The coronavirus pandemic is the first time that all economies across the world have faced such a severe global challenge since the recovery from World War II, and it would be fair to say that the UK have been among the worst affected. In this report, I will investigate how the UK Competitions and Markets Authority (CMA) have adapted to price rises in the economy, how they should ensure a strong recovery in the future, and then conclude whether it is worth intervening in the UK market.
First, it must be noted that the CMA is not an institution built to respond to a crisis; legally mandated deadlines are worked on and completed over months and years after extensive research. However, in March they set up a taskforce to act on firms breaching competition or consumer protection law and advise the Government on emergency legislation. This was because the CMA had to deal with the price gouging (when a seller increases the price of goods to a level much higher than is considered reasonable or fair) of essential items such as medicine, hand sanitizer and food. Due to Covid-19, the demand for these goods became more inelastic (insensitive to changes in price) and consumers were willing to pay even more for them. For example, the median price of hand sanitizer rose by 400%. As a result, the CMA received 15000 complaints from mid-March to mid-November in 2020 over price rises.
This has forced the competition and market authorities to become more innovative and has led them to adopt four new ways of acting:
- During 2020, an unprecedented 97 warning letters were issued to sellers regarding unreasonable price increases.
- Regularly updated consumers on the steps their taskforce had taken to deal with complaints.
- Initiated consumer enforcement investigations in a range of sectors, at speed, in industries such as travel indicating a large level of disservice.
- Gave out public guidance aimed at advising businesses to do the right thing regarding cooperation with competitors.
Whilst the CMA did not technically intervene in the market, their actions caused firms to become wary of price gouging, and consumers to become more well-informed and therefore, more confident in a post-Covid market.
Even before the pandemic, market concentration had been rising in most industries throughout the UK. From 2004-2016, the top five companies share of revenue in all industries rose by 3.8%. If no action is taken, market concentration will continue to rise as larger companies can either bully smaller firms into bankruptcy with their greater resources; or acquire (killer acquisition) them at a cheap price instead. In a business climate where small companies are at a high risk of bankruptcy, due to a lack of funds, the opportunity for huge corporations to exercise their power is much greater. This would create oligopolies (the top 5 firms dominating over 50% of the market) in even more industries than before.
As competition falls, the remaining firms in the market are able to earn abnormal profits, by selling at point (Po) instead of the market equilibrium (Mo); as a result, consumers pay more for their goods. Potential competitors are deterred from entering the industry due to the strong brands of remaining companies, and because of the economies of scale (savings in cost from an increase in production) being exploited.
Regulating these industries in a post-Covid market may prove to be a tough challenge for the CMA as the institution must face multiple trade-offs. Whilst the Competitions Authority should look to bailout bankrupt firms in more concentrated industries. If the company is fundamentally insolvent (unable to pay debts owed), the CMA will be wasting scarce government resources on a firm destined to fail. Moreover, the CMA must thoroughly evaluate all mergers and killer-acquisitions to effectively determine whether letting the merger go through will limit competition, or if it will let a company benefit from the synergies of an insolvent firm. For instance, in May 2020, the CMA prohibited the merger of JD Sports and Footasylum after finding that consumers of sports-inspired clothing and footwear would be worse off as a result of the merger. I believe that it is imperative for the CMA to find the balance between granting aid to profitable firms on the brink of bankruptcy to promote competition, whilst also allowing larger firms to merge when the increase in synergies outweigh the loss of competitiveness in the market. If this can be achieved, real prices (adjusted for inflation) will only rise slightly as some firms will become more efficient and competition will continue to exist.
The WTO predicted a fall in international trade between 13-32% at the start of April. Although a fall in imports can increase net trade (exports-imports), when exports have also fallen at a similar rate. It creates a large problem for the CMA. Many of the reasons for the decline in world trade were due to helping stop the spread of Covid-19. However, in a country isolating itself from the rest of the world before coronavirus, consumers are even more likely to adopt protectionist beliefs after the crisis recedes. As a result, consumers will irrationally prioritize goods in the UK over cheaper goods elsewhere, leading to a decline in external competitive pressure on the domestic industry. This is another potential factor which can cause a fall in competition and therefore an increase in prices.
To negate the impacts from a fall in trade as much as possible, the competitions authority could advise the government to implement free-market supply-side policies such as deregulating markets and removing barriers to entry. For example, in 2020 the government cut the democratic input into the planning process of housing by half. This increases competition in this specific market as it reduces the time needed to gain approval for a construction project, therefore incentivizing potential competitors to enter an industry where profit can be generated more quickly. Nonetheless, I would not justify this intervention as deregulation can lead to a decline in the quality of goods and services. In this instance, it is the government’s job to negotiate trade agreements or to try and remove trade barriers to increase competitiveness in the UK market. For example, the Department for International Trade removed 175 trade barriers in fiscal year 2019-20, resulting in a potential additional increase of £75bn a year in UK exports.
In this report, I have explained the challenges the CMA have faced during the pandemic and predicted how they will handle the issues which may cause prices to rise in a post-Covid market. Although the competition authorities could have used other methods of limiting price, such as price ceilings, the opportunity cost of regulating such a broad cap on prices would outweigh its benefits. Instead, urging firms not to charge excessive prices and acting efficiently upon buyers’ complaints forced down the price of goods such as hand sanitizer more simply, dealing with the immediate issue. Price controls on essential goods should only be used as a last resort and have not been needed in the UK since the 1960s.
To conclude, I believe the most important dilemma the CMA currently faces is trying to limit competition, thus preventing a rise in the price of goods throughout several industries. As I said previously, the best way to go about this is for the CMA to distinguish between mergers that limit competition and acquisitions which promote an increase in synergies. Furthermore, the CMA must work closely with the government to ensure measures are taken to increase international competition by encouraging free trade, consequently keeping price increases low.