Promoting competition

It needs to be stressed first of all that this policy is not mutually exclusive with either public provision or privatization and regulation; rather it is an additional approach to both policies. There are a number of methods by which competition can be created or increased.

1. Liberalization of markets. This means allowing more firms to supply services; for example, in the airlines industry more firms may be given licences to fly certain routes.

2. Deregulation. This has already been discussed in connection with the electricity industry in particular. This has similar effects to liberalization, but applies in particular to privatized industries.

3. Compulsory Competitive Tendering (CCT). This relates mainly to local government authorities. Instead of performing operations in-house, like cleaning and catering, these authorities are required to ask for bids from firms on a competitive basis. Sometimes the previous in-house operators establish a firm, make a bid and win the contract.

4. Creating an internal market. This means creating a market in a situation where there was none. In the NHS in the UK a Conservative government established an internal market that distinguished buyers (local health authorities) from providers of services (hospitals). This was intended to give choice to buyers and encourage them and the hospitals to be more efficient. The policy was at one point largely abandoned by the subsequent Labour government, in that doctors were no longer given budgets to buy services from hospitals. It is now being reintroduced through Primary Care Trusts which manage three-quarters of the UK's health budget. These organizations will pay hospitals by results. Internal markets have also been created in the public utilities, although this has also proved difficult. It is clearly wasteful to duplicate expensive infrastructure in terms of gas pipelines and the electricity grid, so a distinction has been drawn between suppliers of services and suppliers of infrastructure. While the infrastructure may remain a monopoly, suppliers may compete with each other to use it.

a. Advantages

The promotion of competition has three main advantages.

1. Greater efficiency. This means lower costs and lower prices to the consumer. The example of airlines in the USA compared with those in the EU demonstrates the extent of this advantage.

2. Greater quality. Firms are encouraged not just to compete on price but also in terms of quality. Thus in the UK there has been a huge fall in the proportion of public phone booths that are inoperative; before privatization this proportion was very large. Call-out times for installations and repairs have also been reduced.

3. More choice. Sometimes different providers offer different types of service, for example cable TV operators. Customers are now better able to find the type of service that suits them best.

b. Disadvantages

Two main problems can be discussed here.

1. Practicality. The main problem with promoting competition is that it can be impractical in the case of some natural monopolies. Most people are unable to choose between different water suppliers for example. However, further improvements in technology may reduce this problem.

2. Marginalization of certain communities. Monopolies can afford to subsidize certain products because of large profits on other products. Thus rail and bus operators can subsidize unprofitable routes, and the postal service can deliver mail to remote areas. Competition reduces the profit on the popular services, thus encouraging operators to cut services in less popular areas. This is even happening in the banking industry, as many banks are reducing their number of branches. The result is that many communities may lack basic services, a particular problem for the elderly and low-income groups who lack mobility.

The promotion of competition by using markets has been more popular with UK Conservative governments than with the Labour government that has been in power since 1997. Labour has always been more suspicious of markets for philosophical reasons, hence the abandoning of the internal market in the National Health Service when Frank Dobson was the minister in charge. However, Labour has by no means turned its back on market mechanisms, and it is perhaps the most important feature of 'New Labour' that it has encouraged market mechanisms in many areas of the economy that were previously anathema to the party, as mentioned earlier. Prime Minister Tony Blair has come under great pressure and criticism, particularly within his own party, over the issues of foundation hospitals and top-up fees for universities, both of which involve market mechanisms. His proposals in both areas have had to be watered down in order to make them more acceptable to the party majority.

US markets have historically been more liberalized and deregulated than those in the UK or EU. Many industries were deregulated in the Reagan years of the 1980s, for example public utilities, railways, road transport and haulage, airlines and shipping. Different states have had different regulations, as mentioned in the case of the Californian electricity utilities. Deregulation of the airlines has resulted in airfares per passenger-km being only half of what they are in the still heavily regulated EU. The industry has also been much more dynamic - or unstable, depending on one's viewpoint - in the sense of firms going out of business and new firms entering.

The ESM is generally more suspicious of market forces than the ASM; therefore liberalization and deregulation have been slow in spreading in the EU, in spite of the fact that it is supposed to be a single market. Therefore, in spite of the Maastricht Treaty of 1992, the Competition Act of 1998 and the Enterprise Act of 2002, there remain significant differences between the approaches of the UK government and EU governments to competition. EU governments have often made considerable efforts to protect their industries from competition, even from other countries in the EU. This has applied in particular to the countries in the southern part of the EU, meaning France, Spain, Portugal, Italy and Greece. Agricultural products enjoy much protection and this has been an ongoing source of conflict with the United States, which has called the World Trade Organization into making rulings on the issue. Germany has also been guilty of substantial protection of certain industries, coal mining for example. Many governments are also unwilling to allow 'national champions' to be taken over by foreign-owned companies. For example, French authorities would not approve a foreign takeover of Credit Lyonnais, in spite of the firm accumulating losses of over $4 billion over the years, and being a constant drain on public funds. There are also strong restrictions on foreign television and radio programming in France, limiting their market share; the aim in this case is the protection of the French culture.

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