So much for competition

The way markets are structured is critical to delivering an efficient allocation of resources. During the 1980's the movement to increase competition in markets in order to drive prices down and consumer service up was the basis of the privatisation and deregulation programme.

The idea is essentially that monopolies can exploit their customers and the more firms in the market the better it is for keeping costs and prices down.

In some markets economies of scale means you can't efficiently have hundreds of firms. One such market is energy supply, but you could certainly have up to 15 or 20. But when you have oligopoly market structures there is a tendency to collude and so some regulation to ensure fairness and maintain competition is needed.

So the energy market, dominated by six big suppliers, is one that might fall into a situation where they each decide not to compete too hard for business and all keep prices quite high.

Many people have been disappointed by recent high energy prices, some believe that the firms are keeping prices high when they need not. Others think that pricing is unfair with some people getting good deals while others (without Internet or able to pay by direct debit) pay too much.

So the government are introducing a new regime where there will be fewer price plans and customers will have to be put on the lowest available tariff.

This seems to be abandoning the idea of competition as a way of making sure resources are allocated efficiently.

The fear is that this will eliminate competition. The big firms will set similar but higher prices and while some people will be better off the good deals will disappear. The danger is that the government has just done the firms collusion for them and will prevent prices being forced down in the market.

The BBC survey the change here and make some excellent points

Energy prices - a reason to reconsider?

Five of the six big energy companies has announced very high price rises, up to 11%. This is going to have a very large impact on household budgets.

There are two areas I'd like to think about, one fairly obvious and the other more reflective.

1. Fuel Poverty

Fuel Poverty is a relatively new term that refers to a situation where households spend more than 10% of their income on keeping warm. (The definition is vague on gross or disposable income, but only the latter makes sense.)

Clearly an 11% price rise will cause more households to fall into this category. If we taxed energy then people would explain that this was a 'regressive tax'. It would fall more heavily on the poorest households as it takes up a greater proportion of their income.

Therefore we should be worried about these energy price rises on the grounds of equity and income distribution. The Sunday Mirror article below looks at the effect on Fuel Poverty which may now affect one in four households.

2. The privatised energy market

In the 1980's the energy market was privatised. The aim was to introduce competition and force prices down and so making everyone better off.

The effectiveness of this policy should now be reassessed. Has it led to lower prices? Is there actually competition? Was it, in retrospect, a good idea?

Supply side policies take a long time to yield their results. It took two attempts to get the gas market right as well.

Is there really competition in this market? All the big companies are going to raise their prices by about the same amount. This is to be expected as their raw material costs are changing in exactly the same way.

If government still controlled this market then they could moderate the price rises, allow special tariffs to vulnerable groups etc. But the energy companies are private, profit making, firms and they work in the interests of their shareholders.

The Government has proposed forcing all energy companies to make sure customers are on the lowest possible tariff. This implies one tariff per company, probably all pretty identical. A major blow to competition and without any price controls. Politically popular but hardly market economics.

The Daily Mirror article is here

When is a single market not a single market?

Barriers to entry in a market allow firms some monopoly power and that gives them the chance to raise prices. produce at lower quality and earn excess profits. This is not good for the consumer and most countries attempt to prevent it through Competition Law. As the European Union is a 'single market' that means Competition Law is a European and not a national matter unless a firm operates only in one country.

The '1993' rules of the EU make it clear there can be no barriers to firms, workers or capital between member nations. All firms are free to operate in any other member state and all citizens of the EU can work where they like within the EU.

To illustrate this before 1993 a computer manufacturer had to produce 11 different models of the same computer to meet local regulations and a British lawyer could not appear in a court in Germany or Italy. The 1993 regulations said that such barriers were illegal.

However in many countries not all of these regulations were adopted. The Spanish banks continue to charge non-Spanish customers a higher interest rate, insurance companies are denied access to the Irish market and domestic broadcasters deny the right of foreign broadcasters to sell their services in the UK.

Yesterday the European Court ruled that the Premier League had no right to deny broadcasters other than Sky and ESPN to sell access to their broadcasts of football matches. To do so breached the 1993 EU regulations and EU competition law.

This is an example of the law removing a barrier to entry in the market. The result will be that more firms will enter the British market, competition will increase and everyone will have cheaper access to broadcasts. (Although the ruling is complicated and will take some time to work through.)

The actual case involves showing Premier League football in a Portsmouth pub. Of course Sky and the Premier League will protest, it will affect their profits, but the winner is the consumer. Just 38 years after Britain joined the European Union it is about to get one of the benefits it was promised!

 The BBC covers the story here

Markets need information to work properly

We know that free markets allocate scarce resources efficiently. But the key point here is that they are 'free' with full information on both sides of the exchange.

Lots of things can make markets fail to work properly. Two are monopoly power and a lack of information on one side (asymmetric information). Governments work to try to avoid such issues and the Competition Commission and the Office of Fair Trading (OFT) exist to protect consumers.

The OFT is going to investigate the charges made to holidaymakers to convert pounds into foreign currency. The problems of lack of information and monopoly power exist here. People don't really understand the service they are paying or the costs involved. Also financial institutions are able to lock in their own customers to their services and also exploit the lack of information because of a lack of competition between banks.

The BBC explain the issue and a 'Super complaint' by 'Consumer Focus' to the OFT in the article below.

For Deps consider the information a market needs to work well and reduce the issue of scarcity through specialization and exchange. Grecians should consider this from the point of view of market failure that is involved in F581 and the issue of market failure that will arise in Transport Economics.

The BBC article is here