The Economic Environment of Business Lecture 5 Competition

The Economic Environment of Business – Lecture 5 Competition Policy

Why do we need competition policy? l To avoid exploitation of customers by large companies l To promote economic efficiency through competition l To ensure that markets are “contestable”

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

The UK Policy Focuses on the areas of: v. Market share v. Mergers v. Restrictive practices

Monopoly and Mergers Cases are to be investigated if: q. Share of supply is 25% of a market or more Assets are £ 70 million world-wide (asset test) This does NOT mean that such mergers are illegal but do need to be investigated for possible anti-competitive effects

RESTRICTIVE TRADE PRACTICES l Strategies designed deliberately to limit the degree of competition in a market. Some examples: - l 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

UK COMPETITION POLICY: INSTITUTIONS l The Secretary for Trade and Industry l l l 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: l To identify and put right trading practices which are against the consumer's interests l To investigate anti-competitive practices and abuses of market power The Competition Commission l which carries out inquiries into matters referred to it by the other UK competition authorities concerning monopolies, mergers and the economic regulation of

l l l 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

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

Cross-Border Merger Regulations ØWorld turnover combined of 5 b ECU ØAt least 2 of the companies must have a community-wide turnover of at least 250 m ECU each ØIf both parties have 2/3 business in one/same member state, the merger was to be the subject of national and not community controls

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

Concentration and market power – Problems with the US approach: A 70 +1+1+1 = 73% of market in hands of top four players. B 20+20+20+20 = 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