At a time when household budgets are already being squeezed, it is more important than ever that companies feel the heat of competition to force them to keep prices down. But across too much of our economy, that isn’t happening.
Recent analysis finds that the level to which markets are dominated by a limited number of companies is higher than before the 2008 financial crisis.
Companies are enjoying higher markups, particularly those that have enjoyed a strong position in the market: the top 10% of firms in the UK have seen markups rise significantly, with the difference between their prices and the costs of producing their goods and services rising from 58% to 82% over the past 20 years. The largest and most profitable firms are able to sustain their strong position for longer than they used to.
If competition is weak, firms do not face the same pressures to keep prices down, to innovate and improve, or to keep quality high. This harms all of us as individuals who are faced with worse choices and higher prices, and typically impacts those struggling the most as the cost of living rises. The people most likely to feel the force of these developments are those who are already struggling the most.
Businesses providing essential goods and services tend to have fewer competitors, and these are the very industries that stretched households on lower incomes are most exposed to.
Weak competition also harms businesses that may find themselves paying more to their suppliers or being unfairly prevented from growing by small numbers of powerful firms, with the tech sector being an obvious example of this.
It also harms the economy as a whole as inefficient firms can stay inefficient. This comes at the expense of job creation, productivity growth and higher wages. Strong competition can also make our economy more resilient to shocks, which we have not been short of in recent years.
So what is the solution? Government, regulators and businesses must continue to work to create the conditions in which the best businesses can thrive. For the government, it is about ensuring that regulations promote competition rather than stifle it. Regulators, such as the Competition and Markets Authority, must continue to play their roles as robust enforcers of competition and consumer protections.
For businesses, it is about treating their customers fairly and making sure they stay on the right side of competition law. It is also about knowing that if they break the rules, regulators are watching and will take action. And, as consumers, we can all help to protect ourselves by knowing our rights.
Together, we can ensure we have competitive markets that work well for all, keeping prices down and driving up quality in the goods and services on which we all rely.