Andrew Tyrie: How greater competition could spur productivity growth
Productivity growth in the UK has been in the doldrums since the financial crisis back, with catastrophic consequences for living standards.
The slowdown in productivity growth has puzzled economists, particularly given the rapid technological change since the financial crisis. But one suggestion as to why it has been so disappointing is that markets in the UK might have become less competitive.
Its easy to see why competitive markets should improve productivity. A competitive market ensures that more productive firms increase their market share at the expense of less competitive firms. Competition should also drive innovation as firms attempt to get an edge over rivals.
But Lord Andrew Tyrie, chair of the Competition and Markets Authority (CMA) from 2018 to 2020, told Morning Wire that competition authorities over the past decade had not not done enough to ensure that markets truly were competitive.
“The UK government does not have a framework in place for monitoring levels of competition in the economy that’s fit for purpose,” Lord Tyrie said. “It badly needs one”.
According to Lord Tyrie, regulators have been too focused on “individual cases” as opposed to broader changes within markets. As a result they have missed the wider changes over the previous three decades, in particular the rise of the digital economy.
“Levels of competition are likely to have been declining in many sectors and probably in aggregate in the economy as a whole: concentration ratios have been rising; so have excess rents,” he said.
In every sector of the economy – from inflation-busting mobile phone bills to hidden charges on airport luggage, and soaring insurance premiums to polluting water companies – there are examples of companies abusing market power.
Lord Tyrie said rip-offs were just another form of rent-seeking, when a firm gains wealth without any reciprocal contribution to productivity.
“Millions of people now find themselves vulnerable when engaging in quite basic transactions. New digital technologies have made us all vulnerable,” he said.
In a more competitive market, rip-offs would be competed away. Lord Tyrie argued that too often competitive markets and consumer protections were seen as separate tools when in fact they were part of the same policy.
“The best protection consumers can have is usually a highly competitive market,” he said.
The potential economic benefits are huge. A recent report from the Behavioural Insights Unit found that simply giving consumers clearer information – ‘deshrouding’ markets – GDP could grow by somewhere between £5bn to £23bn because firms would be forced to compete on the product itself.
These kinds of interventions would not infringe on the market mechanism, Lord Tyrie argued. “People sometimes think of markets as a jungle-like free for all. This is incorrect. Markets are carefully tended gardens, requiring constant adaptation to changing conditions”.
So how could competition regulators better promote productivity? One of the most important factors, Lord Tyrie said, was measurement.
“One of the first questions I asked when I arrived at the CMA was: are levels of competition overall in the UK, increasing, decreasing or broadly the same? I was told this was a question that the CMA had not ever sought to answer and shouldn’t be expected to try to answer,” he said.
Since Lord Tyrie’s departure, the CMA has started to publish reports about the state of competition in the UK. The most recent report suggested that “competitive pressure may have been stronger in the past”.
Although market concentration across a range of sectors is coming down from its peaks immediately after the financial crisis, it remains above pre-2008 levels. The report also showed there has been a slow increase in the average markup since 2010, with faster increases among the top 10 per cent of most profitable firms.
Over the past couple of years, the CMA has taken a more interventionist approach. The watchdog was thrust into the limelight after it forced Microsoft into making concessions relating to Activision’s cloud gaming division.
Just yesterday it launched a trio of investigations into the potential impact of Microsoft and Amazon’s partnerships with different artificial intelligence (AI) startups on competition.
“Open, fair, and effective competition in Foundation Model markets is critical to making sure the full benefits of this transformation are realised by people and businesses in the UK, as well as our wider economy where technology has a huge role to play in growth and productivity,” Joel Bamford, executive director of mergers at the CMA, said announcing the investigations.
On the consumer side, the CMA has recently launched an investigation into whether the vet market is working for consumers. This came after fears that the market was becoming less competitive and that consumers were being overcharged for medicine.
Lord Tyrie welcomed the recent bout of interventionism, but said it was still not part of a “wider, coherent strategy”.
“Only when it does, and is perceived to be doing so, will it be able to contribute much to improving consumer confidence, an essential objective for improving long-run performance of the economy,” he said.
A CMA spokesperson said: “Supporting investment, innovation, and growth by protecting effective competition is an explicit focus for the CMA, as set out in our medium-term strategy.
“This includes keeping a careful eye on competition in the UK – across all sectors – to the benefit of consumers, businesses, and our economy. In the last year alone, we’ve looked at competition across a wide variety of important markets from groceries, fuel and housebuilding to cloud services and AI,” they continued.
A spokesperson for the Department of Business and Trade said: “This government has been clear it wants to see regulators like the CMA prioritise competitiveness and growth. Ultimately we all need to recognise that it is businesses that create economic growth, and regulators are there to ensure fair competition, but not stand in the way of enterprise and entrepreneurialism.”