Blog: A new phase in competition oversight
The Netherlands had come a long way when the Dutch Competition Act (In Dutch: Mededingingswet or Mw) went into effect in 1998. This law succeeded the Dutch Economic Competition Act, and contained new rules regarding competition agreements, dominant positions, and concentration control. This new law had far-reaching consequences, as cartels were once a normal way of doing business in the Netherlands. The previous act, in principle, permitted cartels. However, since the Mw went into effect, cartel agreements have become illegal, unless they have demonstrable benefits for consumers. In addition, the Mw makes it possible to tackle abuses of dominance, and prohibit undesirable market concentrations, if these exceed a certain turnover threshold.
The introduction of the Mw coincided with the creation of the Netherlands Competition Authority (NMa), one of the predecessors of the Netherlands Authority for Consumers and Markets (ACM). When the NMa started, it soon received over 1,000 exemption requests from the cartel prohibition, which was quite overwhelming. However, the NMa quickly made a name for itself by getting its job done. For example, the NMa blocked a merger between two major convention centers: the RAI convention center in Amsterdam and Royal Jaarbeurs in Utrecht. Furthermore, as the culmination in the so-called construction industry fraud case, the NMa imposed fines, totalling over 100 million euros, on hundreds of construction companies for having concluded price-fixing agreements and market-sharing agreements. Published to commemorate the 25th anniversary of the Mw, the book Fair competition (in Dutch: Eerlijke concurrentie), written by Dutch journalist Roy op het Veld, offers a detailed account of all of these stories and more.
As it was coming of age, competition oversight was still relatively straightforward. Its main priorities were cartels, dominance, and concentrations. The goal was to protect competition, to ensure that consumers got value for money, and that they had sufficient choices.
Competition in the digital economy and elsewhere
However, the world has not stood still in the meantime. For example, Big Tech companies (Alphabet/Google, Amazon, Apple, Facebook/Meta, and Microsoft) have made us acutely aware of their massive impact on various markets as well as on society as a whole. In response, the Digital Markets Act (DMA) went into effect recently. Together with the Digital Services Act (DSA), these acts help realize fair competition in digital markets as well as transparency for challengers to those large platforms. The DMA offers the opportunity to impose in advance rules on large platforms that act as gatekeepers, rules that are relatively easy to enforce. This allows regulators to act in a swift and strict manner, thereby preventing lengthy legal proceedings that are more akin to legal wars of attrition, proving whether or not dominance was abused or competition was harmed.
The DMA limits itself to the digital domain, and allows for more timely interventions (also in areas where current competition rules are inadequate), particularly bridging the gap between dealing with prohibited practices (on the basis of competition rules) and stopping undesirable mergers and acquisitions. This gap obviously also exists outside of the online economy. In many other sectors, concentrations based on organic growth, acquisitions of small rivals, or economies of scale where smaller competitors can be excluded from the market, tend to remain out of reach for competition authorities.
A pattern of concentration and rising profit margins
More generally speaking, international empirical research shows that, in many sectors, concentration has gradually gone up, as have the profit margins of larger companies. This is an indication of a gradual increase in the market power of one or several competitors over time. It is likely that this is happening in the Netherlands as well.
Consumers ultimately pay the price for increasing market power. They are left with few alternatives to vote with their feet and, in doing so, discipline suppliers. If there is no cartel agreement or no abuse of dominance, the law is not violated, which means a competition authority will not be able to take action.
There can also be explanations other than creeping concentration and market power for the ill-functioning of the competitive process. In some markets, buyers cannot sufficiently foresee that, at some point, they will need spare parts. Manufacturers sometimes make it difficult on purpose for independent suppliers to meet that demand, and thus realize excessive profits on these aftermarkets. Or suppliers manage to introduce artificial switching barriers, thereby eliminating competition. The bank code in IBAN numbers comes to mind. If consumers want to switch banks, they cannot do so without getting a new bank account number, and will thus think twice before switching. This is perfect for incumbent banks, but not for new entrants that want to take on those banks. In business markets, too, switching costs can be prohibitively high. Think of the problem of vendor lock-in in markets for cloud services.
Competition oversight has indeed come of age, but has not necessarily turned into a fully grown adult yet. Hopefully, the big cartels from the past truly are a thing of the past, but companies still attempt to curb competition anyway. Such attempts come on top of the advancing concentration in various sectors. The existing regulatory toolkit falls short in situations where competition does not function properly but the Mw is not violated, whether it is because of the market structure or the behavior of companies. That is why a boost must be given to the protection of healthy competition and, by extension, of the competitiveness of all companies.
Improving competition with an extra set of instruments
Some countries have already tackled this problem by introducing an extra set of instruments, often called the New Competition Tool. For example, the UK Competition and Market Authority (CMA) has, since 2002, been able to carry out market investigations, and, if necessary, make policy recommendations or impose proportional remedies, which may vary in each situation. Examples include: making it easier for buyers to switch, imposing transparency requirements on suppliers, and lowering the barriers to entry for new entrants. The German government recently introduced a bill proposing to give its national competition authority similar tools. The German Bundestag will soon vote on that bill.
The CMA used the market-investigation instrument in, for example, the banking sector. That resulted in the implementation of measures to make it easier for account holders to switch. Another example is the investigation into the UK energy market, which revealed that a large group of consumers and small businesses was paying too much. The CMA subsequently put forward market-reform proposals, which included adjustments to help buyers find better deals, receive correct bills, and get a better overview of their energy consumptions.
Last fall, amid concerns regarding competition on the Dutch energy market, ACM launched an investigation into the tariffs of the six largest energy suppliers in the Netherlands. It revealed that the high prices were the result of higher purchase costs and a volatile wholesale market, and not the result of anticompetitive practices. Yet, imagine a situation where an ill-functioning economy was indeed the problem. There would be few tools to step in, for example, by making energy contracts more transparent or, if necessary, by imposing a price measure. By its very nature, the energy market underscores the importance of stepping in quickly. Households cannot do without power and heat, but not everyone can afford and is able to quickly add insulation to their homes or install solar panels. That does not make the energy transition any less urgent, but sometimes you cannot wait for it to simply happen.
Competition oversight has made the Dutch economy more competitive these past 25 years, but now we have entered a new phase, one with new challenges because of steadily increasing market power and practices hampering competition without violations of the law. The current regulatory toolkit was not designed to tackle these challenges. The time has come to take a serious look at introducing a New Competition Tool in the Netherlands as well, in order to protect healthy competition and innovation.
Paul de Bijl, Chief Economist of ACM