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Government intervention - competition policy

Author: Geoff Riley  Last updated: Sunday 23 September, 2012

The aim of competition policy is promote competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union single market.

Competition policy aims to ensure

  • Wider consumer choice
  • Technological innovation which promotes dynamic efficiency
  • Effective price competition between suppliers

There are four key pillars of competition policy in the UK and in the European Union

  • Antitrust & cartels: This involves the elimination of agreements that seek to restrict competition including price-fixing and other abuses by firms who hold a dominant market position (defined as having a market share in excess of forty per cent).
  • Market liberalisation: Liberalisation involves introducing fresh competition in previously monopolistic sectors such as energy supply, postal services, mobile telecommunications and air transport.
  • State aid control: Competition policy analyses examples of state aid measures to ensure that such measures do not distort competition in the Single Market
  • Merger control: This involves the investigation of mergers and take-overs between firms (e.g. a merger between two large groups which would result in their dominating the market).

Main Roles of the Regulators

Regulators are the rule-enforcers and they are appointed by the government to oversee how a market works and the outcomes that result for both producers and consumers. Examples of regulators include the Office of Fair Trading and the Competition Commission. The European Union Competition Commission is also an important body for the UK economy.

The EU Competition Commission is an important regulator of business activity in the single market. The main UK regulators (namely the Office of Fair Trading and the Competition Commission) are to merge in 2011 as part of a competition reform by the new coalition government.

  • Monitoring and regulating prices: Regulators aim to ensure that companies do not exploit their monopoly power by charging excessive prices. They look at evidence of pricing behaviour and also the rates of return on capital employed to see if there is evidence of ‘profiteering.’ Recently the EU Competition Commission made a ruling on the ‘roaming’ charges of mobile phone operators in the EU and enforced a new maximum price on such charges.
  • Standards of customer service: Companies that fail to meet specified service standards can be fined or have their franchise / license taken away. The regulator may also require that unprofitable services are maintained in the wider public interest e.g. BT keeping phone booths open in rural areas and inner cities; the Royal Mail is still required by law to provide a uniform delivery service at least once a day to all postal addresses in the UK
  • Opening up markets: The aim here is to encourage competition by removing barriers to entry. This might be achieved by forcing the dominant firm in the industry to allow others to use its infrastructure network. A key task for the regulator is to fix a fair access price for firms wanting to use the existing infrastructure. Fair both to the existing firms and also potential challengers.
  • The surrogate competitor: Regulation can act as a form of surrogate competition – attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets. Fear of action by OFT and other regulators may prevent anticompetitive behaviour (i.e. there will be a deterrent effect)

The key role of competition authorities around the world including the European Union is to protect the public interest, particularly against firms abusing their dominant positions - A firm holds a dominant position if its power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers.

Anti-Trust Policy - Abuses of a Dominant Market Position

A firm holds a dominant position if its power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers.

Competition authorities consider a firm’s market share, whether there are credible competitors, whether the business has ownership and control of its own distribution network (achieved through vertical integration) and whether it has favourable access to raw materials.

Holding a dominant position is not wrong if it is the result of the firm's own competitiveness against other businesses! But if the firm exploits this power to stifle competition, this is an anti-competitive practice.

Anti-competitive practices are designed to limit the degree of competition inside a market.
Examples of anti-competitive practices

  • Predatory pricing also known as ‘destroyer pricing’ happens when one or more firms deliberately sets prices below average cost to incur losses for a sufficiently long period of time to eliminate or deter entry by a competitor – and then tries to recoup the losses by raising prices above the level that would ordinarily exist in a competitive market.
  • Vertical restraint in the market: This can happen in a number of ways:
    • Exclusive dealing: This occurs when a retailer undertakes to sell only one manufacturers product. These may be supported with long-term contracts that “lock-in” a retailer to a supplier and can only be terminated by the retailer at high financial cost. Distribution agreements may seek to prevent instances of parallel trade between EU countries (e.g. from lower-priced to higher priced countries).
    • Territorial exclusivity: This exists when a particular retailer is given the sole rights to sell the products of a manufacturer in a specified area.
    • Quantity discounts: Where retailers receive larger price discounts the more of a given manufacturer's product they sell - this gives them an incentive to push one manufacturer's products at the expense of another's.
    • A refusal to supply: Where a retailer is forced to stock the complete range of a manufacturer's products or else he receives none at all, or where supply may be delayed to the disadvantage of a retailer.
  • Collusive practices: These might include agreements on market sharing, price-fixing and agreements on the types of goods to be produced.

Price Fixing and the Law

UK competition law now prohibits almost any attempt to fix prices - for example, you cannot

    • Agree prices with competitors or agree to share markets or limit production to raise prices.
    • Impose minimum prices on different distributors such as shops.
    • Agree with your competitors what purchase price you will offer your suppliers.
    • Cut prices below cost in order to force a weaker competitor out of the market.
    • Under the Competition Act 1998 and Article 81 of the EU Treaty, cartels are prohibited. Any business found to be a member of a cartel can be fined up to 10 per cent of its worldwide turnover. In addition, the Enterprise Act 2002 makes it a criminal offence for individuals to dishonestly take part in the most serious types of cartels. Anyone convicted of the offence could receive a maximum of five years imprisonment and/or an unlimited fine.

Legal Collusion – Horizontal Cooperation between Businesses

Not all instances of collusive behaviour are deemed to be illegal by the European Union Competition Authorities. Practices are not prohibited if the respective agreements "contribute to improving the production or distribution of goods or to promoting technical progress in a market.”

  • Development of improved industry standards of production and safety which benefit the consumer – a good recent example is joint industry standards in Europe for mobile phone chargers
  • Information sharing designed to give better information to consumers
  • Research joint-ventures and know-how agreements which seek to promote innovative and inventive behaviour in a market. The EU has introduced a “R&D Block Exemption Regulation” for this

Market Liberalisation

  • The main principle of EU Competition Policy is that consumer welfare is best served by introducing competition in markets where monopoly power exists.
  • Frequently, these monopolies have been in network industries for example transport, energy and telecommunications.
  • In these sectors, a distinction must be made between the infrastructure and the services provided directly to consumers using this infrastructure.

While it is often difficult to establish a second, competing infrastructure, for reasons linked to investment costs and efficiency (i.e. the natural monopoly arguments linked to economies of scale and a high minimum efficient scale) it is possible and desirable to create competitive conditions in respect of the services provided.

State Aid in Markets

The argument for monitoring state aid given to private and state businesses by member Government is that by giving certain firms or products favoured treatment to the detriment of other firms or products, state aid disrupts normal competitive forces. Under the current European state aid rules, a company can be rescued once. However, any restructuring aid offered by a national government must be approved as being part of a feasible and coherent plan to restore the firm’s long-term viability. Government aid designed to boost research and development, regional economic development and the promotion of small businesses is normally permitted.

Merger Policy in the UK and the European Union

Corporate restructuring is a fact of life. There is a natural tendency for markets to consolidate over take through a process of horizontal and vertical integration. The main issue for competition policy is whether a proposed merger or takeover between two businesses is thought to lead to a substantial lessening of competitive pressures in the market and risks leading to a level of market concentration when collusive behaviour might become a reality.

When companies combine via a merger, an acquisition or the creation of a joint venture, this generally has a positive impact on markets: firms usually become more efficient, competition intensifies and the final consumer will benefit from higher-quality goods at fairer prices.

However, mergers which create or strengthen a dominant market position can, after investigation, be prohibited in order to prevent ensuing abuses. Acquiring a dominant position by buying out competitors is in contravention of EU competition law. Companies are usually able to address the competition problems, normally by offering to divest (sell or off-load) part of their businesses. For example, in 2007, the UK Competition Commission decided that BSkyB would be forced to sell some of its 17.9% stake in ITV.

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