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PARTIAL REGULATORY IMPACT ASSESSMENT

A1.1      This is a partial Regulatory Impact Assessment (RIA) of the proposals set out in the Competition Reform White Paper. A full RIA will be produced at a later stage when we develop legislation to implement the proposals in the White Paper. In this document we scope the range of likely costs and benefits and invite views from consumers and industry on quantifying those costs and benefits.

INTRODUCTION

A1.2      The UK competition regime is now founded on two main pieces of legislation ­ the Competition Act 1998 and the Fair Trading Act 1973. (EC competition law also applies where there is an effect on trade between Member States.)

• The Competition Act 1998 mirrors the two European prohibitions. It prohibits cartels and other anti-competitive agreements and also abuses of dominant market position. It is enforced by the Office of Fair Trading (OFT), which can impose fines of up to 10% of UK turnover ­ covering up to three years of the infringement. Recently the OFT fined NAPP pharmaceuticals £3.21 million for anti-competitive behaviour. Firms can appeal against OFT decisions to the Competition Commission Appeal Tribunals.
• The Fair Trading Act 1973 addresses mergers and non-collusive oligopolies¹ (where a number of firms are suspected of engaging in parallel behaviour which could undermine competition ­ inquiries include New Cars, Supermarkets and Banking). Initial investigations are normally carried out by the OFT ­ leading to references to the Competition Commission (although Ministers can also make references independently). The Commission then conducts a formal investigation and sends its report to the Secretary of State for Trade and Industry. The Secretary of State is required to follow the Commission's advice on whether the merger or oligopoly operates against the public interest ­ but it has wide discretion on what, if any, remedies to adopt.

PURPOSE OF THE WHITE PAPER PROPOSALS

Issues

A2.1      Strong competitive pressures across our economy are a key driver for productivity and growth. Competition acts as a stimulus for innovation, efficiency, wider choice and lower prices for consumers. The Government has already made significant improvements to the competition regime. The Competition Act 1998 introduced a much stronger regime than before, but we still need to go further. The White Paper proposes, and in some cases, seeks to consult on, changes which will strengthen our competition regime.

Objectives

A2.2      The main objective of the reforms is to modernise and strengthen the competition regime. The reforms are based on the following principles:

• Competition decisions should be taken by strong, pro-active and independent competition authorities.
• Our regime should root out all forms of anti-competitive behaviour.
• We need a strong deterrent effect.
• Harmed parties should be able to get real redress.
• The Government and our competition authorities should work for greater international consistency and co-operation.
• Competition policy deserves a high profile ­ because of its importance for economic performance.

The option of no change

A2.3      The introduction of the Competition Act 1998 brought the UK into line with Europe, however the recent peer review² showed that further reform is still needed in order to achieve a world-class competition regime. Although the UK competition regime was placed in the top half of its peer group, the well-established competition regimes of Germany and the USA rank ahead of the UK. The Government feels that these proposals would strengthen our competition regime and increase productivity and innovation in our economy.

Risk assessment

A2.4      We welcome views from industry and consumers on the risks inherent in the policy proposals we set out in the White Paper and, where possible an economic valuation of them.

PROPOSALS

A3.1      The Government has already consulted widely on proposals to reform the mergers regime. A draft RIA has been drawn up for merger reform proposals and is available in the document "Mergers: the Response to the Consultation on Proposals for Reform"³. This Regulatory Impact Assessment will address other proposals in general terms.

A3.2      The Governments main proposals are that:

• Criminal sanctions will be introduced for those who engage in cartels. Cartels are a sophisticated form of theft from consumers, and although a criminal sanction is severe, the Government feels that it is proportionate to the offence.
• The OFT will be given a power to seek court orders for disqualification against directors who engage in serious competition breaches.
• In line with the OFT's advice on professions⁴, the exclusion of professional rules in the Competition Act 1998 will be repealed.
• The monopoly regime will be replaced with a new regime for investigating markets which will follow the same procedural principles as the new merger regime ­ decisions will be taken as often as possible by independent competition authorities against a competition based test rather than the current public interest test.
• Harmed parties should be able to bring private actions before a specialist competition body. Other courts should also see Competition Act decisions as

• of infringements, as well as being able to refer competition aspects of other cases to a specialist competition body.
• There will be a new right of appeal when seeking interim measures under the Competition Act to stop anti-competitive behaviour while a case is under consideration.
• OFT powers to review and report on markets will be extended to include future developments that affect markets.
• Consumer groups will have the ability to bring a new category of 'super-complaint' to the OFT.

EXPECTED BENEFITS

Benefits to consumers

A4.1      Stronger markets: Competitive markets benefit consumers by driving down prices and increasing innovation⁵.

A4.2      Harmed parties will be able to get real redress: The Competition Commission Appeal Tribunals will have a strengthened role ­ allowing them to hear claims for damages from third parties. Consumer groups will have the ability to bring "super-complaints" to the OFT. The new procedures for representative actions will gain compensation for consumers.

A4.3      We will have a stronger deterrent effect: There will be a new criminal offence for individuals who engage in cartels ­ carrying the possibility of a custodial sentence. Stronger action against cartels will reduce prices and benefit consumers.

Benefits for business

A4.4      Competition decisions will be taken by strong, pro-active competition authorities rather than Ministers: Our competition authorities will have greater independence ­ with decisions on mergers and complex monopoly cases taken by the OFT and the Competition Commission on the basis of sound economic analysis of the effects on competition. Therefore decisions will not involve politics so there will be greater certainty for business and improve the clarity of the regime. Our competition authorities will have more resources and expertise, resulting in better decisions being taken.

A4.5      Harmed parties will be able to get real redress: Not only will the strengthened role of the Competition Commission Appeal Tribunals benefit consumers, it will also benefit businesses allowing compensation to be sought more easily.

Benefits to taxpayers and the overall economy

A4.6      Reduction in resource costs for DTI: There should be an overall reduction in the level of resource needed at the DTI as it is proposed to take Ministers out of most monopoly and merger decisions.

A4.7      Government regulations: The ability of the OFT to review and report on future developments that affect markets will allow the OFT to publish advice on the effect on competition of proposed legislation. This will benefit the economy by ensuring that proposed legislation is not significantly anti-competitive and there is a level playing field for business.

A4.8      Our regime will root out all forms of anti-competitive behaviour: Together the proposals will help to achieve stronger competition in the economy, leading to increases in productivity⁶ and innovation.

A4.9      There will be greater international consistency and co-operation: This will ensure that international investigations can proceed smoothly and quickly.

Quantifying benefits

A4.10      Economists have estimated the welfare loss from monopolistic behaviour in the UK economy and arrived at figures of between 0.5%⁷ and 1%⁸ of GDP. This amounts to a cost of between £4.5 and £9 billion (given that UK GDP is currently in the region of £900 billion). Therefore rooting out monopolistic behaviour will have significant cost benefits to the economy.

A4.11      The OFT will be given resources to scrutinise markets to root out anti-competitive behaviour. A recent OFT report, "Competition in professions," suggested changes, including repealing the exclusion of professional rules in the Competition Act which is proposed in the Enterprise Bill. The value of services provided by the professions is £11.37 billion per annum so if the changes OFT recommended improve productivity by only 0.1% that represents a gain of £11.37 million per annum compared to additional resources of £750,000 for this study.

A4.12      There have been several estimates of the amount that cartels raise prices by. In general the evidence suggests that there is a rise in prices in excess of 10% of competitive levels⁹. Increasing prices will have some dampening effect on demand ­ so a cartelist might increase its profits by a small proportion, conservatively 5%¹⁰. The typical cartel lasts 5-6 years so the disbenefit to consumers over time is large. The turnover will vary, but for example the Lysine cartel, which ran from 1992 to 1995, had an estimated turnover of approximately $600 million. Therefore the increase in profits due to price-fixing would be very significant.

A4.13      Respondents are invited to submit any further information they have on the prospective size and value of benefits.

COSTS

Costs to consumers

A5.1      It is not anticipated that there will be a direct cost to consumers as a result of these proposals.

Policy Costs

Compliance costs for business

A5.2      Businesses will face increased costs through more frequent and more thorough investigations by the OFT. If there are five more investigations per annum and we assume an average cost of £1 million to business from each investigation, there would be increased costs of £5 million per annum.

Implementation Costs

A5.3      It is unlikely that there will be large changes in compliance costs for businesses. The proposals in this White Paper do not change the prohibitions of the competition regime only investigation and enforcement powers and procedures.

A5.4      There maybe small costs associated with staff training to ensure that staff are aware of developments in the interpretation of law. Where this burden falls on law firms this may be passed on to clients through fees. We would welcome views from business and law firms as to the scale of this cost.

Small Business Litmus Test

A5.5      The proposals do not target legitimate business activity and small businesses should benefit from them in the ways out lined above. The DTI will work with the Small Business Service to promote awareness of the legislation.

Costs for the OFT and the Competition Commission

Costs to taxpayers and the overall economy

A5.6      The Government recognises that our competition authorities will need significant additional resources in order to be able to successfully deliver the radical improvements to the competition regime that are proposed. Ministers will take decisions on the level of increases to the budgets of the OFT and the Competition Commission over the next few weeks.

Quantifying costs

A5.7      Respondents are invited to submit any information they have on the costs associated with these proposals.

DEVOLUTION

A6.1      Competition legislation is not a devolved matter. Responsibility rests with the Government of the United Kingdom. Consequently the proposals apply to England, Scotland, Wales and Northern Ireland. They have no special or different effect in Scotland, Wales and Northern Ireland.

CONSULTATION

A7.1      We value consultation on the proposals in the White Paper and in this Regulatory Impact Assessment. These documents will be published on the DTI website¹¹ and we will be drawing them to the attention of practitioners, business and consumer associations. The consultation period will close on October 5th 2001. Further work will be undertaken on the Regulatory Impact Assessment during the consultation period.

CONTACT POINT

A8.1      

Rachel Crisp
Competition Policy
Department of Trade and Industry
1 Victoria Street
London
SW1H 0ET
competition.reform@dti.gov.uk

1 It also contains provisions on scale monopolies but the Government announced in 1997 that following the Competition Act coming into force, these provisions would only be used in limited circumstances.

2 "Peer Review of the UK Competition Policy regime", published April 2001, is available on the DTI's website: www.dti.gov.uk.

3 This document is available on the DTI's website: www.dti.gov.uk.

4 "Competition in professions", published March 2001, is available on the OFT's website: www.oft.gov.uk.

5 Geroski (1990) Innovation, Technological Opportunity and Market Structure. Oxford Economic Papers 42

6 Blundell, Griffith and Van Reenan (1995) Dynamic Count Data models of technological innovation. The Economic Journal 105.

7 Davies and Majumdar (2001) The Development of Targets for Consumer Savings arising from Competition Policy.

8 See, for example, P. Fergusson and G. Fergusson (1988), Industrial Economics; Issues and Perspectives, Table 5.3 p.94 for a survey of empirical estimates.

9 See, for example, Davies and Majumdar (2001) The Development of Targets for Consumer Savings arising from Competition Policy.

10 Wils (2001) Does the effective enforcement of Articles 81 and 82 EC require not only fines on undertakings but also individual penalties, in particular imprisonment?

11 www.dti.gov.uk