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Matt Gardner
Economist
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The state of competition in the UK: what does it mean for consumers?

If you ask an economist, they’ll usually tell you the best way to increase quality and bring down prices in a market is via strong competition between businesses. All else equal, if a company has to compete with others to win a customer, then it should try to offer the best prices or quality in order to succeed.

 

This becomes increasingly important in the context of the current cost of living crisis. When input costs for businesses are rising then naturally this will be passed onto consumers. But strong competition can at least constrain companies from overcharging consumers, and ensure price rises are lower than they otherwise might be. 

 

That raises the question - how much competition is there actually in UK markets? And are consumers actually benefiting from firms jostling for their custom?

 

The second annual publication of The State of UK Competition from the Competition and Markets Authority (CMA) attempts to answer some of these questions. So what can it tell us about what competition is like in the UK?

 

 

Markets are more concentrated than before the financial crisis

 

Typically, the simplest indicator of competition is the degree to which customers or revenue is concentrated among rivals in a market. Having few businesses with a large market share can mean less vigorous competition.

 

The CMA finds that in the years immediately after the financial crisis, levels of concentration in the economy increased substantially. Since then, it has fallen again but still remains markedly above the levels seen in the early-to-mid 2000s. 

 

There is also evidence that market power is more enduring — the largest companies in markets stay the largest for longer than they used to. It is an indication that competition is putting less pressure on the most profitable companies than it used to.

 

 

Mark-ups have risen over time

 

Concentration doesn’t have to be bad for consumers per se. Businesses with relatively few competitors might still compete vigorously amongst one another and drive down prices. However, the CMA’s analysis finds some evidence that profitability has also been rising over time. 

 

The average mark-ups over cost that companies add to prices have increased from 20% in 2008 to about 35% in 2020. If this is being driven by weak competition then that is seriously bad news for consumers who are already contending with high inflation.

 

 

Low income consumers spend more in concentrated markets

 

In the context of the current cost of living crisis, the CMA’s findings around lower income consumers are particularly troubling. They find that households on lower incomes are significantly more likely to consume goods and services in more concentrated industries.

 

This is because consumers on low incomes typically spend more of their income on essential goods and services, and these markets tend to be more concentrated than others. The CMA did not find any specific evidence of how this might be harming low income consumers. Worryingly though, it does mean that these consumers are more likely to experience the negative effects of concentration if they occur. 

 

 

What can be done to improve competition?

 

Overall, the CMA’s findings suggest that competition has weakened over the last 20 years to the detriment of consumers. Policymakers should now be asking themselves, what can we do to improve things? 

 

The government has recently concluded two consultations that explored ways of increasing competition. One of these is targeted at digital markets, some of which have come to be dominated by a handful of tech giants. The other aims to improve competition policy overall by making tweaks to the current regime. 

 

The reforms to digital markets are hugely welcome, and are something that Which? has supported for a long time. However, considering the CMA’s concerning findings on concentration and mark-ups across the economy as a whole, the government’s proposals for the competition regime more generally look relatively minor. It may be that, as others have argued, more fundamental reforms are needed. 

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