Closing The Free Market

The free market is one of the basic structures of a modern economy. Although a largely theoretical concept, it is applied almost universally in developed nations. It postulates that, if consumers are free to trade goods and services in an open market, buyers and sellers will get what they want at a price they are happy with. Under perfect competition, it is assumed that there are a large number of buyers and sellers, with the main feature being that no one seller can set prices. By implication, this delivers the best price for the consumer. Also, the market is considered the most efficient method for allocating goods and services. The consumer considers the prices and characteristics of the different available offers and makes their choice. In this way, resources are directed towards those goods and services that consumers want most, such as T-shirts and trainers rather than bowler hats and Easter bonnets. If the free market is the best method for allocating goods and services, then any interference with it is, so it is said, harmful. Goods could be allocated wrongly, to the wrong consumers, or at inappropriate prices, or in a way that wastes resources. Therefore to put any part of the economy in the government’s hands would be sheer folly. The government, it is said, does not know what consumers want and should not be making decisions on their behalf. It is spending money it has taken from them, a near-criminal act according to the supporters of the free market, and then spending that money on what the politicians think people want. On this logic, state ownership - or nationalisation - is harmful, subsidies to commercial organisations are damaging, and any form of protectionism is utterly misguided. Any interference with the market is at best questionable, at worst an anathema. This disposes of trade unions, regulation and indeed, any sort of government intervention. As mentioned, the theory requires a large number of buyers and sellers - not always present in a real world economy. But with many sellers, consumers have a choice of who to go to, with the buyer making third choice on the basis of price and other factors. There might be very few sellers, or insufficient for there to be a functioning market with no-one able to set prices. When there are few sellers it is called an oligopoly, with three, or more, up to about six agents. This is few enough for them as a group to agree on prices, that is, to collude, and therefore is not a free market. It violates the rule that no-one should be able to set prices. Or an industry might be dominated by a monopoly, a single seller, which would inevitably set the prices. Typically, it would also raise or lower output to the level at which prices and sales balanced. That is, the level at which prices brought the volume of sales that the company wanted. This would not be the best outcome for consumers as it would probably involve low output and high prices, as this would maximise profit for the monopoly. Usually, nations arrive at a monopoly through takeovers. This is a cheap way for the company to carry out investment or innovation and is seen as an easy way to get growth. It can buy companies that invest heavily or innovate, or simply expand the buyer’s market. But the loss of competition is a major concern; for example, a market dominated by just three or four companies, allows the possibility of price fixing, although in a sophisticated, developed economy, collusion is far more likely. However, with perfect competition, that is, the free market, no-one is able to set prices. But as long as the regulators allow dubious takeovers to go ahead, the free market will become less and less free. Over the decades the regulators have, like the companies themselves, used a variety of excuses to approve acquisitions that should never have got out of the boardroom. The most blatant was when Tesco sought to purchase Adminstore, the owner of smaller chains like Cullens. Tesco already had a 27% share of the retail food market, which is above the 25% threshold that initiates an Office of Fair Trading (OFT) inquiry. In other words, a referral to the Competition Commission should have been more or less automatic. Instead, the OFT concluded that the takeover did not “‘give rise to competition concerns’ at either the national, regional or local level.” (Susie Mesure. The Independent. March 6 2004.) Although being above the threshold gave rise to “concerns”, perhaps of greater concern was the nature of the takeover. Tesco was not acquiring a characterless, standardised supermarket chain. Cullens was like a family store with a delicatessen. All this character, variety and wide choice of foods ceased to exist when Tesco bought Adminstore. Additionally, a degree of competition was eliminated. Bit by bit, with each purchase, competition is eroded, dissolved and ultimately destroyed. If this process is allowed to continue throughout the economy until one sector of commerce becomes a monopoly, or even a near monopoly, then the market ceases to exist. If the market is allowed free rein for agents to act as they wish, it will destroy itself. This means, oddly enough, that if we want to protect the free market, we have to regulate it. There has to be a regulatory competition authority that judges and limits takeovers and mergers, and ideally, blocks any acquisitions that involve companies with 10% or more of their particular sector of the market. Only in that way will consumers get fair prices, a reasonable service and businesses that can be trusted. If we allow a free market in the sale and purchase of companies, ultimately there will be no market.