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Introduction to Competition and OFT Regulation

Daniel CaistorRosie Jaffer

OFT

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Overview

●OFT and OPSI have a long and rich history of working together

- Memorandum of Understanding

- Policy development (CUPI market study)

- Support with IFTS complaints

●Purpose of this session is to:

- Provide clarity on OFT’s tools and legal framework,

- Showcase some of our recent publications and thinking in the public markets area that may be of interest and relevance, and

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Introduction and OFT Tools

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Introduction

● OFT’s mission: making markets work well for consumers through a number of mechanisms

● Benefits of competition well recognised and chime with current economic and political climate

● Our dual competition and consumer remit allows us to take a holistic approach to our work and the wide range of remedies at our disposal allows us to act in a flexible and proportionate manner.

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Our tools in detail….

●Enforcement interventions including:

- Taking criminal action against those involved in serious unfair commercial practices or engaged dishonestly in cartel activity.

- Imposing financial penalties and other sanctions on companies under competition law for involvement in anti-competitive agreements and the abuse of a dominant position.

●Market tools and analysis, including:

- Actively studying markets that may not be working well for consumers through market studies, or in response to supercomplaints from designated bodies.

- Referring a market to the Competition Commission for investigation where we have reasonable grounds for suspecting that any feature, or a combination of features, of the market is preventing, restricting or distorting competition in the UK.

- Monitoring, enforcing and reviewing orders and undertakings put in place in the context of a market investigation reference.

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Our tools in detail continued…

●Merger control

- Reviewing information relating to merger situations and, where necessary, referring any relevant mergers to the Competition Commission for further investigation.

- Monitoring, enforcing and reviewing orders and undertakings put in place in the context of a merger reference.

●Advocacy, advice and education

- Raising awareness of competition issues and advising policy makers where wider Government policies affect competition and markets.

- Informing consumers through education and awareness campaigns.

- Carrying out business education and encouraging business compliance.

- UK and international policy work, using our influence to promote the economic interests of UK consumers.

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How we work

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OFT integrated into the policy cycle

RATIONALE

OBJECTIVES

APPRAISAL

FEEDBACK

EVALUATION

MONITORINGMONITORING

IMPLEMENTATION

Can competition explain the underlying reason for

need to intervene?

What is the desired market

response?

How will the market

respond?

What is the competition

assessment?Need to monitor and evaluate the impact of any

changes to the market

Are there wider

lessons to be learned?

Can consumer detriment be explained by

behavioural economics?

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Theory of Harm & OFT Prioritisation principles

Balance of four factors:

● Impact: Direct and indirect impact on consumer welfare and the economy

●Strategic Significance: Fit with strategic objectives, innovation, precedent setting, capacity building, whether OFT best placed to act, balance of portfolio

●Risk: Likelihood of successful outcome, risk if we do not act

●Resources: People and monetary resources used, efficiency savings

Impact Significance Risk Resources

Theories of harm/consumer detriment

- Many analytical methods informed by economic research and literature e.g. behavioural economics

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Competition law framework

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Key aspects of competition law

● TFEU Article 101 / CA 98 Chapter I prohibition – agreements between undertakings, decisions by associations of undertakings or concerted practices which have as their object or effect the prevention, restriction or distortion of competition

● Includes price fixing, controlling production, market sharing, bid rigging, discriminating between trading parties, etc

● TFEU Article 102 / CA 98 Chapter II prohibition – any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position. Non-exhaustive list in s.18(2) CA98

● TFEU if does or may affect trade between Member States – loosely interpreted.

● TFEU Article 106 / CA98 Schedule 3(4) – prohibitions do not apply to undertaking entrusted with SGEI or having character of revenue producing monopoly insofar as the prohibition would obstruct the performance of the assigned tasks.

- strictly applied. Must be least restrictive measure necessary

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Key terms - undertaking

●“undertaking” – entity engaged in economic activity, regardless of its legal status and way in which it is financed (Case C-41/90 Hofner and Elser v Macrotron)

- Relevant activity is offering goods and services on a given market (eg Case C-205/03 FENIN)

●An entity may be an “undertaking” in respect of some activities but not others

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Key terms - abuse

● “abuse”

Article 102 (and s.18 CA98) lists some abuses

● discrimination – can be by price, directly or indirectly imposing unfair purchase or selling prices, or other unfair trading conditions which place a competitor at a disadvantage eg discriminatory licensing terms

● limiting production – eg not updating and developing an essential facility

● tying or bundling products - eg Microsoft tying Windows media player with Windows OS

● predatory pricing – eg France telecom for dropping broadband internet prices below production costs “no interest in applying such prices except to eliminate competitors”

Categories not closed

● Refusal to supply – licensing of indispensable input (origin in Cases C-241&242/91 RTE/Magill, applied in Case C-418/01 IMS healthcare)

● abuse of regulatory procedures – July 2010 AstraZeneca – misrepresentations to patent authorities to extend protection and selective deregistration to restrict generic market entry from parallel imports – led to European Commission sector inquiry

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Useful resources

●OFT guidance

- OFT 401 & 402 – Agreements and concerted practices, Abuse of a dominant position

- OFT 403 & 415 – Market definition, Assessment of market power

- OFT 421 – SGEI exclusion

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Recent relevant publications

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Creating new markets from public information

● In 2006, OFT conducted Commercial Use of Public Information Market Study

●Competition in this sector could benefit the economy by around £1bn by improving access to unrefined public sector information

●A number of positive changes have already occurred in the sector

●OFT involvement in CUPI on-going

PROVIDING PUBLIC SERVICES OPENING UP MARKETS

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Choice in public services markets

●Risks

- rent seeking behaviour/cream skimming

- cross subsidisation

- and ultimately creation of market power

●OFT publication ‘Choice and Competition in Public Services, identified conditions for success:

- relatively free entry and exit, particularly ‘effective failure’ while ensuring certainty of supply

- diversity of supply to facilitate consumer choice

- effective funding incentives including managerial autonomy to allow innovation

PROVIDING PUBLIC SERVICES OPENING UP MARKETS

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Choice in public service markets – level playing field

●Need to ensure competitive neutrality otherwise

- risk of incumbency advantage and

- increased risk of major system failure

●OFT publication ‘Competition in mixed markets’ identified main barriers to competitive neutrality:

- differences in regulation, taxation and pension treatment between different providers

- incumbency advantages enjoyed by existing firms

- lack of clarity in the application of competition law

●Challenge is to identify ‘subtle’ public restrictions

ONCE MARKET OPENED UPNEED TO ENSURE LEVEL

PLAYING FIELD

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Activating consumers key to competition

●Ensure consumers play an active role in markets

●Key factors for user choice (demand side)

- Awareness of choice

- Assessment of information

- Capability to act

●Consumers may not act instantly but important to recognise supply side response to anticipated consumer demand

●Choice-tools can help facilitate consumer choice and improve supply-side performance

●Even where consumers able to make a choice, demand rationing may still be necessary

NUDGING CONSUMERS

RISK OF CONSUMERS NOT BUDGING

INSTANTLYBOLSTER USER CHOICE

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Links

●Government in Markets:

http://www.oft.gov.uk/shared_oft/business_leaflets/general/OFT1113.pdf

●Choice & Competition in Public Service Markets: http://www.oft.gov.uk/shared_oft/business_leaflets/general/oft1214case.pdf

●Competition in mixed markets: Competitive Neutrality

http://www.oft.gov.uk/shared_oft/economic_research/oft1242.pdf

●Product Standards Report

http://www.oft.gov.uk/shared_oft/economic_research/oft1030.pdf

●Choice-tools

http://www.oft.gov.uk/shared_oft/reports/consumer_protection/oft1321.pdf