Services sector sees weakened competition as larger players grow market share – CCPC

Competition and Consumer Protection Commission report shows an increase in market concentration and markups in the sector

CCPC chair Brian McHugh said competitive markets are vital for a healthy economy and the report shows 'an increase in concentration and average markups, meaning the promotion of strong competition has never been more important'.

Company competition has “weakened in several important areas” across the Irish services sector with the largest companies increasing their market share significantly since 2008, the Competition and Consumer Protection Commission (CCPC) revealed in a report.

In the report, which looked at competition within the services sector between the years 2008 and 2022, the CCPC found the average market share of the top four businesses in the service sector has increased from 25% in 2008 to 37% in 2022.

Similarly, the average market share of the top 10 companies in the services sector increased by 13 percentage points over that period to 47%.

The report said these market shares were “broadly stable” between the years 2008 and 2015, after which they started to increase more significantly. The report stated: 

This pattern is not unique, mirroring similar trends observed across other advanced economies. 

It noted the increase was most pronounced in more “digitally intensive sectors” such as information and communication, which includes the tech sector — as well as the professional, scientific, and technical services sector, which also includes accounting and legal services.

The report said: “While Ireland’s services sector demonstrates resilience and adaptability in a number of ways, the balance of evidence suggests that competitive intensity has weakened in several important areas.

“Strong competition is critical for the health of the Irish economy and the welfare of consumers, and some of these results point to rising risks to competition in key parts of the Irish economy.”

Trend towards consolidation 

The report identified a “clear trend” towards consolidation over the past 15 years over the largest companies, with it being particularly pronounced in the information and communication as well as professional, scientific, and technical sectors, where a “small number of businesses now account for a larger share of turnover”.

CCPC chairman Brian McHugh said competitive markets are vital for a “healthy economy”, and the “initial findings show an increase in concentration and average mark-ups, meaning the promotion of strong competition has never been more important”. He added: 

The report acts as a warning about weakening competition in some sectors. 

In terms of the impact on prices, the CCPC found that aggregate mark-ups in the services sector “increased modestly” over the 15 years looked at in the report.

Mark-ups estimate the difference between price and marginal cost of producing that service. The average mark-up across the sector stood at 3%, with some sectors seeing higher increases — with the professional, scientific, and technical sector seeing an 8.2% increase.

The report said that barriers to entry and expansion in Ireland are “influential” when it comes to the increasing concentration among some of the larger companies operating in the services sector.

The report said: “Financial capacity, regulatory burdens, and legal fees in particular were major challenges for entry, while financial capacity and knowledge sharing barriers affected expansion.”

Over the period covered in the report, net entry to the service sector has been positive, with entry rates generally exceeding exit rates “though this aggregate trend masks industry divergence”. The report said: 

Increasing long-term survival rates, coupled with the declining exit rate, may be a sign of a decrease in the level of business dynamism in the services sector in Ireland. 

In less dynamic industries, the long-term survival rate is typically higher as less productive and more inefficient businesses remain active while in the absence of challenge by rival businesses.

“While it is positive that new businesses are able to successfully enter the market and win enough business from incumbent businesses to survive, an increase in longer-term survival rates can indicate a lessening in competition,” the report said.

Towards the end of the report’s time series, it noted a decline in the number of new businesses being formed which it said “reinforces findings about weakening business dynamism”.