Consumers and the economy are getting a bad deal because companies don’t face enough competition

The Social Market Foundation (SMF) think-tank says that big companies in sectors such as broadband, mobile telephony and personal banking don’t face enough competition, meaning that consumers are hit with a lack of choice, higher prices and underinvestment. This is resulting in everyday consumers having less money in their pockets and sees the country suffering from a less productive economy overall.

The negative effects of a lack of competition in consumer markets are also fuelling public unhappiness about the economy and distrust in business, the SMF says.

The research identifies a link between higher levels of market concentration and lower levels of customer service and trust in markets. The more industry concentration has declined, the more likely it is that consumer trust has increased.

The research, in a new paper titled ‘Concentration, not competition: the state of UK consumer markets‘ is published at the Conservative Party conference and comes as the Government and business leaders worry about a ‘crisis of capitalism’.

It analyses ten key consumer markets, which collectively account for about 40% of all consumer spending – cars, groceries, broadband, mobile telephony, landline- only phone contracts, electricity, gas, personal current accounts, credit cards and mortgages.

The SMF’s analysis of these markets finds that:

• eight of the ten consumer markets examined were ‘concentrated’, meaning they are dominated by a small number of large companies. Only cars and mortgages can be considered ‘unconcentrated’ consumer markets.
• in telecommunications, market concentration is high and it has increased over the past decade with respect to broadband and mobile telephony.
• the personal current account market is more concentrated than in 2007 with the market dominated by the five largest banks. This is despite recent entrants into the market.
• the gas and electricity markets have become less concentrated since the early 2000s, with a number of new entrants in the sector. However, the market remains dominated by the “big six” energy companies.
• concentration in the groceries market has declined in recent years. The rise of Aldi and Lidl in recent years has eroded the market share of the “big four” supermarkets and reduced industry concentration.

‘Concentration, not competition: the state of UK consumer markets‘ is sponsored by TSB. SMF retains full editorial control and responsibility for its contents.

The SMF identifies seven drivers of market concentration: barriers to entry in markets, barriers to scaling up; bundling and gateway products; low switching rates; incumbent advantages; natural monopolies; and uncompetitive sub-markets.

The author of the report, SMF chief economist Scott Corfe said:

“Consumers and the economy are getting a bad deal because free markets aren’t free enough. Big companies in sectors such as broadband, mobile telephony and personal banking don’t face enough competition. As a result, they can charge more and invest less, which means a less productive economy and worse-off customers.

“The negative effects of a lack of competition in consumer markets are also fuelling public unhappiness about the economy and distrust in business.”

SMF director James Kirkup said:

“Free, competitive consumer markets create prosperity and jobs, give people choice and keep prices low. Uncompetitive consumer markets feed a sense that markets are ‘rigged’ for the benefit of the few, not the many.

“It is more important than ever that UK consumer markets work well and deliver good outcomes for households. If they don’t, markets risk being replaced with state ownership as the electorate loses faith in private enterprise.”

TSB Bank CEO Paul Pester said:

“We created TSB to bring more competition to banking and ultimately make banking better for all UK consumers. The problems consumers face in banking are well documented, but sadly not isolated.

A handful of large, established players have a stranglehold across the markets UK consumers rely on the most. These high levels of concentration are resulting in poor consumer outcomes and reducing the incentive for some of our biggest companies to keep fit to compete on a global scale.

“It’s time for change: it’s time for consumers, not dominant businesses, to be put at the centre of the markets that people rely on most. This will be good for consumers, ultimately good for the global competitiveness of the companies themselves and good for the competitiveness of the UK economy.”

APPENDIX

FOUR NEGATIVE OUTCOMES OF A LACK OF COMPETITION

The new SMF analysis finds that lack of competition in key consumer markets is resulting a range of negative outcomes for UK consumers:

1. Lack of choice – in concentrated markets, consumers may not have access to the diversity of product and service choices that they would like.
2. Poorer customer service and lower levels of trust – we identity a link between higher levels of market concentration and lower levels of customer service and trust in markets.
3. Higher prices – where markets are more concentrated, consumers often face higher prices.
4. “Supernormal” profits and underinvestment – Where competition is weak, company profits margins are likely to remain higher than would otherwise be the case. The presence of supernormal profits contributes to an unequal distribution of wealth and income in the UK, raising questions around social justice and fairness.

SEVEN DRIVERS OF MARKET CONCENTRATION

The analysis identifies seven key drivers of concentration and a lack of competition in consumer markets in the UK:

1. Barriers to entry in markets – high fixed costs and regulatory/licensing requirements deter new entrants into consumer markets.
2. Barriers to scaling up – for example, energy companies face significant environmental and social obligations once they exceed 250,000 customers. Regulatory and licensing requirements for financial services firms can deter entrants from providing new products and services.
3. Bundling and gateway products – bundling of services has become much more prevalent in the telecommunications sector. Similarly, the dominance of dual fuel energy tariffs may undermine competition in the gas and electricity markets. Bundling can decrease the likelihood of an individual switching supplier for a given product, given the need for them to “unbundle” and choose new products for other services. In banking, personal current accounts may act as a “gateway product”, with individuals more likely to opt for a loan, credit card or mortgage from institutions with which they hold a current account.
4. Low switching rates – Low switching rates make it much harder for new entrants to significantly grow their market share. For example, data from Bacs show that less than two per cent of current account holders switch accounts each year.
5. Incumbent advantages – For example, in the retail sector, incumbent firms have significant supply chain bargaining power, allowing them to purchase goods and services at a lower price than a new entrant to a market. This can make it difficult for a new company to compete on price with a larger firm.
6. Natural monopolies – There are some industries where there is an inherent natural tendency towards monopolies or limited competition. For example, rail transport often inherently lacks consumer choice given the challenges associated with having multiple train providers on a given route. The introduction of competition in these instances may actually lead to inefficiencies compared with a monopoly situation.
7. Uncompetitive sub-markets – An example of this is “mortgage prisoners” who are unable to switch mortgage – for example, because they are in negative equity. These individuals can find themselves facing relatively high interest standard variable rate (SVR) mortgages which they are unable to switch out of.

NOTES TO EDITORS

• The report can be read here: https://www.smf.co.uk/publications/concentration-not-competition-the-state-of-uk-consumer-markets
• This report is the first part of a research project that will conclude in early 2018. The purpose of this report has been to analyse the level of competition and concentration in UK consumer markets, and the consequences for consumers. The next report will consider the ways in which policymakers and others can reduce concentration, encourage competition, and get a better deal for consumers.

• About the Social Market Foundation

The Social Market Foundation (SMF) is an independent, non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this. https://www.smf.co.uk

• Interviews/media enquiries

For interviews with report author SMF chief economist Scott Corfe, please contact SMF communications manager Mercedes Broadbent on mercedes@smf.co.uk // 07425 609148 // 020 7222 7060 or David Mills SMF communications director on david@smf.co.uk