government deregulation of markets
Another important policy in industries where welfare and efficiency might be affected by the dominant market power of some suppliers is to open up markets and encourage the entry of new suppliers – a process called de-regulation of product markets.
Examples of this in the UK include the opening up of markets for household energy supplies, the proposed ending of the 150 year Post Office monopoly and also financial deregulation affecting both banks and building societies.
Impact of the European Union
The expansion of the European Single Market has accelerated the process of market liberalisation. The Single Market seeks to promote four freedoms – namely the free movement of goods, services, financial capital and labour.
In the long term we can expect to see the microeconomic effects of the EU Single Market working their way through many British markets and industries and the general expectation is that competitive pressures for all businesses working inside the European Union will continue to intensify.
Making Markets More Contestable
Product market liberalisation involves breaking down barriers to entry in industries and making them more contestable. The aim is to boost market supply, bring down prices for consumers and encourage an increase in competition, investment and productivity leading to a rise in economic efficiency.
In the long term, if product markets become more competitive and investment flows into these industries, there are macroeconomic implications for example an increase in an economy’s underlying trend rate of economic growth which might contribute to an improvement in average standards of living.
The Office of Fair Trading (www.oft.gov.uk) believes that enhanced competitive forces can lead to an enhancement in the allocation of resources as this quote from their web site makes clear.
Competitive markets provide the best means of ensuring that the economy's resources are put to their best use by encouraging enterprise and efficiency, and widening choice. Where markets work well, they provide strong incentives for good performance - encouraging firms to improve productivity, to reduce prices and to innovate; whilst rewarding consumers with lower prices, higher quality, and wider choice. By encouraging efficiency, competition in the domestic market - whether between domestic firms alone or between those and overseas firms - also contributes to our international competitiveness. Where markets operate freely and effectively competition can be expected to bring all the benefits mentioned above. However, markets can and do fail.
Competition policy is therefore used to ensure the efficient workings of markets and to avoid such market failures, most notably to prevent abuses of market power (that is less innovation, higher prices, lower choice, and lower quality than would result from efficient competition). Competition analysis seeks to determine whether existing or proposed agreements or practices have led or will lead to abuses of market power, and if so to impose remedies to rectify the problem.
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