Competition and Quality in the Dutch Notary Profession

1
Competition and Quality in the Dutch Notary
Profession

• Joëlle Noailly
• Joint work with Richard Nahuis
• CPB Netherlands Bureau for Economic Policy
  Analysis
• Competition Workshop, The Hague
• March 21, 2006

2
Motivation and Objective

• Deregulation of notary services in the
  Netherlands (1999 Notary Act)
• pioneer in Europe
• recent evaluation from Commission Hammerstein
• Main questions
• Did the deregulation increase the level of
  competition in the profession?
• What is the impact of competition on the quality
  of notary services?

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Outline

• Motives for regulation in the notary profession
• 2. Deregulation Policy 1999 Dutch Notary Act
• 3. Measuring competition
• relative-profits indicator
• entry thresholds indicator
• 4. Impact of competition on quality
• consumer satisfaction
• corrections in notary acts at the Land Registry
• 5. Conclusions and policy implications

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1. Motives for regulation in the notary profession

• Profession generally highly regulated
• professional monopoly
• education, entry regulation, fixed prices,
  advertising
• Public interest approach
• Regulation to correct for market failures
• information asymmetry (credence good)
• externalities
• Private interest approach
• Regulations are anti-competitive measures that
  only protect the private interest of the
  professionals

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The 1999 Notaries Act
Developments since 1999
Regulatory reform

• free entry
• cap of 10 per year until July 2003
• approval of business plan

Appointment
no significant increase in notaries and
offices
longer training period (already so in practice)
Prices

• free prices
• (since July 2003 for real estate services)

? family services, ? large real estate services
Quality control
KNB as public body
some evidence that complaints
increased
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3. Measuring competition

• 2 relevant markets
• national market
• professional customers
• corporate and large real estate services
• local market (town level)
• individual consumers
• family services and small real estate services
• 2 indicators
• Relative profits (national/local, 1996-2002
  period)
• Entry thresholds (local, 1995 and 2003)

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3. Measuring Competition Relative Profits

• Boone (2004)
• Increase in competition ? increase in the
  profitability of most efficient firms relative to
  less efficient ones (decrease in b)
• Data Production Statistics (CBS) in the legal
  services, 1996-2002, N200 offices per year
• Estimation OLS and Fixed Effects

blt0
relative profits
relative variable costs
time dummies
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3. Measuring Competition Relative Profits

• National Market

Trend competition decreases over 1996-1999 and
increases over 1999-2003 FE Comp02 gt Comp96
OLS Comp96 Comp02 Mixed results on the
national market. Some evidence that competition
has increased after 1999
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3. Measuring Competition Relative Profits

• Local markets

Trend no significant increase in competition
after 1999 Only OLS Same level of competition
in 1996 than in 2002
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3. Measuring Competition Entry Thresholds Ratios

• Bresnahan and Reiss (1990, 1991).
• Only applicable to the local market
• Entry threshold critical market size required
  for a firm to break even (P0)
• So if profit margins fall with additional
  competition due to entry, then market size has to
  be higher to compensate (otherwise firms won't
  enter)
• Ratios

gt1 ? Increase in Competition 1 ? Joint monopoly
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3. Measuring Competition Entry Thresholds Ratios

• Data notary offices per town (KNB Yearbooks)
  1995 and 2003, 510 small isolated towns
• Estimation Ordered probit
• ProbNkProbPkgt0 and Pk1lt0
• Demand shifters market size, income per capita,
  elderly, young, average house prices

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3. Measuring Competition Entry Thresholds Ratios

• Entry threshold market size such that PN0
• A monopoly offices needs a market size of about
  6000 potential consumers to be profitable
• Ratios above 1 so entry affects conduct
• No significant difference in entry thresholds
  between 1995 and 2003

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3. Measuring Competition Overall results

• Local market both indicators (RP and ETR) show
  no significant difference between the level of
  competition in 2002/2003 and the level in
  1995/1996.
• National market Mixed results using RP but some
  evidence of an increase in competition after 1999
• Deregulation seems to have benefited more
  professional consumers than individual consumers.

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4. Effect of competition on quality

• Concerns that competition might affect integrity
  and quality of notaries
• Quebec experience
• Commission Hammerstein
• Estimate impact of competition on 2 quality
  indicators
• consumer satisfaction
• corrections in acts at Land Registry
• Consumer satisfaction
• Data consumer surveys (EIM), 2003, N800, 22
  aspects of quality
• Principal component analysis reveals 4 major
  aspects SERVICE, LOCATION, TIME, PRICE
• Competition dummy has no significant impact

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4. Effect of competition on qualityCorrections
in acts

• Data corrections in notary acts at the Land
  Registry, 1995 and 2003, N479 notaries
• Positive correlation with complaints
• In 1995 competition has a negative significant
  effect on corrections. This is not true anymore
  in 2003.

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4. Effect of competition on qualityOverall
results on quality

• Consumer satisfaction not affected by competition
• only surveys after 1999 available
• Corrections in notary acts
• In 2003, competition has no positive impact on
  quality while this was the case in 1995.
• Possible explanation change in nature of
  competition?

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Conclusions and policy implications

• Findings
• Keep in mind that not all the effects of the
  deregulation may have been realized yet
• No significant increase in competition after the
  deregulation. This is especially true for the
  local market (relevant for the individual
  consumer).
• Concern about effect of competition on quality
  seems justified
• Exploit policy options that stimulate competition
  without reducing quality
• Still room to stimulate competition (abolish
  business plan, allow for specialization)
• Extra focus on quality needed, (no reason to
  challenge professional monopoly, more control by
  KNB)
• ? How effective are these policies?