the results of itsinvestigations. In some cases those findings lead to the OFT taking enforcement action.

The OFT can require firms to stop practices that are against consumers’ interests e.g. firms’ attempts to restrict competition. Firms often have an incentive to restrict competition because reduced competition will lead to higher profits and an easier existence. The ways in which firms may seek to restrict competition are many and various. For example, a firm may try to:

1. reach agreement with other firms about the prices each will charge
2. arrange with other firms the territories for which each will be the sole or main supplier
3. reduce the supply to the market with a view to forcing up prices
4. devise ways of preventing other firms from entering its market e.g. by tying retailers into exclusive deals
5. take over its competitors to reduce the degree of competition it faces.

In countries, including the UK, with strong competition laws, all of these practices are likely to be subject to legal scrutiny. With the power of the law to support it, the OFT enforces competition and consumer protection laws in several ways, including:

Uncovering and deterring anti-competitive behaviour.

The work of the OFT’s Competition Enforcement (CE) division includes stopping and deterring cartels. Any business involved in a cartel risks being fined up to 10of its UK turnover for up to three years. The CE team works across all market sectors, conducts on-site investigations where needed, and liaises with other bodies across the world to identify international cartels. Action can be swift and effective.

The OFT can require firms to stop practices that are against consumers’ interests e.g. firms’ attempts to restrict competition. Firms often have an incentive to restrict competition because reduced competition will lead to higher profits and an easier existence. The ways in which firms may seek to restrict competition are many and various. For example, a firm may try to:

• reach agreement with other firms about the prices each will charge
• arrange with other firms the territories for which each will be the sole or main supplier
• reduce the supply to the market with a view to forcing up prices
• devise ways of preventing other firms from entering its market e.g. by tying retailers into exclusive deals
• take over its competitors to reduce the degree of competition it faces.

In countries, including the UK, with strong competition laws, all of these practices are likely to be subject to legal scrutiny. With the power of the law to support it, the OFT enforces competition and consumer protection laws in several ways, including:

Uncovering and deterring anti-competitive behaviour.

The work of the OFT’s Competition Enforcement (CE) division includes stopping and deterring cartels. Any business involved in a cartel risks being fined up to 10of its UK turnover for up to three years. The CE team works across all market sectors, conducts on-site investigations where needed, and liaises with other bodies across the world to identify international cartels. Action can be swift and effective.

For example, two supposedly rival major UK national bus companies privately agreed not to compete against each other on certain bus routes in Leeds – the cosy deal was struck in a local hotel. Having been alerted to what looked like a cartel, the OFT investigated. The two companies were quick to admit their action, and the heavy fines originally imposed on them were reduced in recognition of their readiness to co-operate and stop their malpractice.

Putting an end to any abuse of market power e.g. charging excessive prices to a captive market, or forcing out competitors through predatory pricing.

In the UK, it is not illegal for a business to be a sole supplier or to dominate a market. The test is whether a firm is abusing its market power. For example, a dominant UK pharmaceutical company (Napp) that supplied, in tablet form, a drug for cancer patients was found to be operating a highly discriminatory pricing policy. The price of tablets sold privately to cancer patients was around ten times higher than the price charged to UK hospitals, where the firm kept its price artificially low in this huge market in order to make it almost impossible for rival firms to compete. The firm was fined more than £2 million and was ordered to reduce the price it charged private consumers and to limit the discount offered to hospitals.

A publisher of Scottish newspapers (Aberdeen Journals) was fined more than £1 million and ordered to change its ways after being found guilty of trying to force a rival publication out of business by starving it of advertising revenue. The bigger company had set its own prices to advertisers at below the cost to itself of carrying the advertising. The OFT took up this case following a complaint from the victim of this anti-competitive practice.

Identifying mergers (two firms joining together) that might be against the public interest so that these can be further investigated by the Competition Commission.

The Competition Commission currently has two sides to its work: reporting on merger, monopoly and anti-competitive situations, and an appeals side that hears cases against decisions made. The OFT’s CE division identifies mergers that pose a threat to competition. In such cases, the merger will be investigated in detail to see whether it should be allowed to proceed. Within this role, the OFT recommended, and the Competition Commission concluded, that Lloyds TSB be prevented from merging with Abbey National .A merger of these banks seemed likely to lead to reduced competition in the supply of personal and SME banking services.

Applying robustly the rules that protect consumers

The OFT’s Consumer Regulation Enforcement (CRE) division takes action against traders who trade unfairly. It also encourages organisations in specific market sectors (e.g. electricity suppliers) to set up codes of practice that benefit consumers. It also provides a range of information to help consumers understand their rights and make good choices.

The CRE division’s work includes:

• discouraging businesses from putting unfair terms into contracts e.g. an airline that wanted to restrict its obligation to compensate customers for certain types of luggage damaged in transit
• providing advice and information to enable terms in contracts to be set out fairly
• regulating the consumer credit market so that borrowers are not misled when entering into credit agreements. Businesses that offer consumers credit require a licence. This keeps out unscrupulous firms (e.g. car dealers who ‘clock’ or reduce mileage)
• working closely with the Advertising Standards Authority to remove deceptive or misleading advertising e.g. commercials offering ‘interest free loans’
• managing standards for Internet and home shoppers, so that they have the same rights as other shoppers.
• Taking court action against businesses e.g. for supplying poor goods, failing to honour guarantees of service, acting dishonestly e.g. giving false information about a car’s history, forging customers’ signatures.

The OFT can also issue a ‘Stop Now’ order, a court order to make traders comply immediately with their requirements. These will become known as (part 8) Enforcement codes when the Enterprise Act commences later this year.

Encouraging businesses to regulate their own activities by setting out Codes of Practice based on good practice e.g. estate agents.

The OFT liaises with government departments and international organisations, as well as answering queries from individual consumers and providing information about consumers’ rights.

It communicates with consumers, businesses, the government and others regularly. Through its announcements, publications and press releases, the OFT:

1. explains its decisions openly to all
2. shows how efficient, competitive markets are important for consumers, fair-dealing businesses and good economic performance
3. creates an atmosphere that encourages firms to comply with good competitive practice
4. helps raise consumer awareness and confidence
5. co-ordinates activities with other enforcing agencies locally, nationally and internationally
6. advises government on how to achieve a climate in which competition and consumers can best flourish.

The OFT helps to make markets work better for consumers through its roles of investigation, enforcement and communication. Sometimes the OFT is obliged to take action against firms that operate against consumers’ interests, but more often than not, the mere existence of the OFT is enough to give businesses the incentive to engage in fair and open competition.

Being able to select from a variety of alternatives is an essential consumer freedom, and in most markets today UK consumers have greater choice than ever before. This choice is important, but it is not sufficient on its own. The choice has to be exercised properly and wisely. If consumers want to encourage competitive markets, they need to make businesses work for their money.

Indeed, we as consumers can best support the work of the OFT by becoming more discriminating, and by seeking and demanding excellent products and high standards of service. Provided that a supplier is not acting unfairly or illegally, OFT cannot protect us against our own folly: only we can do that.