17 February 2021

Planning is a competition issue too

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Competitive markets are important not just because they affect the price of things we buy, but also the look and feel of where we live, and even where we go when we die.

Conservative MP John Penrose’s new report on competition calls for a return to a Thatcherite focus on choice and consumer-friendly economics. He’s written his own account of it for CapX, but what I appreciate most is the focus on regulatory barriers to competition, both in regulated sectors like energy and broadband and in the wider economy, where regulation can be a drag on competition.

The biggest example of this, in the UK at least, is probably land-use planning – the set of rules that determines what can and can’t be built on a piece of land, and how property can and can’t be used. Penrose does not go into detail about this in his report, and it has been forgotten by other reviews of competition that have focused on digital markets, where the effects of planning laws are less obvious (though still important). But despite the rise of online shopping, most markets are still local, and online merchants still compete with local alternatives. It’s reasonable to infer that laws that hold back competition in local markets may matter a lot.

The UK’s Competition and Markets Authority (CMA) has recognised this itself. In its 2007 investigation into the groceries market, the CMA (then called the Competition Commission) highlighted that the planning system can raise costs for new entrants and give incumbents a mechanism to object to new stores opening near them. In the period between 2000 and 2007, four of the big five retailers objected to 9% of grocery retail planning applications. But with the inclusion of the unnamed fifth retailer, that number rose to 34%.

It seems reasonable to infer that at least one major supermarket company had been, and perhaps still is, using the planning system as a weapon against its competitors, although the Commission did not conclude that this was a significant barrier to entry. It is more likely that objections to new supermarkets on Nimby grounds are the biggest obstacle here, rather than action from the supermarkets themselves, but this doesn’t make it any less of a barrier to entry and competition.

The report also highlights the “town-centre focus” and “need test” as biasing the system away from larger stores toward convenience and mid-sized stores. These have been changed since 2007, but the planning practice guidance still directs local authorities to set out their “needs” for retail in their local plan, which puts up barriers to developments that contradict those needs. This creates an obvious barrier to competition. If a supermarket thinks it can profit by entering a new area, it implies the local area is currently being served by incumbents whose prices are uncompetitive.

The Competition Commission report demonstrates that local authorities consistently plan for medium-sized stores and against larger ones. Counterintuitively, this kind of policy may have led to supermarkets competing more directly with independent retailers with “local” versions of their stores. They may have focused on larger stores out of town if the system had been more permissive, in what may be an unintended consequence of laws designed to protect those merchants from competition.

This general constraint on entry was still present in 2019, when the CMA reviewed the merger of Asda and Sainsbury’s, which it eventually blocked. That review “confirmed the existence of barriers to entry for Large stores and the generally reduced number of openings by the Parties, Tesco and Morrisons in recent years”. During this, Aldi – whose entry to the UK market has driven the incumbent supermarkets to significantly cut prices and improve the quality of their “discount” ranges – told the CMA that the main constraint on its expansion in the UK was the price and availability of land.

Grave consequences

The funerals market is another example of how regulations can have perverse consequence: the CMA noted that rules requiring crematoria to be located at least 200 yards from any housing (or 100 yards in London) meant that, in practice, new crematoria usually had to be built in the countryside, running up against Green Belt land-use regulations.

New crematoria may also struggle to prove that there is a “need” in an area where there is already one – usually meaning that at least 130,000–171,000 people do not live within 30 minutes of an existing crematorium. This means that crematoria often have a de facto local monopoly because of planning laws, since a new competitor could not demonstrate “need” to build a new one near them. The CMA named the planning system as one of two significant barriers to entry in the crematoria side of the funerals market. It noted that, as we would expect, new crematoria since the 1980s have usually been built in areas where there was no alternative already present.

These are just two examples where the CMA has looked into the role of the planning system in great detail. More generally, it is clear that planning constraints raise the price of land by restricting what can be built and where. By making it more expensive for people to move for work and locate near others with complementary skills, it acts as a drag on business formation and businesses’ access to talent, which may be disproportionately more costly for start-ups. Anything that makes it harder for new businesses to set up will protect incumbents from competition and make consumers worse off.

One of the most striking trends in competition in the United States since the beginning of the 1990s has been the divergence between national concentration and local concentration of industries. As national concentration has risen, local concentration has fallen, as national-level chains have extended across the country into areas once served by only a few local businesses. We do not have equivalent local-level data for the UK, but it is possible that we have missed out on this trend, or some of it, because of planning.

Penrose’s report should help to start a move towards this broader understanding of competition. It is sorely needed: understanding the effect that planning and other supply-side regulations have on innovation and competition is the first step towards fixing them

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Sam Bowman is Director of Competition Policy at the International Center for Law and Economics.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.