New competition watchdog role for Imperial academic

An Imperial academic talks about the importance of increased competition before he takes on his new competition watchdog role.

Tommaso Valletti, who is a Professor of Economics at Imperial College Business School, has been appointed by the European Commission to give advice on competition policy.

Maxine Myers caught up with Professor Valletti before he starts his new job

1. Can you tell me about your new role with the European Commission?

I have been asked to join the Economic Advisory Group on Competition Policy. This is a group of a dozen internationally renowned experts who have in-depth knowledge on topics relating to competition policy. We have been asked to work with the Directorate General for Competition and its Chief Economist Team, who are primarily responsible for directly enforcing competition rules, to advise them on the various economic issues surrounding competition policy.

1. What is competition policy and why is it so important?

Competition policy ensures that businesses compete with one another by preventing or correcting any anti-competitive behaviour such as price fixing where companies work together to set prices of goods or services.  It is important to promote healthy competition between businesses to ensure that prices for goods and services are as low as possible for consumers.

1. How has the introduction of competition policies improved our lives?

In the mid Twentieth Century many of Britain’s major industries were nationalised by the Government, limiting competition, which ultimately led to many becoming uncompetitive.  When Britain joined the European Community (EC) in 1972 the economy was subject to EC Competition Laws, which increased competition.

One area of the economy that has benefited from increased competition is the European aviation industry. The European Commission introduced policies in 1993 that enabled the growth of more airlines companies.  This led to increased competition, making flying more affordable for passengers who can now fly to more destinations around the world.

Another sector of the economy to benefit from increased competition is Europe’s telecommunications industry. The cost of making calls and surfing the internet in Europe has been dramatically reduced following proposals made by the European Commission in the past few years.  This has not compromised internet quality such as download speed.

1. The Prime Minister David Cameron recently announced that the six biggest energy companies will face a competition test over the next year. Is this a good idea and will it help consumers who are facing higher energy costs this year?

A “competition test” is a method the government will use to establish whether the energy market can be made more competitive. However, I think it will do very little in terms of bringing energy costs down for consumers. If the government has serious concerns about the rising cost of household energy bills, then the energy industry should be referred to the independent and expert body called the Competition Commission, which can look into the matter and remedy the situation.

1. Can you give me an example of when competition policy has failed and the government has had step in to improve competition in a sector?

There have been some recent examples where firms have grown so large that they can potentially monopolise parts of the economy. When this happens, government monitoring is not enough and competition authorities have to impose tougher measures. For example, in 2008, the UK’s Competition Commission decided that BAA could not own both Heathrow and Gatwick airports together, so one had to be sold. This resulted in increased competition between the airports, which now vie for airlines to use their facilities. This ultimately contributes to keeping fares down for passengers.

1. What are some of the on-going challenges European competition regulators are facing?

There are two types of challenges facing competition policy. These are the emergence of new types of monopolies and the erosion of competition policy during economic downturns such as the 2008 worldwide financial crisis.

The rise of new companies such as Google, for instance, has called into question whether they are being monopolistic in their business practices. There is an ongoing investigation by the European Commission to assess if Google is impeding innovation by preventing companies from offering competing services.

The erosion of competition policy is also real cause for concern. Countries often adopt policies to protect their markets, restricting international trade, with the aim of “protecting” local businesses and jobs from foreign competition. This is a problem because these policies may result in firms becoming less efficient and consumers may have to pay more for goods and services.

A recent example occurred in Italy where the airline company, Alitalia, was allowed in 2009 to merge with Air One, the second largest carrier in Italy, despite being opposed by competition authorities. This resulted in more expensive airfares and a poorer quality of service. In my view, a slackening of strict competition policy in troubled times has to be resisted strongly. Otherwise countries will not recover from the crisis, which will last longer and be more costly to overcome.

What upcoming projects and research are you working on in relation to competition policy?

I am working on few projects that are all related to electronic markets. For example, a project that I am working on focuses on the impact of competition on investment in broadband communications. In particular, I am investigating the impact that broadband can have on a range of outcomes such as how it impacts on a firm’s productivity. Another project I am working on analyses new business models for the internet, namely whether companies such as BT might start charging content providers, such as YouTube, for the delivery of content.