Why markets are broken

The market economy is not functioning as it should because of a lack of competition, according to a report from the Social Market Foundation which styles itself as 'the voice of the radical centre': Lack of competition

The research finds that all too often, the markets that matter most to consumers are concentrated in the hands of a small number of large companies. That’s bad for customers and bad for the wider economy: where companies don’t have to fight hard to win and keep their customers, they face less pressure to reduce prices and to increase quality, to invest and to innovate. In other words, concentrated markets are often uncompetitive. The research also identifies a link between higher levels of market concentration and lower levels of customer service and trust in markets.

It is argued that the UK’s economic status quo is at a critical juncture. Faith in a largely “free market” settlement is increasingly in doubt, as household incomes are squeezed and many fail to see economic growth translating into an improvement in their day-to-day lives.

It is stated that in this environment, it is more important than ever that 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.

Scott Corfe, the SMF's chief economist and author of the study said: 'Consumers and the economy are getting a bad deal because free markets are not free enough. Big companies in sectors such as broadband, mobile telephony and personal banking do not face enough competition. As a result they can charge more and invest less.'

Reports by the Competition and Markets Authority last year found that lack of competition between retail banks costs customers the equivalent of £116 a year each and an investigation into the energy industry found that consumers in Britain were paying £1.7bn a year too much for energy. However, critics said that the changes recommended by the CMA amounted to little more than tinkering and did not address the fundamental problems.

The collapse of Monarch means that there will be less competition for domestic and European flights, pushing up prices and forcing more travellers to rely on Ryanair who treat their customers with contempt.

In principle, vigorous competition policies should be the antidote to excessive concentration, they are certainly the remedy favoured by economists. However, enforcing such policies in practice often leads to legal challenges by big companies which take years to resolve. The EU competition commissioner is doing her best to challenge big hi tech companies in particular, but this will not help the UK in the long run.

I was once asked by an economist colleague why John Major's government had taken no effective action on competition policy. I pointed out that the CBI was back in favour and was lobbying on the issue. Admittedly, the policies were eventually put into effect by New Labour.

However, the problems remain. Too many big businesses treat customers with contempt. Companies do not fear losing their customers and have become lazy fat cats on their profits, basking in the sunshine. Regulation has been inadequate (some think there should be one super regulator rather than sector specific ones). The impression is given that markets benefit the few rather than the many.

Marxists would, of course, say that this represents an inevitable drift towards monopoly capitalism. But a weaker and less supine government might be able to do something effective to tackle the issue.