external environment - regulation of competition
Richard Bowett describes how and why the Government seeks to regulate the nature of competition in markets.
Monopolies & Mergers Legislation: Anti-Competitive Practices
A monopoly is defined in the UK as any business with a market share of 25%+. These businesses have a lot of market power which is sometimes abused.
An important potential form of abuse is ‘anti-competitive’ practices where a large business tries to make life difficult for smaller businesses (ideally putting them out of business) and this gives consumers less choice, higher prices and worse service.
These anti-competitive practices are as follows:-
These are illegal agreements between businesses in the same market to ‘gang up’ on consumers, suppliers or competitors eg by putting prices up to harm consumers, or down to harm competitors.
Keeping Competitors Out
This can be done by erecting artificial barriers to entry. Another trick is to use ‘destroyer pricing’ and cut the price to make entering the market unattractive, or too costly for a new entrant, and raising the price again when they have ‘won’. The existing firm needs to have lower costs (eg through economies of scale) and/or larger financial reserves to keep this up
For example, pressuring suppliers not to supply to competitors. Another one is to pressure retailers not to stock the products of competitors, or to stock them disadvantageously. For example, the eye-level shelves in a supermarket generate the best sales, so putting the brands of a competitor on the bottom shelves (also associated with discount brands) damages the sales of the competitor.
Arguments For Monopolies
1. A monopoly is a matter of definition. Firstly, it depends on how you define the product. Coca-Cola has a monopoly on sales of Coca-Cola, but not on sales of non-alcoholic refreshments. Secondly, it depends on how you define the market. Tesco has a very high market share in the UK, but is not especially dominant in the EU market, let alone the world market.
2. Monopolies usually earn above-normal profits, which is considered to ‘rip-off’ the consumer. On the other hand, some products are very expensive to develop, especially the R&D costs. For example, developing a new medicine, or finding and developing a new oil-field can be hugely expensive and sometimes ends in failure. Without the promise of large profits businesses would not bother and we would all be the losers.
UK Competition Legislation
The main areas of UK competition legislation are:
1. Monopolies & Restrictive Practices (inquiry & Control) Act 1948 & Monopolies & Mergers Act 1965. These Acts set up the Competition Commission (as it is now called) with the power to block business deals eg mergers that are ‘against the public interest’. One issue is what this actually means, and long and expensive arguments are usually involved with each side arguing that a proposed deal is or isn’t ‘against the public interest’.
2. Restrictive Trade Practices Act 1956 (goods) & Restrictive Practices Act 1976 (services). A ‘court’ was set up to decide which restrictive practices were acceptable and which not. Businesses were expected to go voluntarily to this ‘court’ for a decision.
3. Fair Trading Act 1973. This Act defined a monopoly at 25% of market share, and set up various official bodies to oversee the arrangements for controlling this.
4. Competition Act 1980. This Act allowed the Minister in charge to instigate an investigation into monopoly practices if he thought it necessary.
5. Telecommunications Act 1984. This Act made the Competition Commission independent of the government. It also privatised BT and forced BT to accept competition into the market (BT was a nationalised monopoly before).
6. Competition Act 1998. This Act was designed to match EU law, and to control anti-competitive practices.
The Competition Commission (formerly the MMC)
The job of this independent body is to examine alleged cases of anti-competitive practices, or abuse of monopoly power, and report to the Minister as to whether further action (such as forbidding a merger) is ‘in the public interest’. It has been very active over the years, although it is frequently accused of favouring business at the expense of consumers.
The EU & Anti-Competitive Practices
The EU has a very bad press in the UK. It is actually founded on the principles of free trade, competition, efficiency and economic growth. It is true, however, that many of its decision make this hard to believe, but the founding principle make this very clear. The EU started with the Treaty of Rome. Article 85 of this treaty forbids agreements between member states which work to protect business from competition. Article 86 forbids abuse of monopoly power. The regulation of competition is gradually passing from member states to the EU, especially for larger businesses with interests in more than one EU country.
Regulation of Business
There are quite a few businesses that used to be nationalised. For one reason or another, usually because of ‘natural monopoly’, these businesses have remained in a very dominant position. To limit their ability to act against consumers, they are all subject to a controlling body of independent supervisors.
The main industry regulators are:
OFTEL for the telecommunications market, and especially BT
OFGAS for the gas industry
OFWAT for water
OFFER for electricity.
The main objectives of these industry regulators are:
- To agree a limit to price increases. This is usually tied to promises about increased efficiency. For example, an agreement set at RPI – 1% means prices can only rise at 1% less than inflation, so to make any profit at all the business has to generate efficiencies (cost savings) of more than 1%.
- To agree methods of allowing more competition into the market. For example, BT controls most of the final link between the telephone network and the consumer’s house. This limits the ability of competitors to offer telephone and internet services. BT has been forced to open up access to its own network (at reasonable, not extortionate, prices) to allow more competition into the market.
There are many other arrangements by which different kinds of business, and different markets, are regulated. For example, the Financial Services Authority (FSA) oversees all financial businesses, especially those dealing with consumers.
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