Protecting competition means protecting consumers
With competition, markets work much better for consumers than they would without it. The need for businesses to compete with each other leads to lower prices, more choice and more innovation. But why is that the case?
When businesses are not exposed to competition, they do not have to try to win over customers. Conversely, consumers have no way of showing those businesses that they are not satisfied with what they are getting. Unable to switch to a different provider, consumers are caught in a vicious circle of high prices, little innovation and declining quality. That kind of market is called a concentrated market. The power is concentrated in the hands of the provider, who decides what to offer and at what price.
Tackling concentrated markets
The best way to tackle concentrated markets is to stimulate competition. In many sectors, such as telecommunications or energy, we have seen in the past that opening a market to competition has immediate positive effects. Where consumers once had to contend with high prices or poor service, they can now simply switch to another provider.
Consumer welfare
Competition law protects competition to achieve markets that work for consumers. The guiding principle is consumer welfare: all proceedings under competition law are aimed at preventing harm to consumers. The consumers’ point of view is also a criterion for defining the relevant markets. Only products that consumers consider to be substitutes for each other are included in a market. This is important in order to avoid wrongly including companies in the market whose products are not potential substitutes (when calculating market shares, for example).
The German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen – GWB), which is enforced by the Bundeskartellamt, is in effect a law that protects freedom – the freedom of consumers to choose exactly the products or providers they want.
No cartels – better markets
Cartels cause enormous harm to consumers as secret agreements exclude prices, quotas or customer groups from competition – sometimes for years. That is why the Bundeskartellamt invests many resources in prosecuting cartels and imposes heavy fines amounting to millions of euros on cartel members every year. The aim is to effectively deter companies from engaging in cartels in the first place. Based on a study conducted between 2009 and 2014, the Bundeskartellamt estimates that uncovering and breaking up cartels saves consumers an average total of at least 460 million euros. Due to the deterrent effect of cartel prosecution, the total savings can be assumed to be even higher than that.
Click here for more information on cartel prosecution.
Keeping an eye on dominant companies
Competition must be fair. However, some companies have achieved a market position which allows them to act unconstrained by competition. This is called a dominant position, and in extreme cases, a monopoly. It is usually easier for such companies to impede their competitors, for example by making it more difficult for newcomers to enter the market or by squeezing existing competitors out of the market. The Bundeskartellamt therefore takes great care to ensure that dominant companies do not abuse their dominant position to stifle competition. This is the only way to keep markets open and ensure that consumers have a variety of products and services to choose from.
Click here for more information on abuse control.
Price competition works
Experiencing competition at first hand
In the past hotel, booking platforms such as Booking.com or HRS used so-called price parity clauses. The clauses prevented hotels from offering their rooms on other websites at prices lower than those on the booking platform, thus stifling competition. As a consequence, the Bundeskartellamt prohibited the use of these clauses. Since then, hotels have been free to set their own prices. Check for yourself: prices on a hotel’s website are often cheaper than on a booking platform. It pays off to compare prices between booking platforms and hotel websites. New booking platforms now have a better chance of gaining market shares by offering better deals.
Businesses which are not exposed to competition can set their prices without having to fear that costumers might switch to competing providers. This usually results in higher prices.
The Bundeskartellamt therefore takes great care to ensure that dominant companies do not set exploitative prices.
If prices are abusively excessive and thus significantly higher than in a comparable market, the Bundeskartellamt can intervene. On this basis, the authority has already conducted proceedings in the drinking water supply, gas and district heating sectors, achieving refunds totalling millions of euros for customers.
However, if a company has no dominant position or has not concluded any secret agreements, the Bundeskartellamt is not authorised to intervene in the company’s pricing – nor is this intended in a free market economy.
Preventing harmful mergers
Not every merger is harmful, but some mergers can significantly impede competition if companies that customers previously used as alternatives become part of the same company group, allowing that group to act more independently of competition than before the merger. This ultimately harms consumers as they are no longer able to choose between independent alternative providers.
The Bundeskartellamt therefore examines mergers between close competitors very carefully and, if necessary, prohibits the merger.
One example of many is the sale of “real” stores. The Bundeskartellamt made sure that regional competition in the food retail sector would be maintained. A substantial share of “real” stores had to be sold to medium-sized retailers as the large retail chains were only allowed to take over stores where the effects on competition were unproblematic. Planned takeovers that raised competition concerns were prohibited.
Click here for more information on merger control.
Competition and market transparency – not a simple matter
Sometimes it is necessary to take measures to boost competition even though there are several providers active in the market. One example is the fuel sector. The Bundeskartellamt ensures greater market transparency for consumers with regard to petrol stations. Consumers can easily check current fuel prices, for example with an app on their smartphones. This stimulates competition as cheaper petrol stations attract more customers and consumers can save more money.
Click here for more information on the Bundeskartellamt’s Market Transparency Unit for Fuels.
Why are there no market transparency units for all sectors?
While it can be useful to require companies to increase market transparency, such a decision needs to be carefully considered. If transparency brings more advantages to providers than to customers (for example, with regard to calculating prices), greater transparency can even be harmful. In the case of petrol stations, the oil companies concerned used to know exactly what their competitors were charging even before the market transparency unit was set up. The market transparency unit has now levelled the playing field for consumers by making it possible for them to compare all prices.