A2 Micro: Competition Policy

The aim of competition policy is promote competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union single market.

Competition policy aims to ensure
o Wider consumer choice
o Technological innovation which promotes dynamic efficiency
o Effective price competition between suppliers
There are four key pillars of competition policy in the UK and in the European Union

1. Antitrust & cartels: This involves the elimination of agreements that seek to restrict competition including price-fixing and other abuses by firms who hold a dominant market position (defined as having a market share in excess of forty per cent).

2. Market liberalisation: Liberalisation involves introducing fresh competition in previously monopolistic sectors such as energy supply, postal services, mobile telecommunications and air transport.

3. State aid control: Competition policy analyses examples of state aid measures to ensure that such measures do not distort competition in the Single Market

4. 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).

The Regulators

Regulators are the rule-enforcers and they are appointed by the government to oversee how a market works and the outcomes that result for both producers and consumers. Examples of regulators include the Office of Fair Trading and the Competition Commission. The European Union Competition Commission is also an important body for the UK economy.

What do the regulators regulate?

1. Prices: Regulators aim to ensure that companies do not exploit monopoly power by charging excessive prices. They look at evidence of pricing behaviour and also the rates of return on capital employed to see if there is evidence of ‘profiteering.’ Recently the EU Competition Commission made a ruling on the ‘roaming’ charges of mobile phone operators in the EU and helped to enforce a new maximum price on such charges.

2. Standards of customer service: Companies that fail to meet specified service standards can be fined or have their franchise / licence taken away. The regulator may also require that unprofitable services are maintained in the wider public interest e.g. BT keeping phone booths open in rural areas and inner cities; the Royal Mail is still required by law to provide a uniform delivery service at least once a day to all postal addresses in the UK

3. Opening up markets: The aim here is to encourage competition by removing barriers to entry. This might be achieved by forcing the dominant firm in the industry to allow others to use its infrastructure network. A key task for the regulator is to fix a fair access price for firms wanting to use the existing infrastructure. Fair both to the existing firms and also potential challengers.

4. Regulation can act as a form of surrogate competition – attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets.
In a nut shell the role of competition authorities around the world is to protect the public interest, particularly against firms abusing their dominant positions

Anti-Trust Policy - Abuses of a Dominant Market Position

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

Competition authorities consider a firm’s market share, whether there are credible competitors, whether the business has ownership and control of its own distribution network (achieved through vertical integration) and whether it has favourable access to raw materials.

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

Anti-competitive practices are designed to limit the degree of competition inside a market.

Examples of anti-competitive practices

1. Predatory pricing also known as ‘destroyer pricing’ happens when one or more firms deliberately sets prices below average cost to incur losses for a sufficiently long period of time to eliminate or deter entry by a competitor – and then tries to recoup the losses by raising prices above the level that would ordinarily exist in a competitive market.

2. Vertical restraint in the market: This can happen in a number of ways:

a. Exclusive dealing: This occurs when a retailer undertakes to sell only one manufacturers product. These may be supported with long-term contracts that “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).

b. Territorial exclusivity: This exists when a particular retailer is given the sole rights to sell the products of a manufacturer in a specified area.

c. Quantity discounts: Where retailers receive 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.

d. 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.

3. Collusive practices: These might include agreements on market sharing, price-fixing and agreements on the types of goods to be produced.

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.”

o Development of improved industry standards /technical standards of production and safety which eventually benefit the consumer.

o Research joint-ventures and know-how agreements which seek to promote innovative and inventive behaviour in a market.