Competition authorities doing more harm than good?

There have been several examples in the news recently of competition authorities acting in ways which may actually ultimately lead to less competition in several different industries. Read on to find out more.

Here we are- three excellent examples of how government regulation, aimed at improving service and price for consumers, could potentially in the long run make the situation worse…

1. Apple and E-book pricing: Before Apple came onto the e-book scene, Amazon dominated the market with around 90% market share. Thanks to Apple’s insistence on ‘agency’ pricing- where the publishers set prices rather than retailers- Amazon’s share has dropped to around 60% and other companies (e.g. the Nook and Kobo) have been able to enter the market. But regulators, currently primarily in the US, are viewing this as essentially price fixing and it looks like publishers will be forced to agree to abandon this pricing strategy. In the short term it might help to reduce prices for consumers, but if it allows one firm to dominate the e-book market then in the long run it may not be in consumers’ best interests. Macrumors.com provides an excellent background and explanation of this story here.

2. Lloyds have recently ended exclusive negotiations with the Co-Op about selling the ‘project verde’ group of branches after the Co-Op has faced significant regulatory hurdles which may well end up making it impossible for the deal to go through. This time it’s the Financial Services Authority which is standing in the Co-Op’s way, as because the whole Co-Op group would become classified as a financial institution- from supermarkets to funeral directors. And this would mean a significant shift in the way the company functioned, something they may be unwilling or unable to do. So, again, the likelihood of the Co-Op emerging as a strong national high street bank to help shake up the industry and generate more competition looks much less likely. For more on this story see Robert Peston’s excellent blog post here.

3. The rising price of stamps has obviously been in the news a lot recently, and I must confess to doing a bit of hoarding of stamps before the price hike. However, Royal Mail chief executive Moya Greene still worries that the company faces a ‘spiral of decline’, as reported by the BBC. The issue here is about what Royal Mail views as unfair competition. It’s been a few years now since the postal market has been opened up to competition, particularly for letters, and now numerous firms- including the Netherlands’ TNT, Deutsche Post, and others, are involved in the UK postal market. However, while rivals such as TNT are free to provide the services they want to (and so only offering profitable services- e.g. bulk delivery of letters for large national firms) Royal Mail is constrained by its universal service obligation, meaning it must deliver the next working day to anywhere else in the UK for a set fee- so even at 60p for a first class stamp, many of those letters are still costing significantly more, and it’s becoming increasingly difficult for Royal Mail to cross-subsidise between profitable and not profitable services as they are undercut by private sector competition on their most profitable services. In the long, it could be the ‘average’ consumer who suffers as deliveries cost more and become less frequent in order to keep Royal Mail afloat.