The Economic Environment of Business

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The Economic Environment of Business Lecture 5

• Competition Policy

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Why do we need competition policy?

• To avoid exploitation of customers by large
  companies
• To promote economic efficiency through
  competition
• To ensure that markets are contestable

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The Case for a Competition Policy

• The Structure-Conduct-Performance Model
• The structure of an industry influences
• the conduct of firms in that industry.
• This in turn determines the performance
• of firms.
• With little competition, a firm can be
• inefficient yet still make high profits, and
• vice-versa for the competitive firm.

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The UK Policy

• Focuses on the areas of
• Market share
• Mergers
• Restrictive practices

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Monopoly and MergersCases are to be
investigated if

• Share of supply is 25 of a market or more
• Assets are 70million world-wide (asset test)
• This does NOT mean that such mergers are illegal
  but do need to be investigated for possible
  anti-competitive effects

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RESTRICTIVE TRADE PRACTICES

• Strategies designed deliberately to limit the
  degree of competition in a market. Some
  examples-
• Predatory pricing
• often financed through cross-subsidization,
  refers to policy of undercutting rivals prices
  with sole aim of eliminating them, then raising
  price to original level.
• Refusal to supply
• Manufacturer refuses to supply goods if
  retailer discounts price below recommended
  level..
• Collusive practices
• including market sharing, price fixing and
  agreements on types of goods to be produced

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UK COMPETITION POLICY-INSTITUTIONS

• The Secretary for Trade and Industry
• has overall responsibility for competition
  policy, but other important roles are played by
• The Director-General of Fair Trading at the
  Office of Fair Trading whose aims are-
• To identify and put right trading practices which
  are against the consumer's interests
• To investigate anti-competitive practices and
  abuses of market power
• The Competition Commission
• which carries out inquiries into matters referred
  to it by the other UK competition authorities
  concerning monopolies, mergers and the economic
  regulation of utility companies

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• COMPETITION ACT 1998
• New Act took effect in March 2000 and grants
  similar powers as enjoyed by European Commission
  i.e.
• Substantial power of investigation no need for
  written evidence prior to investigation
• Fines of up to 10 of UK annual turnover
• Monopolies and Mergers Commission and
  Restrictive Practices Court now reformed as The
  Competition Commission

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EU Policy

• A common policy based on a tradition of
  government intervention, embodied in a number of
  Treaty Articles such as
• Articles 81/82 cover trade between states and
  price fixing
• Articles 85/86- trade restriction within states
  and abuse of dominant power
• Articles 87/88 against protectionism and
  subsidies

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Cross-Border Merger Regulations

• World turnover combined of 5b ECU
• At least 2 of the companies must have a
  community-wide turnover of at least 250m ECU each
• If both parties have 2/3 business in one/same
  member state, the merger was to be the subject of
  national and not community controls

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US Approach
US competition policy can be traced back to the
Sherman Anti-Trust Act (1890). Monopoly was made
illegal from the outset. Based on the
anti-competitive activities of John Rockefeller
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Concentration and market power Problems with
the US approach
A 70 111 73 of market in hands of
top four players.   B 20202020
80 of market in hands of top
four players. i.e. 4 firm concentration
ratio higher in B than A using this method Yet,
B is clearly more competitive than A!
Numbers represent the market share of each of
the top four firms in markets A and B