The Competition Commission - does it work?

The competition commission, as A2 students well know, is the body responsible for the regulation and upkeep of strong competition in the world of business and economics. The commission inquires and subsequently regulates firms that they believe have restricted competition in respective markets. Their main target is to ensure that consumer welfare is as high as is possible, so surely this can only work to your advantage? Not quite I'm afraid.

Let’s look at the failed merger between Ryanair and Aer Lingus.

Three times now Ryanair have attempted to purchase the 71% of Aer Lingus, and three times the competition commission have denied the latter company even the opportunity to accept or decline. This is because the CC has reason to believe that such a takeover will result in Ryanair decreasing the number of flights from the UK to Ireland. This reduction in supply will equal an increase in price, and therefore lower consumer welfare. Fair enough, but is this guaranteed to happen?

The market structure as it stands is an Oligopoly, with several airlines offering cheap flights from the UK to Ireland. If you were to merge two of these firms into one, it would become a slightly more concentrated market but will remain an oligopoly none-the-less. So Ryanair will have no justification to lower their flights on this path and increase prices, as other airlines will easily be able to undercut them. So why merge; to create economies of scale, and to lower dis-economies of scale. They can easily do this through extra savings from buying the fuel in bulk, as Ryanair will be taking on the fuel bill for Aer Lingus now so cost savings are increased as quantity is also increased. Dis-economies of scale can now be reduced through cutting staff that are now no longer needed. Managerial positions within each company will clash and so many will find themselves out of the job pretty quickly.

All of this cumulates into massive savings for the company. Ryanair can either choose to keep these profits, re-invest them in other ventures or to further consumer welfare, or they could pass some of the savings onto the consumers themselves, making the “lad’s holiday” you may be planning later on in the year a whole lot cheaper.

And to think the competition commission are supposed to be working in our favour..

But let’s look at another investigation of theirs that perhaps works in our favour.

Although only recently coming to the surface, the takeover bid of Makro Holding Ltd by Booker Group PLC can have a big effect on retailing and customer welfare. These Cash and Carries work as localised monopolies, some on a bigger scale than others. Booker is the largest wholesale retailer in the UK with revenues of over £3.5 billion in 2011, while Makro’s revenue was barely scraping over the £1billion mark in 2009 when Booker first enquired about a takeover.

These firms are able to supply wholesale products in bulk at a cheap price to other smaller firms, which leads to them selling these products on singularly at a greater price per unit. This all works well because these wholesale companies are competing against Large supermarket retailers who are also able to buy directly off producers of goods in bulk. There is competition formed between supermarket retailers and wholesalers in this instance. However a takeover from Booker will eliminate the competition from Makro for them while they are reaping in the extra revenue gained from this venture. The higher quantities will result in further savings through economies of scale. This allows them to lower prices massively in their warehouses throughout the country, and out-price any localised businesses. So in the short-run, it’s great for consumers.

In the long run, it’s not so good. With the barriers to entry being so high in this market, Booker will soon find that they dominate and so can raise their prices again to gain supernormal profit. “Bossman” will have no choice but to buy his stock from this superpower, and you’ll soon find that your favourite can of diet cola has shot up in price.

So at least we might have something to thank the competition commission for, maybe it is looking out for our own welfare?