:Fixed Point

Will the UK’s antitrust authority, the Office of Fair Trading (OFT) achieve more success by reducing its caseload by up to 40%?

I’m not sure. Firstly, the OFT has stated in the recent past that it intends to pursue the most damaging antitrust cases - cartels, such as the current investigation into BA’s fuel surcharges. Indeed, under the Enterprise Act, the OFT was given significant additional powers to investigate cartels and the offence was also criminalised. Thus far, not one criminal case has been investigated, and there have only been moderate civil judgements involving regional cartels of small building firms. Of course pursuing cartels, even with the benefit of a whistleblower programme is not easy but there are suggestions that the OFT’s suffers from poor decision-making and leadership.

Take for instance, the investigation the alleged price fixing of private school fees. Here were fifty of the top schools in the UK accused of exchanging information relating to prospective fee increases for a period of years. My insiders tell me that the case was as clear as could be imagined, with detailed notes and minutes kept of the participating schools. After two and a half years of investigation, the case was settled, and how? The schools were to admit that they exchanged information that led to a distortion of competition, BUT there was no conclusion that the information sharing led to fee increases. The schools collectively put £3m into a fund to benefit students who could not ordinarily afford school fees and each school was also fined £10,000.

The private schools’ representative body, the Independent Schools Council claimed that the case was a “scandalous waste of public money”. I agree, but only because it seems there was a good chance of getting a successful decision that wasn’t pursued to the end. The ISC also said the schools only exchanged information only in order to keep fees down. I know of no credible model where an exchange of information, in a hugely supply constrained industry, leads to a fall in price. Revenues raised by the schools may go into new faciltities, but the counter argument is that this leads to gold-plating: an arms race of wasteful investments that add little value.

The settlement was a victory for the schools and an embarrassment for the OFT. When a school such as Eton, with a turnover of £20m per year is faced with a potential fine of up to 10% of its revenue for each year the offence was committed, and gets away with a total fine of just 0.05% of its annual revenue, even where there appears to be good evidence, what elsle can the conclusion be? Extrapolating, and assuming the average turnover per school is around £8m, with 20,000 students, a fine for just one year would have raised around £16m from the fifty. The OFT’s budget in 2004-2005 for competition enforcement which includes cartel investigations was £38m. By any stretch, a case which covers almost 50% of your budget is a good thing.
Perhaps the most damning aspect of the settlement is that it allowed the schools to evade potentially costly third-party claims by parents. As in the US, recourse to damages is an integral part of the antitrust enforcement regime. Encouraging and allowing consumers to sue reinforces the not-very-controversial view that firms should not place their own interests above responding to customer needs.Instead, the public are left with a £3m trust fund that even at a generous 6% annual return will deliver only £180,000 - enough to send nine fully funded students to Eton. Hardly a big win for the consumer (thanks to Tim Worstall for pointing out my inability to do simple maths).
If the private school case was dropped because the OFT couldnt’ be bothered, or its staff lacked the requisite skill, or it doesn’t have the guts to face up to the big-hitters, then what does this mean for the current investigation into BA? Can we expect a similar drawn out investigation, concluded with a nod and a wink?