BSc Economics and related programmes Economics of Competition and Regulation EC 3015 Week 7: Market investigations

Disclaimer Certain aspects of cases may be simplified for the purpose of teaching underlying principles. Please refer to official publications for more nuanced discussion of cases. Market Investigations2

Overview Examples Legal framework Market definition Adverse effect on competition (AEC) Remedies 3Market Investigations Examples Legal framework Market definitionAEC Remedies

Examples (since March 2004) Store credit cards Domestic bulk liquefied gas Home credit Classified directory advertising services Northern Irish personal banking Groceries market Payment protection insurance (PPI) BAA Airports Rolling stock leasing Market Investigations4 Examples Legal framework Market definitionAEC Remedies

Examples (since March 2004) Store credit cards : – APRs around 30% – Weak competitive pressure Domestic bulk liquefied gas – 150,000 households – change tank when changing supplier – Remedy: make switching easier Market Investigations5 Examples Legal framework Market definitionAEC Remedies

Examples (since March 2004) Home credit – Remedy: companies must share data on clients’ payment record Classified directory advertising services – Yellow pages publisher main “problem” – required to reduce prices, than increase capped at RPI Market Investigations6 Examples Legal framework Market definitionAEC Remedies

Examples (since March 2004) Northern Irish personal banking – better information – 14 days’ notice of charges – improved switching process Groceries market: – recommendation on competition test in planning law (appealed by Tesco, with some success – see CAT judgement) – new code of conduct and recommendation on ombudsman to oversee Market Investigations7 Examples Legal framework Market definitionAEC Remedies

Examples (since March 2004) Payment protection insurance (PPI) – limit ability to sell PPI at point of sale – improved information BAA Airports – divestiture of an airport Rolling stock leasing – recommendation to change aspects of franchising practice for train operating companies Market Investigations8 Examples Legal framework Market definitionAEC Remedies

LEGAL FRAMEWORK Market Investigations9

Legal framework Previously carried out through Fair Trading Act 1973: depends on existence of monopoly. Now Enterprise Act 2002: depends on “feature of market” 10Market Investigations Examples Legal framework Economic theory Remedies

Legal framework (2) “that any feature, or combination of features, of a market in the United Kingdom for goods or services prevents, restricts, or distorts competition in connection with the supply or acquisition of any goods or services in the UK or a part of the UK.” – from EA2002 (Adverse Effect on Competition =AEC) 11Market Investigations Examples Legal framework Economic theory Remedies

ECONOMICS -- THEORY Market Investigations12 Examples Legal framework Economic theory Remedies

Market power problems Monopolies and dominant firms: Dealt with by sectoral regulation, or abuse of dominance provisions Multiple firms: Cartels, explicit collusion: Art. 81 & Ch. I Implicit collusion & other related problems EU: collective dominance – no adverse findings purely on this basis so far Motta: see section 4.6 on parallelism in wood pulp Market Investigations13

Market power problems (2) Multiple firms - continued: UK old Fair Trading Act 1973 – “complex monopoly” Rather vague, used for a range of purposes. There may be problems that are not the result of a breach of law Covered by Part 4 of the Enterprise Act 2002 Market Investigations14

Types of case Most common: Competition limited by barriers to customer search and switch – see below Other: By-products of government policy: 1. Heritage of high market concentration from airport planning 2. Limits on competition from urban planning 3. Method used to privatise railways Market Investigations15

Barriers to search Examples – Store cards – PPI Purchased as a secondary product while in the store/ bank. Possible belief that no alternatives available => lack of price sensitivity => prices much above competitive level Market Investigations16

Barriers to search Examples – Store cards – PPI Purchased as a secondary product while in the store/ bank. Possible belief that no alternatives available => lack of price sensitivity  prices much above competitive level Compounded by lack of information provided to customers These qualify for an AEC Market Investigations17

Barriers to switch For existing customers, perceived lock-in to existing supplier Examples: Liquid gas: contracts relating to ownership of tanks PPI: Use of “single premium” contracts – low redemption value Irish banks: difficulties and uncertainties in moving accounts Market Investigations18

Barriers to switch Switching limited by lack of competitors owing to barriers to entry Examples: Home credit: incumbent advantage of credit- worthiness PPI: point-of-sale advantage makes “stand-alone” provision difficult to achieve Market Investigations19

Barriers to switch Effects: – Reduced responsiveness to prices and/or quality – Prices above competitive levels – Quality or product or service may suffer (though effect may be offset by incentives produced by higher prices) These qualify for an AEC Market Investigations20

REMEDIES Market Investigations21

Remedies Must address features of the market which lead to the adverse effect on competition. e.g. Lack of information =>specify better information Point-of sale advantage=> limit ability to cross- sell Market Investigations22

Remedies (2) Addressing features leading to AEC e.g. (2) Incumbent information advantage => share key information with entrant Restrictions on planning new supermarkets: recommend change in planning law Market Investigations23

Remedies: types Orders – to companies, including divestiture, prohibitions, etc Undertakings – promises by companies – enforcement more difficult, do not cover entrants Recommendations – to government, other regulatory bodies Market Investigations24

Remedies: restrictions Must be related to features identified causing AEC effective n remedying AEC proportionate – (not unduly costly, complex given scale of AEC) properly reasoned, taking account of and weighing evidence See CAT appeal on groceries (on Web) Market Investigations25

Reading See items placed in week 7 of web pages, including guidance notes, items on remedies in airports, P Davis talk on PPI, and CAT decision on Tesco appeal cubbin.org.uk Market Investigations26