The Locomotive Act of 1865 regulated the speeds of new-fangled motorised road transport to no more than 4mph on country routes and 2mph in cities, despite the fact that they were able to move very much faster. Why?
The government had been influenced by drivers of horse drawn vehicle and train companies. Despite the advantages to be seized from innovative new ways of transporting people and goods, it was decided that these innovations should be constrained to fit with existing business models. Imagine if these restrictions had lasted?
Entrepreneurs benefit our economy and society. They create products and services that consumers want and provide a powerful incentive for incumbent businesses to drive down costs, streamline processes, and innovate to develop their own better products and services. Reducing barriers to new businesses entering markets, therefore, can increase competition and consumer choice. Even just the threat of entrance to a market can be a powerful disciplining tool to drive the benefits of competition.
My organisation, the Competition & Markets Authority (CMA), formed from a merger of the Competition Commission and the Office of Fair Trading in 2014, works to promote competition in markets, to benefit consumers. We look to policy makers to consider the impact on competitive markets when shaping new policies and legislation.
And, if we’d been around in 1865, we would surely have been advocating against some of the provisions in the Locomotive Act. The well-established wisdom is that competition benefits the economy, encourages the best use of resources and benefits consumers, including businesses as consumers. It also puts pressure on businesses to innovate to attract customers looking for new, better or cheaper goods and services.
New businesses, in the fast-paced world we live in today, can take up a dominant position quite quickly: look at Google, Apple, Facebook and Amazon, businesses that are relatively young, but with many customers globally. Dominant positions however, as we have seen from companies such as Yahoo, IBM, Myspace and Bebo, can be eroded.
The challenge for the CMA and other competition agencies, is to be agile enough in working with regulators and policy makers to allow businesses to develop the goods and services that consumers want – in markets that have not been defined or even thought of yet – without rules stifling innovation.
Entrepreneurs, seeking to innovate and enter markets, could encounter a number of hurdles. To encourage entrepreneurialism and the noted benefits to the economy, we need to give confidence to new entrants that they are able to compete; that they can operate new business models, if that is what consumers want, and they are able to gain market share from incumbents, if they provide products or services to meet demand. An effective competition regime will help do this.
The CMA takes action against firms that seek to abuse their dominant position or who collude with other firms to fix the conditions in which they will all trade. In two cases earlier this year, Ultra Finishing, a supplier of bathroom fittings, and ITW, a supplier of commercial fridges, were fined by the CMA for engaging in ‘resale price maintenance’: they restricted retailers’ abilities to sell their products online at independently-determined prices. We have also investigated suspected breaches of similar activities in the hotel online booking sector.
As well as addressing specific concerns, the CMA can also investigate whole markets where competition does not appear to be working effectively. These investigations can lead to market-opening remedies.
New entrants into a market like retail banking are an important source of competition and innovation, and we are aware of the current barriers to challenger banks. Our investigation, which reported in August, aims to improve information available to both personal and business customers on the offerings available from challengers – as well as incumbents – to allow them to compare and choose the right bank for them. Remedies around ‘open banking’ are designed to make it easier for smaller banks to win customers, which should improve the degree of competitive pressure on the large incumbents.
Likewise, with the energy market, the CMA found evidence to suggest that the average prices offered by the ‘big six’ energy firms have been “above those that we would expect to prevail in a well-functioning competitive market”. In seeking to remedy this, we have developed a range of proposals with the objective being that competitive pressures bear down on costs, reducing the prices paid by customers. Specifically relating to third party intermediaries or brokers in the energy market, our remedies should help consumers choose the supplier that best meets their needs.
Both these investigations considered the important role of price comparison websites (PCW). Technology such as PCWs and user-generated content, such as online reviews, can be helpful in informing consumers – including small businesses, which often face the same difficulties in making the best consumption choices. The CMA is mindful however of the need to protect consumers from fake reviews and lack of transparency around sponsored materials; with the objective to empower consumers to make the best decision.
Entrepreneurs, seeking to create a space for their business, may be well placed to spot market failures, either through regulation that needs to be improved or by spotting anti-competitive behaviour by other businesses. They will know a market well, and can spot types of behaviour that could inhibit their entry to or growth in a market. But it is important that all businesses are aware of the signs of abuse of dominance and know what to do if they suspect it is happening. Complying with competition law is good for businesses too: it helps them avoid expensive fines and reputational damage, which might turn customers away.
The CMA has a number of tools to stop anticompetitive behaviour, from proactive guidance for businesses to help them comply with competition law, to enforcement powers to stop illegal behaviour. We encourage reporting of all anti-competitive behaviour or issues in markets. This can be done online at www.gov.uk/government/publications/report-anti-competitive-or-market-issues-to-the-cma
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