The impact of consumer protection on competition and competition law: The case of deregulated markets

This paper deals with the question what the relationship is between consumer activity and non-competitive market outcomes in deregulated markets. These market failures could be the result of bad regulation, bad competition law enforcement or insufficient consumer activity. The different causes trigger different remedies. The question is whether to tackle a certain market failure on the supplier or on the consumer side. The answer depends on the actual and direct causes of market failures. The choice for appropriate and proportional remedies should be determined on the same basis. This paper argues that opening up markets to competition does not automatically lead to more consumer benefits. When consumers have insufficient information about the choices they can make or they face high search and switching costs they are not able to take the advantages made possible by effective competition and to activate competition. Information failures, therefore, can distort the working of an otherwise competitive market and can lead to sub-optimal effects and inefficiency. The liberalisation of network industries is one example when more competition does not automatically lead to a more competitive outcome because consumers have incomplete information. In many countries liberalisation has led to mixed results. While it improved competition for large users and provided better prices at the same time it raised major difficulties for small consumers to exercise their choice. The questions that are discussed in this paper are the following. When should a specific market failure be tackled on the supplier or consumer side? Which role consumer information problems play in achieving and maintaining competitive markets? How do consumer protection rules addressing information failures effect the enforcement of competition rules?