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COMPETITION AND THE ECONOMY

1.1      The importance of competition in an increasingly innovative and globalised economy is clear. Vigorous competition between firms is the lifeblood of strong and effective markets. Competition helps consumers get a good deal. It encourages firms to innovate by reducing slack, putting downward pressure on costs and providing incentives for the efficient organisation of production. As such, competition is a central driver for productivity growth in the economy, and hence the UK's international competitiveness.

COMPETITION AND CONSUMERS

1.2      Competition between firms protects consumers. In markets which lack effective competition, firms know that customers have little or no choice but to buy from them ­ and so they can treat their consumers unfairly.

1.3      With strong competition firms are forced to work hard to win and keep customers. As a result, competition drives down prices and drives up quality and choice. This is most marked in areas which have moved from (often state owned) monopolies to more open markets. For example, greater competition between utility firms has helped to reduce bills for UK householders.

1.4      We can see equally positive results of competition in other markets. A recent court action outlawed fixed prices for branded over-the-counter medicines ­ including popular painkillers and vitamin pills. Within hours, major supermarket groups announced that they would cut prices of such medicines by up to 50%.

COMPETITION AND AN EFFICIENT ECONOMY

1.5      Strong competition is closely linked to dynamic and efficient markets (see Box 1.1).

 

Box 1.1: Competition and Productivity: The Economic Evidence Blundell, Griffith and Van Reenen (1995)1 and Nickell (1996)2 find that various measures of competitive pressure in a sector have a positive impact on firm efficiency and productivity growth rates. Geroski (1990)3 finds evidence that market power tends to reduce the rate of innovation and productivity growth. Caves and Barton (1990)4 find that increased market concentration is associated with reduced technical efficiency. Barnes and Haskel (2000)5 attribute 30-50% of productivity growth in the UK and US to the entry and exit of firms in their markets. Caves (1998)6 finds that new entrants bring with them higher rates of productivity. Porter (1990)7 finds in his major survey of international industrial performance that it is firms which face strong domestic competition which perform best in international markets. More recent work (Porter 2000)8 shows that in Japan only those sectors characterised by strong domestic competition remain internationally competitive following the country's recent economic downturn ­ examples include cameras, automobiles and audio equipment. 1 Blundell, Griffith and Van Reenen: Dynamic Count Data Models of Technological Innovation. The Economic Journal, 105, March 1995. 2 Nickell S: Competition and Corporate Performance. Journal of Political Economy, 104 (4) 1996. 3 Geroski, P: Innovation, Technological Opportunity and Market Structure. Oxford Economics Papers 42, July 1990. 4 Caves and Barton: Efficiency in US Manufacturing Industries. MIT Press, 1990. 5 Barnes and Haskel: Productivity in the 1990s: Evidence from British Plants. Draft Paper, Queen Mary College, University of London, 2000. 6 Caves, R: Industrial Organisation and New Findings on the Turnover and Mobility of Firms. 7 Porter, M: The Competitive Advantage of Nations. MacMillan Press, 1990. 8 Porter, M, Takeuchi, H and Sakakibara, M: Can Japan Compete? Macmillan Press, 2000.

Productivity and enterprise

1.6      Establishing strong competition in the UK economy is central to the Government's aim of meeting the productivity challenge through the promotion of enterprise for all.

1.7      Productivity is the main factor which determines living standards ­ so raising our productivity holds the key to our long-term prosperity. However, UK productivity lags behind that of our principal competitors. The labour productivity gap with the US was 45% in 1999, that with France was 19%, and Germany, 7%. If the UK were to match the productivity performance of the US, for example, output per head would be over £6,000 higher.

1.8      As the Government's reforms have recognised, competition is by no means the only driver of productivity in an economy ­ enterprise and innovation, skills and investment are also important drivers of productivity. But the competition regime is vital. Strong competition regimes encourage open dynamic markets and through them, innovation and value for consumers.

1.9      This White Paper sets out a blueprint to build a world-class competition regime for the UK.

LIBERALISING MARKETS

1.10      A strong domestic competition framework is essential. However, the full benefits of competition will only be felt in markets that are open to trade and investment by overseas firms as well as by domestic rivals.

1.11      With markets open to international competition, the best, most efficient domestic firms can expand while continuing to face effective competition. Inefficient domestic firms either need to improve or leave the market. Such change leads to major improvements in national productivity and can boost economic growth.

1.12      The opposite happens with protectionist trade policies. Closed markets can shelter inefficient domestic firms from the need to compete, encourage cartels, limit buyer power and deny consumers the benefits of lower prices that can emerge from competitive pressure.

1.13      Recent Government policy has had a twin focus of opening up UK markets wherever possible and pushing for increased liberalisation in European markets.

Liberalising UK markets

1.14      The UK's approach to opening up utility markets to competition can deliver significantly lower prices and create more dynamic markets. Such benefits can be illustrated by looking at the gas, electricity and telecommunications markets, which have been extensively liberalised in recent years.

Gas and electricity markets

1.15      Liberalisation of energy markets has led to lower costs through increased efficiency and lower prices for consumers. The UK gas and electricity markets are already fully liberalised, with all types of customer able to choose their own supplier. For example:

• More than 30% of domestic gas customers and 25% of electricity customers have switched suppliers.
• Domestic electricity prices have fallen as markets have opened up. In real terms, quarterly credit electricity customers paid 23% less in 2000 than in 1995.

1.16      The UK experience also shows that energy liberalisation need not get in the way of our objectives on fuel poverty and the environment. For example:

• Electricity and gas disconnections have fallen in the last 3 years ­ suppliers must offer customers a range of payment options.
• Total carbon dioxide emissions from power stations in 2000 were estimated to be 23% below 1990 levels, despite a 19% increase in electricity consumption.

Computing and telecoms

1.17      UK consumers have benefited from rapid price falls as a result of the opening up of the UK market in telecoms:

• For mobile phones, prices have fallen by 20% in 18 months from the beginning of 1999.
• A quarter of consumers in each of the mobile and fixed markets have switched suppliers.
• There are high levels of overall satisfaction with both mobile and fixed line services.
• The cost of international calls has fallen dramatically over the past decade.

1.18      While much remains to be done to secure the benefits of further liberalisation of the UK telecommunications market the progress underlines the importance of securing effective competition and open markets in telecommunications.

Liberalising European markets

1.19      The Government has been at the forefront of the debate in Europe about opening up previously closed markets to competition. For example, at the Stockholm Summit, the EU endorsed the target to conclude as early as possible in 2001 work on the legislative proposals announced by the Commission following its 1999 review of the telecommunications regulatory framework.

1.20      The UK has pushed for the early adoption of the European Commission's proposals for full liberalisation of European energy markets, also for the telecommunications and financial services markets. The UK experience has shown that opening up markets to competition can deliver significantly lower prices to all consumers and create more dynamic markets. And in many markets there have been welcome developments in respect of increased competition and consumer choice.

1.21      One example is air travel in Europe. The open market for flights within the EU, developed during the 1990's, has allowed new players to enter the market and offer better deals for consumers. The Government believes that further liberalisation is necessary so companies can compete effectively across borders in the interests of both business and consumers.

1.22      The Government will actively promote policies to create stronger competition and liberalisation of markets to benefit both business and consumers.