1. Competition in the Microscope:
Its benefits and challenges
Dr Amelia Fletcher
Chief Economist, OFT
Competition Policy Seminar
Nuffield Trust
11 January 2011
Especially on this occasion! The views expressed are my own, not necessarily those of the OFT. 1

2. Competition as a virtuous circle
NB Competition is not Active
Active buyers:
just on price, but on competitors:
Buy what they
as many dimensions Compete to
most value, as the buyers can win business
given budget observe and care from active
constraints about buyers
2

3. The fate of low quality inefficient suppliers?
The basic idea: In a competitive market…..
Change in control
Shape up Lose out
Low quality
(Within-firm Either inefficient Or (Cross-firm
efficiency suppliers efficiency
effect) effect)
A greater prevalence of high quality, efficient suppliers
3

4. Evidence on the benefits of competition
Interventions to prevent technical
Significant body of evidence on progress being inhibited by anti-
price effects of cartels and anti- competitive behaviour by
competitive mergers incumbents: Microsoft, Intel
(incl. US hospitals)
Static Dynamic
‘Good news’ stories on removing Significant body of evidence
entry barriers: showing large and positive effects
Telephony, air travel, pharmacies, of competition on productivity
taxis growth, working through changes
in both technology and
management
4

5. The ‘management effect’ in action
5
Source: John van Reenen (2010)

6. Challenges for the virtuous circle
Demand-side
Poor Poor Low
awareness assessmen capability Active
Active buyers: of options t of options to act
competitors:
Buy what they
Compete to
most value,
win business
given budget Supplier Barriers to Limited from active
constraints incentives/ entry/exit/ diversity
buyers
behaviour expansion of
suppliers
Supply-side
6

7. The virtuous circle can need a helping hand
Competition Empowerment/
enforcement: Consumer
Regulation:
Guards against enforcement:
Added buyer
anti- Guards against
protection/
competitive misleading and
empowerment;
mergers, unfair practices
Added supply-
agreements, and contracts
side rules
and behaviour
7

8. Three broad approaches to regulation
Should we?
1. Try to mend the
‘virtuous circle’ – eg by
buyer empowerment,
such as mandating
Suppose: And so: provision of quality info
Quality is hard to Instead of a 2. Safeguard the problem
observe or ‘virtuous circle’ without harming the
consumers find it we get a ‘vicious ‘virtuous circle’ – eg by
hard to make circle’ or ‘race to setting minimum quality
quality decisions the bottom’ standards
3. Block the ‘vicious circle’
– eg by preventing price
competition between
suppliers
8

9. Three comforting case studies
Books Retail opticians Legal services
• 1997: Net Book • 1984: Liberalised • Many liberalisation
Agreement measures since
removed • Major concerns 2001, incl. referral
about reduced fees in 2004
• Major concerns of standards and
reduced quality, choice, and poorer • Major concerns of
titles and sales eye care reduced quality
• In fact, by 2007, • In fact, by 2004, • In fact, none
more sales, more improvements in observed, and
titles (incl. relative quality and choice more efficient firms
to Germany, where (although impact have gained share.
RPM retained), and on prices more 9
no fall in quality mixed!)

10. Challenges for the virtuous circle
Demand-side
Poor Poor Low
awareness assessmen capability Active
Active buyers: of options t of options to act
competitors:
Buy what they
Compete to
most value,
win business
given budget Supplier Barriers to Limited from active
constraints incentives/ entry/exit/ diversity
buyers
behaviour expansion of
suppliers
Supply-side
10

11. Supply-side challenges: A level playing
field
Supplier
incentives/ ● General barriers to a level playing field:
behaviour - differences in regulation, taxation and pension
treatment
- incumbency advantages enjoyed by existing
suppliers, including ongoing relationships
- suppliers that are ‘too important to fail’
- (unclear application of competition law?)
● Many of these have been addressed in health:
- Transfer of public providers into the private sector
- Clear application of competition law (for the most part)
- A key driver of the ‘any willing provider’ policy?
● But it’s not necessarily going to be an easy ride…
- Distorted incentives for GPs to self-supply?
- Distorted incentives for vertical integration? 11

12. Challenges for the virtuous circle
Demand-side
Poor Poor Low
awareness assessmen capability Active
Active buyers: of options t of options to act
competitors:
Buy what they
Compete to
most value,
win business
given budget Supplier Barriers to Limited from active
constraints incentives/ entry/exit/ diversity
buyers
behaviour expansion of
suppliers
Supply-side
12

13. Demand-side Challenges
Poor Poor Low
awareness assessmen capability
of options t of options to act
Key questions: Key questions: Key questions:
● Are buyers aware ● Is the buyer ● Are buyers ‘inert’?
of options? capable of making ● Can buyers play
● Is information a reasoned suppliers off against
available on quality decision across each other?
of options? options?
Key issue in health: Key issue in health: Key issues in health:
● What information ● How can such ● Inert patients?
should be provided decision-making be ● Fit of GP negotiation
(on upstream facilitated (for both with ‘any willing
providers and patients and GPs)? provider’? 13
GPs)?

14. Conclusions and a question
In conclusion:
● Competition can generate substantial benefits
● There are always challenges, but these can be overstated!
● Markets typically work best when regulation works with
competition, not against it
Finally, a question (to provoke debate):
● On the demand side, to what extent are each of the following
envisaged to be a key driver of competition?
- Patients choosing between GPs (and so incentivising GPs to provide
good quality outcomes)
- Patients/GPs passively choosing between upstream suppliers, based
on their ‘posted’ offering (weaker?)
- GPs actively playing upstream suppliers off against one another to
get better value for money (stronger?)
14

15. Why?
● If patient choice ● Increased concern
between GPs is the about GP mergers
key driver ● Info on GP quality
important
● Potentially less concern
about vertical mergers?
● If GPs/patient choice ● Increased concern
between upstream about vertical mergers
suppliers is the key ● Info on upstream
driver quality important
● Potentially less concern
about GP mergers?
15

16. Competition in the Microscope:
Its benefits and challenges
Dr Amelia Fletcher
Chief Economist, OFT
Competition Policy Seminar
Nuffield Trust
11 January 2011
Especially on this occasion! The views expressed are my own, not necessarily those of the OFT.16