This article was originally published by The Times and made available here.
When we talk in economics about consumers, the image that usually springs to mind is of a person in a shop buying something. What if we invert the perspective, though, so the consumer is the person behind the till selling the customer a trinket? Because that person will, after all, go out later and buy a trinket of their own using the wages they have just earned. There are 32.5 million of these consumers in Britain, 60 per cent of the adult population, and they are also known as workers.
The point is so obvious it is barely worth making but it’s important because our competition regulators have a single concern: consumer protection. “Our statutory duty is to promote competition for the benefit of consumers,” the Competition and Markets Authority says. What that tends to mean is prices. It wants to be sure the customer at the till is getting a good deal. The wages of the consumer working behind the till are less of a concern.
Recent economic analysis is making this view look increasingly outdated. What monopolies theoretically do is corner a market and use their dominance to gouge customers with higher prices, as JD Rockefeller supposedly did at Standard Oil in the early 20th century before the company was broken up. It’s hard to discern that happening today. Amazon has brought prices down. Facebook and Google offer their services free. Looking at prices, it’s hard to spot any detriment to the final consumer.
Yet there is evidence that the economy’s competitive forces are withering. The CMA’s State of UK Competition report last November said: “Competition across the economy as a whole may have declined over the last 20 years.” Concentration is rising, in other words there are fewer operators in certain markets or regions, and “mark-ups”, the amount businesses charge above cost, are bigger. That chimes with analysis in the US and Europe.
The CMA is evolving; a new unit is being created to tackle the natural monopolising forces of the digital economy. It has taken action in traditional fields; blocking the Sainsbury’s-Asda merger and cracking down on housebuilders’ rip-off leasehold deals. But, as identified in two recent reports from Lord Tyrie, the outspoken former CMA chairman, and John Penrose, the Tory MP and anti-corruption champion, the regulator is too reactive.
In his paper for the Centre for Policy Studies last week, Tyrie said the CMA should be “a repository of expertise on the microeconomy: are levels of competition falling or rising; in which sectors and why?” Penrose wants it to be “a microeconomic sibling for the Bank of England’s macroeconomic role”.
To bring us back to the worker-consumer, this kind of regional and sectoral microeconomic analysis is exactly what is needed to identify where competition is being eroded. Monopolistic power is at least as likely to reveal itself in low pay as in high prices, as investigations into Sports Direct, Amazon and Leicester’s garment sweatshops have shown. If a regional population has fewer employer options, workers cannot shop around for a better wage.
Dominance in labour markets is called monopsony and is the flip side to consumer protection. Rather than push up prices to boost profits, a company drives down labour costs. For the consumer, it amounts to the same thing. Either way, their cost of living rises as they are gouged by powerful companies.
History shows that monopolies rarely raise prices. Standard Oil engaged in predatory pricing to kill the competition. Amazon allegedly treats sellers on its marketplace the same, spotting what’s popular and undercutting them. Google and Facebook buy rivals to neutralise competitive threats. All of which is economically scarring.
Competition is the dynamism that drives productivity. A regulator that can map microeconomic patterns, identify areas of market concentration and act preventatively to help new entrants would be invaluable.