Championing competition
An Office of Fair Trading case study

Page 5: Enforcing

The OFT can require firms to stop practices that are against consumers' interests e.g. firms' attempts to restrict competition. Firms often have an incentive to restrict competition because reduced competition will lead to higher profits and an easier existence. The ways in which firms may seek to restrict competition are many and various. For example, a firm may try to:

  • reach agreement with other firms about the prices each will charge
  • arrange with other firms the territories for which each will be the sole or main supplier
  • reduce the supply to the market with a view to forcing up prices
  • devise ways of preventing other firms from entering its market e.g. by tying retailers into exclusive deals
  • take over its competitors to reduce the degree of competition it faces.

In countries, including the UK, with strong competition laws, all of these practices are likely to be subject to legal scrutiny. With the power of the law to support it, the OFT enforces competition and consumer protection laws in several ways, including:

  • Uncovering and deterring anti-competitive behaviour.

The work of the OFT's Competition Enforcement (CE) division includes stopping and deterring cartels. Any business involved in a cartel risks being fined up to 10of its UK turnover for up to three years. The CE team works across all market sectors, conducts on-site investigations where needed, and liaises with other bodies across the world to identify international cartels. Action can be swift and effective.

For example, two supposedly rival major UK national bus companies privately agreed not to compete against each other on certain bus routes in Leeds - the cosy deal was struck in a local hotel. Having been alerted to what looked like a cartel, the OFT investigated. The two companies were quick to admit their action, and the heavy fines originally imposed on them were reduced in recognition of their readiness to co-operate and stop their malpractice.

  • Putting an end to any abuse of market power e.g. charging excessive prices to a captive market, or forcing out competitors through predatory pricing.

In the UK, it is not illegal for a business to be a sole supplier or to dominate a market. The test is whether a firm is abusing its market power. For example, a dominant UK pharmaceutical company (Napp) that supplied, in tablet form, a drug for cancer patients was found to be operating a highly discriminatory pricing policy. The price of tablets sold privately to cancer patients was around ten times higher than the price charged to UK hospitals, where the firm kept its price artificially low in this huge market in order to make it almost impossible for rival firms to compete. The firm was fined more than £2 million and was ordered to reduce the price it charged private consumers and to limit the discount offered to hospitals.

A publisher of Scottish newspapers (Aberdeen Journals) was fined more than £1 million and ordered to change its ways after being found guilty of trying to force a rival publication out of business by starving it of advertising revenue. The bigger company had set its own prices to advertisers at below the cost to itself of carrying the advertising. The OFT took up this case following a complaint from the victim of this anti-competitive practice.

  • Identifying mergers (two firms joining together) that might be against the public interest so that these can be further investigated by the Competition Commission.

The Competition Commission currently has two sides to its work: reporting on merger, monopoly and anti-competitive situations, and an appeals side that hears cases against decisions made. The OFT's CE division identifies mergers that pose a threat to competition. In such cases, the merger will be investigated in detail to see whether it should be allowed to proceed. Within this role, the OFT recommended, and the Competition Commission concluded, that Lloyds TSB be prevented from merging with Abbey National .A merger of these banks seemed likely to lead to reduced competition in the supply of personal and SME banking services.

  • Applying robustly the rules that protect consumers

The OFT's Consumer Regulation Enforcement (CRE) division takes action against traders who trade unfairly. It also encourages organisations in specific market sectors (e.g. electricity suppliers) to set up codes of practice that benefit consumers. It also provides a range of information to help consumers understand their rights and make good choices.

The CRE division's work includes:

  • discouraging businesses from putting unfair terms into contracts e.g. an airline that wanted to restrict its obligation to compensate customers for certain types of luggage damaged in transit
  • providing advice and information to enable terms in contracts to be set out fairly
  • regulating the consumer credit market so that borrowers are not misled when entering into credit agreements. Businesses that offer consumers credit require a licence. This keeps out unscrupulous firms (e.g. car dealers who 'clock' or reduce mileage)
  • working closely with the Advertising Standards Authority to remove deceptive or misleading advertising e.g. commercials offering 'interest free loans'
  • managing standards for Internet and home shoppers, so that they have the same rights as other shoppers.
  • Taking court action against businesses e.g. for supplying poor goods, failing to honour guarantees of service, acting dishonestly e.g. giving false information about a car's history, forging customers' signatures.

The OFT can also issue a 'Stop Now' order, a court order to make traders comply immediately with their requirements. These will become known as (part 8) Enforcement codes when the Enterprise Act commences later this year.

  • Encouraging businesses to regulate their own activities by setting out Codes of Practice based on good practice e.g. estate agents.

Office of Fair Trading | Championing competition

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