Government ensures competition so that firms act in the public interest.
If there are lots of firms in a market then they will tend to compete on price. Customers will get more choice at lower prices.
Government intervention was also thought necessary with the privatised utilities until there was sufficient competition in the industry.
The Office of Fair Trading
The OFT is a government body responsible for ensuring that businesses act in line with competition law.
The Competition Commission
The Competition Commission is divided into two parts, one dealing with the traditional reporting duties and the other with appeals in the form of Appeals Tribunals.
The reporting function is concerned with monopolies, mergers, and regulatory inquiries. Although it does not have the power to initiate its own inquiries, it will act on cases referred to it by the DFTG (Director General of Fair Trading) or the Secretary of State for Trade and industry.
The Appeals Tribunal hear appeals against decisions and penalties levied by the DFTG.
Privatisation of British Telecom, British Gas, the water, sewage and electricity industries and the railways led to the establishment of dedicated regulatory offices headed by their own director generals.
These regulatory bodies (OFTEL, OFWAT, OFGEM and ORR) have the same investigative and punishment powers as the DGFT.
The director general can also limit price rises if they believe that there are efficiency savings to be made.
Merger occurs when a firm joins with another firm.
Monopoly is a form of market structure in which there is only one seller of a good or service. A firm is usually described as a monopoly if it has at least 25% of the market share and therefore has a dominant position.
Restrictive Practices are techniques used by larger firms to prevent other firms from joining the market. It includes price-fixing, market sharing, monopolising or attempting to monopolise markets.
1973 Fair Trading Act states that any merger involving more than 25% market share is eligible for referral to the Competition Commission (CC).
At least one of the firms must operate in the UK.
Dealing with it…
OFT makes provisional assessment of likely mergers for investigation.
OFT advises the Secretary of State for Trade and Industry (SS) who decides whether the proposed merger should be referred to the CC.
CC conducts investigation to decide whether merger is in the public interest.
The can be allowed, prohibited or given specific conditions.
Their conclusions are sent to SS who makes final decision.
1998 Competition Act states that OFT can investigate any firm thought to be abusing market power at either a local or national scale.
Fines of up to 10% of annual turnover can be levied for each year of the infringement.
Dealing with it…
OFT must decide whether a firm has a ‘dominant’ market position (not only a matter of market share but also contestability).
OFT has to determine that the firm is engaging in anti-competitive practices (e.g. unfair pricing) on the basis of its dominance before a fine can be imposed.
The EU Commission will consider investigating any merger involving world sales of more than €5bn.
EU Commission has the power to ban activities and impose fines to a maximum of 10% of worldwide turnover.
1998 Competition Act made price fixing and other restrictive practices illegal as the threaten to “appreciably” reduce the level of competition in an industry.
Can be fined up to 10% of annual turnover for every year in which they were involved in the practices.
Restrictive practices include: Price fixing, agreeing to reduce output to drive up market prices, making agreements to share markets, the imposition of minimum resale prices.