House of Commons - Public Accounts

Select Committee on Public Accounts Forty-Second Report

3 The OFT's economic impact

19. As a result of the Competition Act 1998, and the Enterprise Act 2002, the OFT took on greater responsibilities for enforcing competition in markets. As a result, its budget increased by 70% between 2000-01 and 2005-06, from £33 million in 2000-01 to £56.8 million. £17 million of the OFT's budget in 2005-06 was dedicated to competition enforcement work. This budget increase was matched by an increase in the OFT's competition powers under the Competition Act 1998 and the Enterprise Act 2002.[29]

20. The OFT's work should bring direct benefits to consumers through lower prices in markets that have featured anti-competitive practices. It should also have a wider impact on the UK's productivity. The Treasury sees increasing competition as one of the five main drivers of productivity improvements.[30] The OFT is the main body charged with improving competitive markets.[31]

Consumer benefits

21. The main aim of the OFT is to make markets work well for consumers. It can demonstrate its impact on the economy in several ways. It can measure its impact on the price paid by consumers for specific products; it can record the level of fines it imposes for anti-competitive behaviour; and it can estimate its economic impact more broadly through the use of evaluation techniques.

22. It has achieved some successes for consumers. For example, before its investigation into price fixing of football shirts, an England adult shirt retailed at £39.99. Following the investigation, shirts were widely available for £25.[32] Similarly, before its investigation into price fixing for board games, Monopoly cost £17.99. Following the OFT's decision, it was sold for £13.49.[33] It has not yet identified and investigated a major criminal cartel, however, and in general its cases have not achieved the headline successes of the football shirt and board game examples.[34]

23. When it concludes that competition law has been infringed, the OFT typically levies a fine on the company. Fines are set to reflect the size of the market, the gravity of the offence and also act as a deterrent to future anti-competitive behaviour. Since the introduction of the Competition Act, the OFT has imposed fines totalling £60 million. Most of this £60 million came from five major decisions.[35] The fines in these cases were later reduced on appeal.[36]

24. The OFT's fines are lower than those achieved by the Dutch competition authority. For example, the Dutch authority imposed €79 million (about £50 million) in 2004-05.[37] The Dutch experience may be unusual however, with a large number of cases involving construction cartels.[38]

25. It is difficult to quantify the total impact of the OFT on the economy. For example, where it successfully prevents anti-competitive behaviour by a company, there may be a wider deterrent effect that is difficult to measure.[39] And the OFT pointed out that it should avoid an excessive focus on cases with quantifiable benefits at the expense of less easily quantifiable outcomes.[40]

26. Some estimate of the OFT's economic impact is nevertheless possible. In response to the C&AG's report, the OFT conducted a preliminary evaluation of the impact of its competition enforcement work. This initial work suggests a conservative figure of £110 million of consumer benefits since 2000, based on an examination of cases in which the OFT had found the Competition Act had been infringed. The OFT assumed that its intervention stopped consumers being overcharged for the relevant products and its estimate aggregates the net benefit.[41] The OFT should develop its methodology further, in particular by exploring whether it can measure the deterrent effect of its work.

Burdens on business

27. Some burden on business from the OFT's work is inevitable. These burdens may be small in relation to the potential benefits from stopping anticompetitive behaviour. But the OFT must try and reduce any unnecessary burdens - from delays, long timescales, and unclear information requests.

28. At present, the extent of the burden is unclear. If a case is appealed, cost information may enter the public domain. If there is no appeal, however, it is harder for the OFT to establish the costs of cases for the parties involved. The OFT is planning to consider how much its closed cases have cost by talking to the parties involved.[42] There is some evidence that legal costs alone costs can be sizeable. CBI members, for example, estimate that they can incur legal fees in excess of £200,000 on an OFT case. In complex cases, these costs can be far higher, particularly if the company appeals. One company whose case started in 2001, including an appeal, has incurred legal fees in excess of £1.7 million.[43]

29. The burden is particularly relevant where the OFT targets small or medium-sized markets. In such markets, the companies involved tend to be small, and more affected by an OFT investigation than larger companies. In addition, in smaller markets, there is a wide scope for different interpretations of market conditions, so companies may not recognise the OFT's theoretical model of the market under investigation.[44]

30. Many of the OFT's investigations involve small, local markets. Recent investigations have, for example, involved a single crematorium in Hertfordshire (Harwood Park) and roofing contractors in the West Midlands. This reflects the nature of the UK economy, with a large services sector made up of a large number of medium-sized markets.[45]

Public awareness

31. One of the OFT's roles in the Enterprise Act 2002 is to increase awareness of the ways in which competition may benefit consumers and the wider economy. Besides alerting business to the risks of behaving anti-competitively, such awareness will also encourage consumers and businesses to complain to the OFT if they have suffered from anti-competitive behaviour. The OFT seeks to communicate and educate through a range of channels, including its website, its annual report, press releases, and public seminars and roadshows.[46]

32. Awareness of competition law among the business community stands at around 40%, though on a rising trend.[47] But smaller businesses have a much lower awareness (24%). And while nearly a quarter of small businesses believe they are harmed by anti-competitive practice, only a minority would report it to the OFT.[48] In response, the OFT has established a small business forum. It believes that small businesses may have an interest in a specific competition issue from time to time, but less interest in competition more generally.[49]

29 C&AG's Report, para 1.11 Back

30 The others are promoting enterprise; supporting science and innovation; raising skill levels; and encouraging efficient investment. HM Treasury, Pre Budget Report, November 2005, chapter 3. Back

31 Q 27 Back

32 C&AG's Report, Executive Summary, para 1 Back

33 ibid, Figure 21 Back

34 ibid, para 4.14 Back

35 These investigations are: Toys and Games; Replica football kits; Genzyme; Napp; and Aberdeen Journals. C&AG's Report, Figure 20 Back

36 Q 10 Back

37 C&AG's Report, Figure 27 (Appendix 4) Back

38 Q 11 Back

39 Q 28 Back

40 Q 30 Back