Competition, Legislation And Regulation

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Competition, Legislation And Regulation

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Competition, Legislation And Regulation

  1. 1. Competition, Legislation and Regulation
  2. 2. Market Structure <ul><li>The degree of competition in an industry: </li></ul><ul><ul><li>Concentration Ratio (CR) – The proportion of market share accounted for by a number of firms in the industry </li></ul></ul><ul><ul><li>A five firm CR of 60% means the top five firms in the industry account for 60% of total sales </li></ul></ul>
  3. 3. Market Structure <ul><li>Perfect Competition : </li></ul><ul><ul><li>Large number of buyers and sellers </li></ul></ul><ul><ul><li>Homogenous (identical) products </li></ul></ul><ul><ul><li>Firms are price takers </li></ul></ul><ul><ul><li>Perfect knowledge </li></ul></ul><ul><ul><li>No barriers to entry and exit </li></ul></ul>
  4. 4. Market Structure <ul><li>Monopolistic or Imperfect Competition </li></ul><ul><ul><li>Many buyers and sellers </li></ul></ul><ul><ul><li>Some degree of control over market </li></ul></ul><ul><ul><li>Differentiated products </li></ul></ul><ul><ul><li>Relatively few barriers to entry </li></ul></ul><ul><ul><li>N.B. Do not confuse ‘monopolistic’ with ‘monopoly’ </li></ul></ul>
  5. 5. Market Structure <ul><li>Oligopoly – Competition between the few – industry dominated by relatively small number of large firms </li></ul><ul><ul><li>Barriers to entry </li></ul></ul><ul><ul><li>Non-price competition </li></ul></ul><ul><ul><li>Price stability? </li></ul></ul><ul><ul><li>Homogenous or highly differentiated/branded </li></ul></ul><ul><ul><li>Potential for collusion </li></ul></ul><ul><ul><li>Potential for high profits </li></ul></ul>
  6. 6. Market Structure <ul><li>Duopoly – Industry dominated by two large firms </li></ul><ul><ul><li>Market leader </li></ul></ul><ul><ul><li>Price leader </li></ul></ul><ul><ul><li>Barriers to entry </li></ul></ul><ul><ul><li>Non-price competition </li></ul></ul><ul><ul><li>Potential for abnormal profit </li></ul></ul>
  7. 7. Market Structure <ul><li>Monopoly – where firm is the industry or where one firm dominates the market </li></ul><ul><ul><li>Monopoly power is said to exist if market share > 25% </li></ul></ul><ul><ul><li>Natural monopolies – water, gas, electricity </li></ul></ul><ul><ul><li>High barriers to entry </li></ul></ul><ul><ul><li>Abnormal profits </li></ul></ul><ul><ul><li>Can exercise control over price OR output </li></ul></ul><ul><ul><li>Monopoly power may be necessary for development of some products </li></ul></ul>
  8. 8. Market Structure Highly Competitive High Degree of Market Power Perfect Competition Farming Stocks Currencies Monopolistic Competition Restaurants Small Builders Solicitors Oligopoly Supermarkets Banks Electrical Goods Monopoly Gas Water Electricity Tele- communications
  9. 9. Legal Framework for Business <ul><li>Legislation - Laws made to protect consumers, workers, shareholders, environment from business activity </li></ul><ul><ul><li>– necessity of observing the law for business – adds to cost, red tape bureaucracy, etc. </li></ul></ul><ul><li>Covers almost every aspect of a business’s activities </li></ul>
  10. 10. Legal Framework <ul><li>Consumer legislation: </li></ul><ul><ul><li>Sale of Goods </li></ul></ul><ul><ul><li>Trade Descriptions </li></ul></ul><ul><ul><li>Consumer Protection </li></ul></ul><ul><ul><li>Food Safety </li></ul></ul><ul><ul><li>Supply of Goods and Services </li></ul></ul><ul><ul><li>Weights and Measures </li></ul></ul>
  11. 11. Legal Framework <ul><li>Employee Protection : </li></ul><ul><ul><li>Health and Safety at work </li></ul></ul><ul><ul><li>Minimum Wage </li></ul></ul><ul><ul><li>Discrimination </li></ul></ul><ul><ul><li>Unfair Dismissal </li></ul></ul><ul><ul><li>Recruitment </li></ul></ul><ul><ul><li>Redundancy </li></ul></ul><ul><ul><li>Trade Union Legislation </li></ul></ul><ul><ul><li>Contracts and terms of work </li></ul></ul><ul><ul><li>Working Time Directive </li></ul></ul><ul><ul><li>Disabled Persons </li></ul></ul>
  12. 12. Legal Framework <ul><li>Other aspects affecting business : </li></ul><ul><ul><li>Employers liability insurance </li></ul></ul><ul><ul><li>Display screens (VDUs) </li></ul></ul><ul><ul><li>Fire precautions </li></ul></ul><ul><ul><li>Data Protection </li></ul></ul><ul><ul><li>Accessibility legislation </li></ul></ul><ul><ul><li>Hazards and risks </li></ul></ul><ul><ul><li>Working environments – heating, lighting, ventilation, etc. </li></ul></ul><ul><ul><li>Patents </li></ul></ul><ul><ul><li>Licences </li></ul></ul><ul><ul><li>Planning Laws </li></ul></ul>
  13. 13. Issues: <ul><li>The extent of the regulation and the legal framework within which businesses operate all increases costs both direct and indirect (administration, monitoring, etc.) </li></ul><ul><li>Balance between protection and suffocating enterprise/initiative </li></ul>
  14. 14. Regulation <ul><li>Monitoring business activity to act in the consumer’s interest: </li></ul><ul><ul><li>Competition Commission – investigates mergers, takeovers, anti-competitive behaviour </li></ul></ul><ul><ul><li>Office of Fair Trading (OFT) – ensuring efficient operation of markets within the law </li></ul></ul><ul><ul><li>Regulation of former nationalised industries – OFTEL, OFWAT, OFRR, OFGEM, etc. </li></ul></ul><ul><ul><li>Advertising Standards Authority (ASA) – legal, decent, honest </li></ul></ul>
  15. 15. Regulation <ul><li>Forms of anti-competitive behaviour </li></ul><ul><ul><li>Price fixing </li></ul></ul><ul><ul><li>Cartels </li></ul></ul><ul><ul><li>Collusion </li></ul></ul><ul><ul><li>Predatory or destroyer pricing </li></ul></ul><ul><ul><li>Distribution agreements </li></ul></ul><ul><ul><li>Insider dealing/trading </li></ul></ul>
  16. 16. Self Regulation <ul><li>Where business/industry monitors its own behaviour – often through an agreed code of practice. e.g. </li></ul><ul><ul><li>PCC – Press Complaints Commission </li></ul></ul><ul><ul><li>Portman Group – alcoholic drinks industry </li></ul></ul><ul><ul><li>FSA – Financial Services Authority </li></ul></ul><ul><ul><li>BMA – British Medical Association </li></ul></ul>

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