GovWire

Those of you into do-it-yourself home improvements will know that having the right tools is essential to do a good job. A tool is a means of delivering an end result a new set of shelves, a repaired garden fence. It is the desired outcome that influences the choice of tool. And so it should be for competition authorities. If the aim is to ensure that markets are working effectively for the benefit of consumers, and if there are markets where this is not happening, it is the responsibility of policy makers to consider what can be done. This is where tools come in a means to an end. One may conclude that existing tools can fix the problem. But it may be that the old tools are inadequate and new ones are required. It is in this light that market investigation powers should be assessed what do they add to existing tools in achieving desired outcomes?

While Sweden is considering whether market investigation tools are a helpful adjunct to existing competition powers, the UK came at the issue from the other direction. As long ago as 1948 the UK gave an independent body the power to investigate industries with monopolistic or oligopolistic structures where anti-competitive practices might damage the public interest, with the decision on remedies taken by elected ministers.

Fifty years later the UK introduced prohibitions on restrictive agreements and abuse of dominance. At that point the 1948 sector investigatory model might have been considered obsolete, after all the prohibitions were specifically designed to address and punish anti-competitive behaviour. In fact the old system was retained in parallel with the new prohibitions and was modernised in 2002 with the competition authorities given power to select markets for investigation and impose remedies independently of ministers.

The reason for this was explained in Parliament during the passage of the legislation: Most UK markets are broadly competitive and where competition problems exist they can more often than not be addressed by means of the Competition Act 1998 [the UK equivalents of what are now Articles 101 and 102 of the EU Treaty]. But from time to time the competition authorities become aware of markets in which competition does not appear to be working properly, even though there appears to be no breach of the Competition Act prohibitionsmarkets characterised not so much by a virtually anti-competitive behaviour as by general anti-competitiveness [Footnote 1].

Since 2002, about 20 investigations have been conducted including strategically important markets such as groceries, energy, retail banking and audit services and highly sensitive markets such as private healthcare and funerals and we are currently considering an investigation into veterinary services.

What we have learned is that Articles 101 and 102 are not sufficient to address all significant competition issues. This is true regardless of market structure but particularly in oligopolistic markets where the concepts of tacit collusion and collective dominance are too complex and uncertain to be of practical value in many cases.

This matters because if a system does not have the tools to address competition concerns causing serious consumer harm it calls into question the overall credibility of the regime. The statement that: we know theres a competition problem, we recognise that it is causing harm to consumers and businesses, but theres nothing we can do about it, is unlikely to engender public or political confidence in the system.

Market investigations fill gaps that other competition tools cannot address in 2 ways. First, addressing market failures that are not the result of anti-competitive agreements or an abuse of dominance, and second, allowing the CMA to impose by order market-wide forward-looking structural or behavioural remedies including divestitures, price controls, IP licensing and information transparency requirements.

Let me give 2 examples.

Funeral services

First a market where there were no anti-competitive agreements or dominant players but where, on any measure, UK consumers were getting a bad deal funeral services which we investigated in 2020. The sector had seen annual price increases well in excess of inflation for over 13 years. The large funeral director firms were earning average returns significantly and persistently above what one would expect in a well-functioning market [Footnote 2]. Persistent excess profits indicated that cost drivers or quality differentials did not explain the pricing issues. We estimated conservatively that the consumer detriment averaged at least 400 per funeral across a significant proportion of the market [Footnote 3]. Some funeral directors were not providing acceptable levels of quality.

The market features which caused these detrimental outcomes were:

• low level of customer engagement caused by the challenging circumstances surrounding the purchase of a funeral
• lack of easily accessible and clearly comparable information on the services provided
• lack of visibility to customers of the quality of care given to the deceased

We introduced sunlight remedies shining a light on the pricing and back of house practices of the sector. The objectives were to support customers when making choices about funerals and to ensure that the pricing, business and commercial activities of funeral directors were exposed to greater public and regulatory scrutiny. We were initially minded to consider price controls but decided not to because the later stage of the inquiry was during the COVID-19 pandemic when the sector was under particular pressures.

So, we had a market which was clearly not working well highly vulnerable consumers paying more than they should and sometimes receiving poor quality services. Was this a gap that Competition Act powers were unable to address? Yes, there were no anti-competitive agreements or dominant players. Did our market investigation help address the problem? We think so by imposing transparency remedies that could not have been introduced under Competition Act powers. In a later review we found that that the remedies were having a constraining effect on funeral prices with a real terms reduction after many years of price rises.

Airports

Now a market where there was probably a dominant market position but no abuse and where remedies would have been extremely difficult under the prohibitions even if there had been an infringement.

4 airports owned by the British Airports Authority (BAA), a privatised company, accounted for 90 per cent of airport passengers in south-east England and 3 BAA airports accounted for 84 per cent of airport passengers in Scotland. Our predecessor body, the Competition Commission (CC), concluded that common ownership precluded effective competition between these airports with consequences reflected in BAAs performance lack of engagement with its airline customers, insufficient strategic management, inefficient investment, and an unsatisfactory passenger experience.

The CC required the divestiture of Gatwick and Stansted in the south-east and either Edinburgh or Glasgow. We later commissioned independent experts to evaluate the effectiveness of the remedy. They concluded that all 3 of the divested airports had grown passenger numbers above levels at comparable airports. This led to quantifiable benefits relating to improved connectivity and choice and downward pressure on fares that would total around 870 million by 2020 [Footnote 4].

While BAA was probably dominant in the south-eastern and Scottish airport markets, there was no obvious abuse that would have satisfied the Article 102 test. Instead we had inefficiencies and low quality with detrimental impacts on other businesses and UK consumers. The market investigation tool allowed us to address poor outcomes resulting from inadequate competitive pressures in a way that other instruments would not and gave us a remedy not practically available under other instruments.

I now turn to 4 specific areas of interest:

• the test for poor market functionality
• remedies
• protecting the interests of businesses
• the relevance of all this to digital markets

Well functioning market

The CMA is required to decide whether there are features of a market that prevent, restrict or distort competition. If so, there is an adverse effect on competition (AEC). Although the language is similar to Article 101, the focus is on whether the market as a who

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