Competition PolicyCompetition Policy

Unit 3Unit 3

Four main bodies Four main bodies that UK firms may that UK firms may

encounter…encounter…

GovermentGoverment

Government ensures competition so that firms Government ensures competition so that firms act in the public interest.act in the public interest.

If there are lots of firms in a market then they will If there are lots of firms in a market then they will tend to compete on price. Customers will get tend to compete on price. Customers will get more choice at lower prices.more choice at lower prices.

Government intervention was also thought Government intervention was also thought necessary with the privatised utilities until there necessary with the privatised utilities until there was sufficient competition in the industry. was sufficient competition in the industry.

The Office of Fair TradingThe Office of Fair Trading

The OFT is a government The OFT is a government body responsible for ensuring body responsible for ensuring that businesses act in line with that businesses act in line with competition law. competition law.

The Competition CommissionThe Competition Commission

The Competition Commission is divided into two parts, The Competition Commission is divided into two parts, one dealing with the traditional reporting duties and the one dealing with the traditional reporting duties and the other with appeals in the form of Appeals Tribunals.other with appeals in the form of Appeals Tribunals.

The reporting function is concerned with monopolies, The reporting function is concerned with monopolies, mergers, and regulatory inquiries. Although it does not mergers, and regulatory inquiries. Although it does not have the power to initiate its own inquiries, it will act on have the power to initiate its own inquiries, it will act on cases referred to it by the DFTG (Director General of cases referred to it by the DFTG (Director General of Fair Trading) or the Secretary of State for Trade and Fair Trading) or the Secretary of State for Trade and industry.industry.

The Appeals Tribunal hear appeals against decisions The Appeals Tribunal hear appeals against decisions and penalties levied by the DFTG.and penalties levied by the DFTG.

RegulatorsRegulators Privatisation of British Telecom, British Gas, the water, Privatisation of British Telecom, British Gas, the water,

sewage and electricity industries and the railways led to sewage and electricity industries and the railways led to the establishment of dedicated regulatory offices headed the establishment of dedicated regulatory offices headed by their own director generals.by their own director generals.

These regulatory bodies (OFTEL, OFWAT, OFGEM and These regulatory bodies (OFTEL, OFWAT, OFGEM and ORR) have the same investigative and punishment ORR) have the same investigative and punishment powers as the DGFT.powers as the DGFT.

The director general can also limit price rises if they The director general can also limit price rises if they believe that there are efficiency savings to be made.believe that there are efficiency savings to be made.

Define…Define… MergerMerger occurs when a firm joins with another firm. occurs when a firm joins with another firm.

MonopolyMonopoly is a form of market structure in which is a form of market structure in which there is only one seller of a good or service. A firm there is only one seller of a good or service. A firm is usually described as a monopoly if it has at is usually described as a monopoly if it has at least 25% of the market share and therefore has a least 25% of the market share and therefore has a dominant position. dominant position.

Restrictive Practices Restrictive Practices are techniques used by are techniques used by larger firms to prevent other firms from joining the larger firms to prevent other firms from joining the market. It includes price-fixing, market sharing, market. It includes price-fixing, market sharing, monopolising or attempting to monopolise monopolising or attempting to monopolise markets. markets.

Mergers PolicyMergers Policy

1973 Fair Trading Act states that any 1973 Fair Trading Act states that any merger involving more than 25% market merger involving more than 25% market share is eligible for referral to the share is eligible for referral to the Competition Commission (CC). Competition Commission (CC).

At least one of the firms must operate in At least one of the firms must operate in the UK.the UK.

Dealing with it…Dealing with it… OFT makes provisional assessment of likely OFT makes provisional assessment of likely

mergers for investigation. mergers for investigation. OFT advises the Secretary of State for Trade OFT advises the Secretary of State for Trade

and Industry (SS) who decides whether the and Industry (SS) who decides whether the proposed merger should be referred to the CC. proposed merger should be referred to the CC.

CC conducts investigation to decide whether CC conducts investigation to decide whether merger is in the public interest.merger is in the public interest.

The can be allowed, prohibited or given specific The can be allowed, prohibited or given specific conditions. conditions.

Their conclusions are sent to SS who makes Their conclusions are sent to SS who makes final decision. final decision.

Monopoly PolicyMonopoly Policy

1998 Competition Act states that OFT can 1998 Competition Act states that OFT can investigate any firm thought to be abusing investigate any firm thought to be abusing market power at either a local or national market power at either a local or national scale. scale.

Fines of up to 10% of annual turnover can Fines of up to 10% of annual turnover can be levied for each year of the infringement. be levied for each year of the infringement.

Dealing with it…Dealing with it…

OFT must decide whether a firm has a OFT must decide whether a firm has a ‘dominant’ market position (not only a ‘dominant’ market position (not only a matter of market share but also matter of market share but also contestability).contestability).

OFT has to determine that the firm is OFT has to determine that the firm is engaging in anti-competitive practices engaging in anti-competitive practices (e.g. unfair pricing) on the basis of its (e.g. unfair pricing) on the basis of its dominance before a fine can be imposed. dominance before a fine can be imposed.

EU PolicyEU Policy

The EU Commission will consider The EU Commission will consider investigating any merger involving world investigating any merger involving world sales of more than €5bn.sales of more than €5bn.

EU Commission has the power to ban EU Commission has the power to ban activities and impose fines to a maximum activities and impose fines to a maximum of 10% of worldwide turnover. of 10% of worldwide turnover.

Restrictive PracticesRestrictive Practices 1998 Competition Act made price fixing and 1998 Competition Act made price fixing and

other restrictive practices illegal as the threaten other restrictive practices illegal as the threaten to “appreciably” reduce the level of competition to “appreciably” reduce the level of competition in an industry.in an industry.

Can be fined up to 10% of annual turnover for Can be fined up to 10% of annual turnover for every year in which they were involved in the every year in which they were involved in the practices.practices.

Restrictive practices include: Price fixing, Restrictive practices include: Price fixing, agreeing to reduce output to drive up market agreeing to reduce output to drive up market prices, making agreements to share markets, prices, making agreements to share markets, the imposition of minimum resale prices. the imposition of minimum resale prices.