THIS ARTICLE WAS UPDATED ON 13 APRIL 2013
The “fast-buck society”, epitomised by the quick-to-fire Beecroft proposals of employment which is currently unlawful under both domestic and European law, does not respect people in society – it only respects shareholder dividend. Companies are in it for the short-term; therefore any strategy they have is to generate profit in the short-term, indeed a legal obligation of theirs. Unions protect workers, and we virtually agree that it’s essential that workers in society must have protection. The situation regarding privatised utilities is an excellent example of the failure of the markets, and 20 years later history could be repeating itself with our NHS.
Privatisation only works if there is effective regulation of the market, given that the market is so imperfect. The end-result was the production of a few entities in a crowded marketplace, offering effectively no competition and no choice for the customer. Meanwhile, some people did extremely well out-of-it; these are the same people who have benefited from the top band tax cut by George Osborne’s abysmally executed budget.
British Gas this morning faced criticism over alleged profiteering, amid City predictions that the company will reveal this week that it made £100m in extra profits in the first six months of the year. The parent of British Gas, Centrica, reports first-half figures on Thursday. City analysts are now expecting the residential energy supply arm of Centrica, which trades as British Gas, to unveil first- half profits up 25% at £355m as part of a wider Centrica group profit of £1.4bn. Centrica is thought to defend soaring profits by pointing out it reduced its residential electricity prices earlier this year by 5%. Bain has successfully argued that those least able to pay bills are genuinely confused by complex tariffs, and believed that current attempts by the government and industry regulator Ofgem to tackle these problems are insufficient.
The precise accusation is that such companies have been profiteering which comes at the expense of the poor, vulnerable and elderly. Consumer Focus, the government-backed consumer watchdog, said households were facing historically high energy bills, and had long held suspicions that domestic power pricing was not fair. From a regulatory point of view, this has been nothing short of a disaster from the customer’s perspective. The City is encouraging investors to buy Centrica shares and believes that the chances of Ofgem taking a tougher stance against the ‘Big Six; is increasingly unlikely.
The ‘Big Six’ form an “oligopoly”, a common market form. Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices such as collusion to raise prices and restrict production in much the same way as a monopoly. Any formal agreement or concerted practice would be unlawful, and be caught by the Competition Act. Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies) – for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as “price leadership”.
What has not happened in this market, unfortunately for the customer, is a situation of competition between sellers in an oligopoly which can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching “perfect competition”. In a normal market, it is supply and demand that mostly affect price. Should a consumer find a similar product offered by another provider at a cheaper price, he will make his purchase from that other provider. Suppliers will not, therefore, over-inflate their prices because they will simply lose customers. In an oligopoly, there is little choice for consumers and this will negate any influence they may have had over price control.
The “Big Six” show all the hallmarks an oligopoly. There is literally a ‘handful’ pf sellers. An oligopoly maximises profits by a number of measures. Oligopolies are price setters rather than price takers Barriers to entry from new competitors, are high The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy new firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market. The sellers are all selling the same thing (e.g. gas, water) – i.e. it’s a heterogeneous undifferentiated market. The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm’s market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and their reactions.
Left to its own devices, it is hard to see how end-users (or customers) can benefit from this imperfect competition. That is why the law must step in, and one of the ways in which it can do this is taxation of the utility companies. Due to the dire state of the public finances, made massively worse by this current Government, this might be a reasonable next step.
David Bennett has recently indicated that a “spoonful” of competition will help the NHS. But this is precisely the point – a ‘spoonful’ will produce an oligopoly, where a lot of profit is returned to the shareholder and incumbent directors, but not much value is returned to the customer. If the NHS fails to attract many entrants because the significant risks in a sustainable business and financial strategy, exactly the same situation will result from private providers doing a bulk of NHS work. This will end up costing the NHS substantially more in the long-term, and makes a fragmented, non-universal service much more likely. Even Richard Branson opined on LBC this week, on Margaret Thatcher’s death, that he wishes that he had seen more competition in the airlines industry; this, from the perspective of the end-user, is exactly why.
