Competition policy covers the different ways in which the competition authorities of national governments and also the European Union seeks to make markets work better and achieve a higher level of economic efficiency and economic welfare.

The Main Aims of Competition Policy

The aim of competition policy is promote competition; make markets work better and contribute towards increased efficiency and competitiveness of the UK economy within the European Union single market. Competition policy aims to ensure:

• Wider consumer choice in markets for goods and services.
• Technological innovation which promotes gains in dynamic efficiency.
• Effective price competition between suppliers.
• Investigating allegations of anti-competitive behaviour within markets which might have a negative effect on consumer welfare.

There are four pillars of competition policy in the UK and in the European Union:

• Antitrust & cartels: This involves the elimination of agreements which seek to restrict competition (e.g. price-fixing agreements, or cartels) and of abuses by firms who hold a dominant position in a market.
• Market liberalisation: Liberalisation involves introducing fresh competition in previously monopolistic sectors e.g. energy supply, telecommunications, air transport and postal services together with new arrangements for car retailers inside the single market.
• State aid control: Competition policy analyses examples of state aid measures by Member State governments to ensure that such measures do not artificially distort competition in the Single Market (e.g. the prohibition of a state grant designed to keep a loss-making firm in business even though it has no prospect of long-term recovery).
• Merger control: This involves the investigation of mergers and take-overs between firms (e.g. a merger between two large groups which would result in their dominating the market).

Anti-Trust Policy - Abuses of a Dominant Market Position

A firm holds a dominant position if its economic power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers.

In appraising a firm's economic power in the marketplace, the EU Commission considers its market share and other factors such as whether there are credible competitors, whether the firm has ownership and control of its own distribution network and whether it has favourable access to raw materials. Note here that market share is not the sole determinant of economic power in an industry

Holding a dominant position is not wrong in itself if it is the result of the firm's own effectiveness and competitiveness against other businesses. But if the firm exploits this power to stifle competition, this is deemed to be an anti-competitive practice.

A recent example of this has been the long investigation and legal battle by the EU Commission into the alleged abuse of market power by Microsoft. Microsoft was accused of continuing to abuse its monopoly in the software market. The investigators alleged that Microsoft bundled Media Player with Windows, unfairly damaging rival programs such as Real Networks’ RealPlayer and Apple Computer’s QuickTime. The investigation and fall-out has now lasted more than eight years. In March 2004 the EU fine Microsoft €497m levied in March 2004 for its alleged abuse of its dominant position in the operating software and server software market. In July 2006, a Guardian Unlimited Business | | EU fines Microsoft €280mfurther fine of £194m was imposed.

Anti-Competitive Practices:

Anti-competitive practices are best defined as strategies designed deliberately to limit the degree of competition inside a market. Such actions can be taken by one firm in isolation or a number of firms engaged in explicit or implicit collusion. Since 1998 there have been numerous investigations in industries such as chemicals, banks, pharmaceuticals, airlines, beer, and paper, plasterboard, food preservatives and computer games!

Examples of anti-competitive practices

• Predatory pricing financed through cross-subsidization (not all price discrimination is anti competitive though – much of it is simply a genuine attempt to remain competitive in a market). An example of an allegation of predatory pricing came in 2005 when Wal-Mart was accused of using this strategy as it tried to break into the German food retail market. Wal-Mart faced accusations that it was using short-term predatory pricing to put small shopkeepers out of business. In July 2006, it was announced that Wal-Mart was pulling out of Germany having sold its stores to another business.
• Vertical restraint in the market:
• Exclusive dealing: This occurs when a retailer undertakes to sell only one manufacturer's product and not the output of a rival firm. These may be supported with long-term contracts that bind or “lock-in” a retailer to a supplier and can only be terminated by the retailer at high financial cost. Distribution agreements may seek to prevent instances of parallel trade between EU countries (e.g. from lower-priced to higher priced countries)
• Territorial exclusivity: This exists when a particular retailer is given the sole rights to sell the products of a manufacturer in a specified area
• Quantity discounts: Where retailers receive progressively larger price discounts the more of a given manufacturer's product they sell - this gives them an incentive to push one manufacturer's products at the expense of another's in order to widen their own profit margins
• A refusal to supply: Where a retailer is forced to stock the complete range of a manufacturer's products or else he receives none at all, or where supply may be delayed to the disadvantage of a retailer
• Creation of artificial barriers to entry: Through advertising and marketing and brand proliferation which increase the costs of a new firm successfully entering a market
• Collusive practices: These might include agreements on market sharing, price fixing and agreements on the types of goods to be produced.

Price Fixing – The Office of Fair Trading

UK competition law now explicitly prohibits almost any attempt to fix prices - for example, you cannot:

• Agree prices with your competitors, e.g. you can't agree to work from a shared minimum price list
• Share markets or limit production to raise prices
• Impose minimum prices on different distributors such as shops
• Agree with your competitors what purchase price you will offer your suppliers
• Cut prices below cost in order to force a smaller or weaker competitor out of the market
• The law doesn't just cover formal agreements. It also includes other activities with a price-fixing effect. For example, you shouldn't discuss your pricing plans with your competitors. If you then all "happen" to raise your prices, you are fixing prices.

There have been many examples of allegations of and investigations in price fixing and other forms of collusive behaviour in UK and European markets in recent years. They all provide interesting evidence of how the competition authorities both in the UK and in the European Union are using their enhanced powers under new competition laws to investigate possible instances of price fixing or anti-competitive behaviour.

Suggestions for wider reading on price fixing and cartels
Breach of competition law by 50 independent schools (November 2005)
Chemical firms face price fixing probe:
Competition Commission of the European Union
Enquiry begins into the price of school uniforms (July 2006)
EU smashes acrylic glass cartel (March 2006)
Fine for European chemical companies involved in price fixing cartel (2006)
OFT to refer grocery market to Competition Commission (June 2006) see also Inquiry spells trouble for the Big 4 retailers (Guardian) and “Supermarkets in competition probe” (BBC)
OFT to study market structure of UK airports (June 2006)
Samsung in price fixing admission
Scottish roofing contractors fined for collusive bidding (June 2005)
Wikipedia: http://en.wikipedia.org/wiki/Price_fixing

Some collusive behaviour is tolerated / encouraged

Not all instances of collusive behaviour are deemed to be illegal by the European Union Competition Authorities. Practices are not prohibited if the respective agreements "contribute to improving the production or distribution of goods or to promoting technical progress in a market. Examples include:

• Development of improved industry standards /technical standards of production and safety which eventually benefit the consumer.
• Research joint-ventures and know-how agreements which seek to promote innovative and inventive behaviour in a market.

Market Liberalization

The main principle of EU Competition Policy is that consumer welfare is best served by introducing competition in markets where monopoly power exists. Frequently, these monopolies have been in network industries for example transport, energy and telecommunications. In these sectors, a distinction must be made between the infrastructure and the services provided directly to consumers using this infrastructure.

While it is often difficult to establish a second, competing infrastructure, for reasons linked to investment costs and economic efficiency (i.e. the natural monopoly arguments linked to economies of scale and a high minimum efficient scale) it is possible and desirable to create competitive conditions in respect of the services provided.

The European Commission has developed the concept of separating infrastructure from commercial activities. The infrastructure is thus the vehicle of competition. While the right to exclusive ownership may persist as regards the infrastructure (the telephone or electricity network for example or the supply of gas and electricity to the individual household and business), monopolists must grant access to companies wishing to compete with them as regards the services offered on their networks (good examples include the markets for telephone communications or electricity and gas supply).

State Aid in Markets

The argument for monitoring state aid given to private and state businesses by member Government is that by giving certain firms or products favoured treatment to the detriment of other firms or products, state aid disrupts normal competitive forces. According to the EU Competition Commission, neither the beneficiaries of state aid nor their competitors prosper in the long term. Often, all government subsidies achieve is to delay inevitable restructuring operations without helping the recipient actually to return to cost and non-price competitiveness. Unsubsidised firms who must compete with those receiving public support may ultimately run into difficulties, causing loss of competitiveness and endangering the jobs of their employees.

Under the current European state aid rules, a company can be rescued once. However, any restructuring aid offered by a national government must be approved as being part of a feasible and coherent plan to restore the firm’s long-term viability. Government aid designed to boost research and development, regional economic development and the promotion of small businesses is normally permitted.

Merger Policy in the UK and the European Union

Corporate restructuring is a fact of life. There is a natural tendency for markets to consolidate over take through a process of horizontal and vertical integration. The main issue for competition policy is whether a proposed merger or takeover between two businesses is thought to lead to a substantial lessening of competitive pressures in the market and risks leading to a level of market concentration when collusive behaviour might become a reality.

When companies combine via a merger, an acquisition or the creation of a joint venture, this generally has a positive impact on markets: firms usually become more efficient, competition intensifies and the final consumer will benefit from higher-quality goods at fairer prices.

	Waterstones (HMV)	Ottakar’s
Number of stores	194	131
Square footage (m)	1.3	0.6
Sales (£m) year to April 05	£440.0	£173.2
Operating profit (£m)	£26.1	£8.2
Employees	4,231	2,023

However, mergers which create or strengthen a dominant market position can, after investigation, be prohibited in order to prevent ensuing abuses. Acquiring a dominant position by buying out competitors is in contravention of EU competition law. Companies are usually able to address the competition problems, normally by offering to divest (sell or off-load) part of their businesses.

Evaluating the factors behind approving or rejecting a merger within the EU

Often a merger is allowed to progress without any intervention by the competition authorities when the economic benefits of allowing the integration to take place are significantly greater than the potential costs. Here are some of the justifications for approving a merger between two businesses:

(1) Efficiency arguments

• Static efficiency: Mergers may result in the exploitation of further internal economies of scale and therefore improved productive efficiency (cost savings)
• Dynamic efficiency: Increased profits can be used for R&D into new products and new production processes (innovation) creating long term dynamic efficiency; provides funds for capital investment

(2) The role of the capital markets:
Some economists argue that capital markets (stock markets) will sort out mergers which eventually fail to deliver the promised financial benefits. If unsuccessful mergers occur, corporate raiders are always ready to kick out the unsuccessful management who are not making enough profit for shareholders. The survival of the fittest ensures efficiency by keeping management on their toes (reducing X-inefficiencies). It is argued that this is a more effective mechanism than government intervention which will only make matters worse because of the potential for government failure.
(3) Market contestability arguments: 
There has been a huge growth of interest in the concept of contestable markets and this tends to complement the free market approach to mergers. By concentrating on removing entry barriers to a marker, monopolies and mergers can only remain dominant by producing good products efficiently
(4) The capital investment argument:
Lower costs and a bigger combined business may prompt higher levels of capital investment which is good news for the productive capacity of the EU economy
(5) The globalisation argument
Mergers and takeovers can reinforce and improve the competitive position of EU companies relative to non EU companies (a countervailing power to dominance of giant US firms) – this is important in industries that are becoming truly globalized and where increasing returns to scale (falling LRAC) is an important ingredient of competitive advantage
(6) Mergers and takeovers as a means of enhancing economic integration within the EU:
Mergers and takeovers are an inevitable consequence of the creation of a single market – perhaps the EU competition authorities should continue take a benign view of mergers if they have at their core, the aim of creating businesses large enough to provide goods and services to a community of nearly 500 million people.
Economic arguments for not approving a merger:
Under what circumstances might the EU Competition Authorities block a merger/takeover or insist on some form of redress before permitting it to proceed?
(1) Monopoly power:
Mergers and takeovers create market dominance; consumers are exploited and resources misallocated if there are entry barriers inhibiting competition leading to market failure and loss of economic welfare. In practice, there are always barriers to market contestability especially in industries where sunk costs are high.
(2) Mixed evidence on benefits of mergers:
The evidence is mixed as to whether mergers improve companies' performance, either in terms of profitability, or cost savings – indeed many of the claims for increased efficiency and economies of scale made prior to a merger or a takeover prove to be exaggerated with the benefit of hindsight.
(3) Imperfections in the capital markets:
The market for corporate control does not work optimally. Unsuccessful managements in poorly performing businesses may remain in place for a long time. Shares are mainly held by financial institutions but whilst they are the owners, they do not run the companies on a day to day basis. This means there is a divorce of ownership and control with managers pursuing their own interests (salary and welfare) rather than maximising profits for the shareholders.
(4) Employment effects
Mergers and takeovers nearly always lead to rationalisation as part of a process of cost cutting but may be at the expense of jobs (possibility of structural unemployment) and fewer outlets / choice for consumers (an issue of equity)
The vast majority of cases referred to the EU competition authorities are cleared.