Business

Study Notes

Competition Legislation

Level:
A Level, IB, BTEC Level 3
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Competition legislation refers to the laws and regulations that businesses need to comply with in relation to how they compete in markets.

Whilst competition legislation is very complex, the main aims of it are to:

• Widen consumer choice in markets for goods and services
• Ensure effective price competition between suppliers
• Deal with anti-competitive behaviour which might have a negative effect on consumers

Some key example of competition legislation are:

Anti-competitive agreements

Both UK and European competition law prohibit agreements, arrangements and concerted business practices which appreciably prevent, restrict or distort competition (or have the intention of so doing).

Anti-competitive agreements include those which:

  • Directly or indirectly fix purchase or selling prices, or any other trading condition (e.g. discounts or rebates)
  • Limit or control production, markets, technical development or investment (e.g. setting quotas or levels of output)
  • Share markets or sources of supply

Price fixing (mentioned above) is a prohibited activity and can lead to significant business fines. Specifically, businesses are not allowed to:

• Agree prices with competitors

• Share markets or limit production to raise prices

• Impose minimum prices on different distributors such as shops

•Agree with competitors what purchase price will be offered to suppliers

•Cut prices below cost in order to force a smaller or weaker competitor out of the market

Abuse of dominant position

What happens when businesses become so large they they effectively dominate the market in which they compete? Here, competition legislation seeks to protect other business and consumers against "abuse of dominant position".

Both UK and EC competition law prohibit businesses with significant market shares unfairly exploiting their strong market positions.

If a business has a market share of 50% or more, then it is assumed to be "dominant".

Having a dominant position does not in itself breach competition law. However - it is the abuse of that position that is prohibited and which has to be proved.

Examples of abusing a dominant market position would include:

  • Imposing unfair trading terms, such as exclusivity
  • Excessive, predatory or discriminatory pricing
  • Refusal to supply or provide access to essential facilities
  • Tying (i.e. stipulating that a buyer wishing to purchase one product must also purchase other products)

The penalties for companies and directors of falling foul of competition legislation can be significant"

  • Up to 10% of annual sales
  • Criminal prosecution
  • Disqualification as directors
  • Civil action by those affected

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