Time to get vigorous with the competition

THE TIMES (LONDON), November 16, 2000

A strong competition policy should include the prospect of jail for those guilty of price-fixing

A vigorous competition policy has a key role in achieving the rapid, inflation-free, economic growth that, in the end, will add more to Britain's wealth and welfare of its citizens than all of the redistribution schemes combined.

There are many advantages to such a vigorous policy.

A policy that makes it difficult for businessmen to collude to fix prices guarantees consumers that the prices they pay for goods and services will reflect only the costs of producing the goods and services they buy, including a reasonable return on the capital committed to the production of those goods and services.

A concomitant result of an effective competition policy is that competing businesses will be under pressure to produce in the most efficient manner - minimising costs so that they are in a position to meet or beat the prices of competitors.

A vigorous competition policy should maximise the rate of innovation and the rate of introduction of new technologies, in the process denying what has been identified as one of the greatest monopoly profits – a quiet life.

A vigorous competition policy also provides a tool with which to judge which mergers are in the public interest, and which are not. The dividing line is simple to describe, if not always easy to discern. Any merger that unduly reduces competition should be halted. It is not necessary for the minister to decide whether he thinks the merger is a good idea, and is likely to produce the anticipated savings (most do not). Nor is it for him to decide how many football fans might be offended, and how many pleased; or how a specific constituency might react; or whether he regards the executives and boards of the acquiring companies as good chaps. All he need do is satisfy himself that he has so structured, funded and staffed the relevant competition authority that it is competent to appraise the competitive impact of mergers. Issues of national defence might be an exception, although I have never seen proof that a nation's defence effort is enhanced by forcing the military authorities to purchase in non-competitive markets.

Regulation is unnecessary with effective competition although some industries contain large natural monopoly elements, and must have their prices, performance and profits regulated lest they exploit their customers.

Finally, a proper competition policy produces a variety of desirable social effects - the diffusion of economic power and the maximisation of economic and social mobility.

There are three ingredients of a successful competition policy. Firstly, legislation: in Britain, the legislation now embodying the competitive rules of the game is likely to be significantly more effective than was true of the old regime. But that legislation is nevertheless seriously flawed. Those businessmen who decide whether to compete or collude, and whether to compete fairly or abuse their market power, have all to gain and little to lose by violating the law. True, there is the possibility of financial penalties equal to 10 percent of UK group turnover for up to three years if the infringement lasted for at least that period. But fines are paid by the shareholders, not by the executives who concocted the anti-competitive schemes. And unless you believe that the same executives who blithely decouple their compensation from their success in building value for their shareholders worry about mere fines, which they will not pay from personal resources, you must agree that fines may not be a serious deterrent to anti-competitive behavior.

Fines, the leniency now offered to "whistleblowers", and threats of irritating and unsettling "dawn raids" will have some effect on the propensity of business executives to fix prices and otherwise undermine market forces. But in the case of price-fixing conspiracies, big fines are a less effective deterrent than jail sentences. In America, it is the threat of a stretch as a guest of the Government that keeps many an executive out of a smoke-filled room (actually, price-fixers probably now meet in the smoke-free environments of various hotel suites) in which prices can be discussed and co-ordinated, as John Shenefield, formerly head of the US antitrust division, pointed out to me earlier this week.

Britain has no such deterrent. I believe you will find that it will be a long while before mere fines will destroy the culture of price-fixing that permeates UK business.

And I doubt, too, that the threat of damage suits, as provided for in the new Competition Act, will be an effective deterrent. True, an injured party can bring a suit to recover damages. These suits are expensive, and the loser pays doctrine is likely to deter all save the best-financed firms from pursuing this remedy. The larger, better-financed firms, of course, are more likely to be members of the "club", and less likely to attack their golfing partners in court.

Even if a plaintiff does prevail, the miscreant pays back his ill-gotten gains - and no more. Given that the probability of being sued is less than one, and that the probability that the complainant will prevail is also less than one, it pays for a potential conspirator or monopolist to chance paying such damages - nothing to lose, and all to gain. In America, of course, damages are trebled, so that a violator of the law must reckon that he might indeed lose a great deal if he is found to have illegally injured a competitor.

Second, staffing: there are two aspects to staffing - quantity and quality. Since even the best of economists, lawyers, accountants and other professionals cannot do good work if overtaxed, it is good that the staffs of the various agencies are being expanded. A more vibrant competition policy warrants the expansion of the Competition Policy Division now under way. Good competition policy cannot be bought on the cheap, and pays for itself many times over.

One must applaud the efforts of the Secretary of State for Trade and Industry to extricate himself from the process of deciding which mergers may go forward, and which may not. That should leave the competition issues with the competition authorities. If politicians then wish to inject considerations other than competitive impact into the mix to counter or modify the results of a decision, they have the legislative tools to do so.

Third are Ministers, who also play a role in the selection of those who direct the enforcement of competition policy. My hope is that the increasing economic sophistication of this generation of decision-makers - and I mean no offence to their predecessors such as Sir Bryan Carsberg who, although afflicted with an accountant's training managed to rise above it and think like an economist - will bring greater clarity to questions such as the definition of relevant markets and the distinction between competitive and anti-competitive behaviour.

But I think it not unfair to say that the market definitions chosen have too often been driven by the results sought, rather than by rigorous analysis, and conclusions concerning the propriety of competitive tactics too often reflect a desire to conclude an investigation with a self-applauding press release, rather than an effort to construct a coherent analysis of the real facts prevailing in the market place.

These mis-steps can be made less frequent by an improvement in procedures and the introduction of more adversarial techniques. I am aware that the nature of the relationship between a firm being investigated and the investigating agency is quite adversarial. But the method of gathering evidence and expert opinion is not. The Office of Fair Trading will tell a firm under investigation that it has received complaints from unnamed parties about certain behaviour, but will not make the complaint and its supporting evidence available.

Experts will appear before the Competition Commission, offer differing interpretations of the facts, but never be required to confront one another so that a discussion of the differences can reveal to decision-makers the strengths and weaknesses of each position. The staffs of the agencies are not required to undergo cross-examination by private parties before their directors-general so that they can fully appraise and understand the quality of the advice they are being given; instead they generally rely on the staff's version of the other party's contentions.

The issues in these cases are extraordinarily difficult, once we get beyond cases of overt price-fixing, replete with smoking guns. The quality of decisions can only benefit from a full vetting of the facts and analysis underlying the contentions of the opposing parties.

And the consistency of policy can only benefit from a reduction in the opaqueness that often characterises decisions. These are extremely important decisions, not only because they resolve the case at issue, one way or the other, but because if well drafted they provide businessmen and their counsel with a guide to future behaviour.

Should traditional competition policy be applied to the new, so-called high-tech industries? Yes: we must also protect the competitive system to ensure rapid diffusion of those new technologies. The developer of a new product or process may wish to control the pace at which those innovations are introduced, and to maintain the price of the product or process at a level that yields monopoly profits. But he must always reckon with the possibility that some equally talented innovator or equally well-funded research laboratory will come up with a superior product, or a more efficient method of production.

That is where competition policy comes in: it must ensure that channels of distribution are not unfairly denied to a new entrant, and that those with a stake in the status quo cannot abuse their dominant positions or conspire with others to make it difficult for the new product to obtain such manufacturing and financial support as it may be able to command in an open marketplace. These policy goals can be achieved only if the competition laws are applied in all their aspects to high-tech as well as to low-tech industries.

Thanks to the Chancellor, we are witnessing a recognition of the fact that competition policy has an important role to play in achieving the macroeconomic goal of sustained non-inflationary economic growth.