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REFORM
COMMENTARY
30 December 2009
2010: the year of competition
Nick Bosanquet, Consultant Director, Reform and Professor of Health Policy,
Imperial College London
Thomas Cawston, Researcher, Reform
Andrew Haldenby, Director, Reform
Key points

2009 was a bad year for competition in the UK economy. The short term effects of
the recession are inevitably anti-competitive: fewer firms in markets and fewer
resources for firms to spend on new business ventures. But policy decisions have
worsened the situation. EU state aid rules have been weakened. The UK
Government’s industrial strategy is already diverting firms away from core activity
and towards attracting government interest and support. In the UK public sector,
Government made the public sector the “preferred provider” of NHS care.

Competition is in the public interest and stimulates wealth creation, innovation and
diversity. Monopoly has the opposite effects. Academic research indicates that
anti-competitive legislation lengthened the Great Depression (by seven years) and
the Japanese recession of the 1990s.

2010 needs a new approach. The goal of competitive markets hasn’t changed but its
urgency has increased. The political focus on deregulation is important but will
not deliver competitive gains in and of itself – competition needs active support to
deliver its full benefits. Market failure must be challenged and actively addressed.
That will mean a new business strategy focused on improvement of the general
business environment rather than support for industries in difficulty; the renewal of
competition in the banking sector; the reversal of EU state aid changes and the
introduction of competition in the big UK public services of health and school
education.
1. Time to compete
Competitive markets drive new products, new technologies, new business models, new
efficiencies and above all, higher productivity and growth.
Schumpeter called
competition “a perennial gale of creative destruction”; Hayek described competition as a
discovery process.i Countries with effective competition policies grow faster than those
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without.ii Up to 40 per cent of productivity differences between OECD nations can be
accounted for by the level of firm entry and exit.iii
The role of new entrants is particularly important in changing business models and
allowing greater access to products at lower cost. In the case of the airways, deregulation
in the 1980s and 1990s broke the monopolies of the incumbent national carriers.iv New
technologies and restructuring in the energy and telecoms markets broke the vertical
monopolies of BT and British Gas.v The tremendous (if immature) innovation in the
technology sector, from Google to Facebook to Myspace to Twitter, demonstrates the
power of market entry. Each of these examples also shows that competition has a social
benefit – through extending access to services throughout society – as well as an economic
one.vi
Competition is just as beneficial in the public sector.vii Professor Julian le Grand has
described the “other invisible hand” in public sector, with competition and choice in
schools and health services being the best means to encourage quality services.viii The UK
public sector is still based largely on monopoly but competition has improved services
where it has been introduced, from tendering in general to welfare services to prisons.ix
Equally monopolies and dominant providers exercise market power, bringing inefficiency,
higher costs and fewer innovations.x Research has shown that the decision to permit firms
to collude to fix prices and supply lengthened the 1930s Depression in the US by seven
years.xi Cartelised firms had less incentive to innovate and monopolies less interest in
achieving greater efficiency. The basic absence of competition in the UK public sector is
the key reason why public sector productivity has fallen in the last decade while average
private sector productivity increased by 23 per cent.xii
2. 2009: competition in retreat
2009 has seen the balance of policy shift against competition. Key factors have included:

Public sector growth. The growth in the public sector, from 36.3 per cent of GDP in
1999-00 to 48.9 per cent in 2010-11, is drawing more resources into the less
competitive part of the economy.xiii

Anti-competitive policy in the public sector. Most importantly, Andy Burnham, the
Secretary of State for Health, shifted policy with the result that NHS providers
should be the “preferred provider” for the delivery of NHS services. Previously,
NHS commissioners had to be neutral in their choice of public, private or third
sector provider. The policy is being challenged by the NHS Partners Network and
ACEVO.xiv Other opponents of competition within the NHS include the British
Medical Association. The BMA’s 2009 Christmas Card wishes a “Happy Christmas
and a market-free new year”, despite the fact that principal GPs and partners in GP
surgeries are self-employed individuals contracted to the NHS.
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
Easier provision of state aid in the European Union.xv The EU relaxed its
prohibitions of state aid in December 2008 and has weakened the rules further in
2009.xvi The new rules will last until the end of 2010 and could be extended if
Member States agree.

Merger in the banking sector. Competition rules were waived to allow the Lloyds /
HBOS merger, initiated in 2008 and completed in 2009.xvii

Industrial strategy. 2009 saw the launch of an active industrial strategy, designed
to provide government support for particular industries in danger. Ministers’
argument that the strategy is consistent with competition policy is undermined by
their insistence that any government support will be limited and temporary.xviii
The further danger is that businesses divert resources away from core activity and
towards attracting government interest and support. This is already happening in
the UK where other sectors are seeking the same degree of government
involvement that the biotech sector is receiving via the Office of Life Sciences. xix

General recessionary effect. In the long term, recessions will be beneficial to
competition. The difficult process of economic adjustment, with firms leaving and
entering the market, will shift activity from low productivity to high productivity
areas.xx But in the short term, recession will damage competition. Firms have less
to spend on new business ventures. Some firms are leaving markets and others
taking out capacity. Firms will develop defensive strategies aiming to raise prices
on stable sales volumes. There will be a further reduction in competition from
international trade.

Devaluation. The fall in the value of sterling will reduce the competitive constraint
on industries that rely on imports.xxi
3. 2010: the year of competition
As the UK approaches 2010, its main political parties are united in the desire to increase
economic growth. Better policy on competition will be one of the most important means
to achieve this.
The private sector needs a clearer awareness of the importance of competition and of
competition authorities. The size of the public deficit is rightly driving a debate across the
public spectrum about a reduction in public spending, regulation and the scope of
government. But a smaller government should not mean weaker competition authorities
less able to intervene. Given the push against competition in 2009, competition authorities
will need greater resources and greater confidence in 2010. xxii Professor Stephen
Littlechild has made useful recommendations to improve the regulatory framework, for
example by giving all regulators the duty to advance competition.xxiii
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The banking sector has seen the greatest pressure for increased regulation. But that
regulation can and should aim to deliver be greater competition, not less. xxiv
Politicians will need to give much stronger leadership in support of competition,
consistent with independent competition regulation. They need to be prepared to stand up
to vested interests even if this may cost short term political capital. In Europe, that means
returning to strict policies on state aid before the end of 2010 if possible. In the UK, it will
mean a new business policy focused on improvement of the general business environment
rather than support for industries in difficulty.
The same arguments apply for the public sector. Competition and choice are the most
important means to deliver both improved public services and a lower public spending
level. Again, political leadership is vital as the public sector undergoes its own transition
towards higher productivity, better management and close attention on the consumer.
Looking beyond 2010, greater competition needs to be go together with a shift in risk from
government to society. In 2005 Tony Blair called for a public debate on risk, arguing there
was danger “of having a wholly disproportionate attitude to risks we should expect to run
as a normal part of life”. He recognised that “a risk-adverse business culture is no business
culture at all.”xxv In the last year the insurance industry has called for a transfer of risk in
areas such as health and pensions to the private sector, and the CII have discussed the
benefits for risk in general. A more competitive economy and a less risk-averse society
will do much to raise economic growth and reduce the scope of government, which are the
defining domestic challenges for the next Parliament.
This Reform commentary draws on a policy seminar on competition policy held at Reform earlier in
2009, kindly sponsored by Virgin Media.
i
Quoted in Littlechild, S. (2009), Regulation, over-regulation and deregulation. Occasional Lecture 22, Centre for the
Study of Regulated Industries.
ii
Porter, M. (1998), On competition.
iii
Nickell, S. (1996), “Competition and Corporate Performance”, Journal of Political Economy, Vol. 104.
iv
Department of Trade and Industry (2004) “Economics paper no. 9 – The Benefits from competition: some illustrative
UK cases”.
v
Pollitt, M. (2009), “Does electricity (and heat) Network Regulation have anything to learn from Fixed Line Telecoms
Regulation?”, Judge Business School, University of Cambridge.
vi
Bosanquet, N. (2006), “Healthcare to 2010 – making reform work”, in Haldenby, A. ed. (2006), Public service reform
2006-2010, Smith Institute. “The development of pluralism in the health service, in both provision and funding, is
something that has traditionally been viewed negatively in terms of equity. This view has been greatly mistaken.
Looking to the private sector as a whole, and in particular new industries, privately funded markets have been
exceptionally successful in delivering equality of service. Even those on low incomes are able to afford the luxury of
new services and goods such as modern communications and information technology, electronic equipment and
international air travel. Given this evidence, we can be confident than the greater development of markets in healthcare
will also achieve the improvements in equity for which Ministers have rightly called.”
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vii
For those public services where choice can be exercised, such as health and education. Services such as policing
need a different form of accountability.
viii
le Grand, J. (2007), The other invincible hand: delivering public services through competition and choice.
ix
Department of Business, Enterprise and Regulatory Review (2008), Public Service Industry Review.
x
Fingleton, J. (2009), Competition policy in troubled times, Office of Fair Trading. “Subsidies are rarely ideal: they are
costly for the taxpayer, can prop-up less efficient firms, create dependency, and ultimately damage competitive
incentives. Restrictions on competition are worse. In addition to higher consumer prices and the inefficiency, they are
less transparent and can result in permanent changes to market structure. Ad hoc changes to the competition rules can
also remove consistency and predictability for business, with additional harm to efficiency. Naturally, incumbent
business will rarely object to subsidies or restrictions on competition.”
xi
Lyons, B. (2009), “Competition Policy, Bailouts and the Economic Crisis”, Centre for Competition Policy. The
National Recovery Act (1993) restricted competition. The Robinson-Patman Act, 1936, strengthened prohibitions of
price discrimination. The Resale Price Maintenance Act also tightened policy on prices. The author added: “There is
also evidence that lack of competition unnecessarily prolonged the 1990s Japanese recession. See Michael E. Porter and
Mariko Sakakibara (2004), ‘Competition in Japan’, Journal of Economic Perspectives, 18.1, pp.27-50.”
xii
Haldenby, A. et al (2009), The front line, Reform.
xiii
HM Treasury (2009), Securing the recovery: growth and opportunity. Pre-Budget Report December 2009. Cm
7747. London: TSO.
xiv
Timmins, N. (2009), “Challenge to NHS rules on competition”, Financial Times, 19 December.
xv
Brennan, K. (2009), Competition policy after the credit crunch. Speech at Chatham House, 26 June. “The ongoing
programme of state aid reform led by the Commission has enabled Member States to deliver state aid interventions
more effectively and quickly. When state aid is used well it is an effective tool with which to address market failures
which hamper our economies and damage businesses, individuals and the environment. But used incorrectly it harms
competition to the detriment of us all. All interventions must be closely scrutinised to ensure that they are limited in
amount and duration to the minimum necessary. The Commission acted rapidly to create targeted flexibilities in state
aid and competition rules to enable governments to take extraordinary action to fight off the crisis, especially the need
to inject equity into banks. However, this new flexibility should be seen as a short term response to the turbulence in
financial markets and its knock on effect on the real economy. It should be regarded as a temporary measure justified by
prevailing economic conditions. We must be robust in the face of calls for long term weakening of the State Aid
regime, especially for larger companies, and remain committed to withdraw the framework, as planned, after 2010.”
xvi
In particular, Member States will be able to grant without notification of individual cases subsidised loans, loan
guarantees at a reduced premium, risk capital for SMEs and direct aids of up to €500,000. All measures are limited until
the end of 2010 and subject to conditions.
xvii
Kay, J. (2009), “The new financial service leviathans: has competition been a casualty of the financial crisis”,
Consumer Focus, 15 September.
xviii
Brennan, K. (2009), Competition policy after the credit crunch. Speech at Chatham House, 26 June. In regard to
emergency measures to provide loans to car companies: “I do not believe these actions compromise competition policy.
They were taken to ensure that our businesses maintain essential investment and remain able to compete strongly in the
global economy.”
xix
Lyons, B. (2009), Competition policy, Bailouts and the Economic Crisis. CCP Policy Briefing. Centre for
Competition Policy, University of East Anglia.
xx
Stern, A. (2009), Implications for the wider economy. Competition Commission. “Recession can be healthy for
competition. Why should there be three major US car companies if the public don’t want to buy the cars?”
xxi
Waterson, M. (2009), Competition in recession: implications for competition in the wider economy – a few thoughts.
Competition Commission. “Industries that rely on imports as the competitive constraint will be subject to significantly
less competitive pressure so long as present conditions prevail.”
xxii
Beardsley, S. and D. Farrell (2007), “Regulation that’s good for competition”, The McKinsey Quarterly.
xxiii
Littlechild, S. (2009), Regulation, over-regulation and deregulation. Occasional Lecture 22, Centre for the Study of
Regulated Industries. “"
xxiv
Gregory, A. (2009), Competition in recession: what are the implications for competition in the financial sector?
Competition Commission. “Economic efficiency needs a competitive banking industry lending at fair margins –
particularly important for smaller firms without access to corporate bond market …. Can make a case for a banking
industry of more smaller banks, banks separated by function, and organised markets for significant financial products.
In general, implies more competition, not less – though arguably less competition in relaxing credit criteria.”
xxv
Blair, T. (2005), Speech to the Institute of Public Policy Research, 26 May.
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