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.
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.
Cartels and the law in the UK
Cartels are a particularly damaging form of anti-competitive behaviour - taking action against them is one of the OFT's priorities. Any business found to be a member of a cartel could be fined up to 10 per cent of its worldwide turnover. In addition, the Enterprise Act 2002 makes it a criminal offence for individuals to dishonestly take part in the most serious types of cartels. Anyone convicted of the offence could receive a maximum of five years imprisonment and/or an unlimited fine.
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.
House of Fraser and Oakley – price fixing for sunglasses
The House of Fraser department store group is facing accusations that it colluded with Oakley to fix the price of its sunglasses, which sell for between £50 and £200 a pair. Following a two year investigation, the Office of Fair Trading (OFT) has published a provisional report claiming that both House of Fraser and Oakley have breached the 2002 Competition Act. Both companies now have the opportunity to make submissions to the OFT in defence of their position.
The OFT believes that between November 2001 and March 2004, Oakley supplied House of Fraser with sunglasses on the condition that the department store sold them at no lower than the Oakley suggested minimum selling price. The investigation was instigated after complaints from rival retailers and complaints from some customers. If the findings are confirmed, the OFT has the power to fine a firm up to ten per cent of its turnover.
Dual pricing – Sony versus the internet retailers
The UK Office of Fair Trading is investigating accusations of possible illegal price discrimination by the global electronics giant Sony. Some online retailers have complained that Sony is discriminating against them by offering cheaper (discounted) prices to established high street retailers and making the online retailers pay more for their supplies of many of Sony's top selling products.
The complaint came from the Interactive Media in Retail Group (IMRG) and their claim was that dual pricing acts as an anti-competitive strategy which is damaging to consumer welfare. Dual Pricing is a mechanism recently introduced by electrical consumer goods manufacturers whereby their dealers pay more for goods if sold online.
The IMRG claimed that there is no economic justification for dual pricing and that the defence that it costs more to run a "bricks and mortar" retail business compared to an online business is both irrelevant and open to dispute. In a press release they claim that
Sony have been exposed in the newspapers as one of the manufacturers being looked at but others including Panasonic, Sharp, Phillips and Hitachi may also have their dual-pricing tactics considered.
Price fixing in the dairy industry
The Office of Fair Trading is investigating claims that some of the UK's top dairy processing businesses have been involved in a price fixing agreement. Dairy Crest and Robert Wiseman, two of the UK's top three dairy processors are under the microscope and Arla Foods may also be part of the broader scope of the investigation which centers on a decision by the dairy processors to jointly increase the price paid to milk farmers in the UK. But this investigation is coming under quite fierce criticism from supporters of the farming industry who believe that unless effective steps are taken to raise the prices and incomes flowing to milk producers, the industry itself may collapse with the loss of thousands of jobs.
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