Editorial: Flawed market regulation fails consumers

Classic free market economic theory argues that there is little, if any, need for regulation.

Voluntary exchange between buyers and sellers in a market serves the interests of both parties, without the need for any outside control.

If a product is in short supply relative to demand, its price will rise, indicating to producers that there are profits to be made if they produce more of that good.

However, there will always be certain circumstances in which the market fails on its own terms because the flow of information and incentives does not work correctly.

The EU is focused on protecting consumers from various types of market failures. There has always been a broad consensus among politicians that regulation is needed to protect consumers from the possible abuse of businesses with a dominant position, especially in small markets, as is the case in Malta.

The competition regulatory function is vested in the Malta Competition and Consumer Affairs Authority (MCCAA). It is, therefore, worrying that the post of director general of the MCCAA has remained unfilled for over 18 months.

A spokesperson told Times of Malta that it is “engaged in the recruitment process”, adding that MCCAA is committed to ensuring the individual ultimately appointed to this role possesses the necessary competence, expertise and leadership qualities to oversee the operations effectively.

It is not clear why no suitable candidates with experience in “competition law, industrial organisation economics, and, preferably, knowledge of consumer matters” applied for this post.

Is this due to unattractive financial remuneration or are the skill set and qualifications necessary to qualify for this post difficult to find? In this latter case, did the government consider opening applications to EU citizens, as it has frequently done for many other posts in financial services regulation?

Whatever the reason for this delay in appointing the head of the MCCAA, the interests of consumers are being put at risk at a time when concerns about the cost of living are putting pressure on many households.  

Small markets in goods and services could suffer from three key market failures. Market power is often concentrated in the hands of one or two business operators. Businesses in a particular sector can be so strong that they can raise prices or reduce the quality of their products without new competitors being able to enter successfully or customers being able to switch away. 

Another risk is that some businesses can produce goods and services that they can sell successfully but, in doing so, they cause pollution, the cost of which is borne by people other than the buyer or seller. The public must be protected from such externalities.

The existence of information asymmetries results in consumers not having sufficient knowledge about a product or service to make informed decisions about what is in their best interests, leaving them vulnerable to exploitation by unscrupulous sellers of goods and services.

Consumers often lack the legal and technical expertise to recognise when they are being taken advantage of by businesses with a dominant market position. They need the protection of the MCCAA, which must be fully functional as a regulator at all times.

Competition authorities and regulators have a mandate to promote competition. This is a complex job.

Decisions by regulators not only have an immediate effect on the companies directly involved but they have broader signalling and deterrent effects on a wider range of companies that may be considering exploiting their dominant position in a small market.

It is, therefore, crucial to ensure that MCCAA is fully functional at all times.