Championing competition
An Office of Fair Trading case study

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Page 1: Introduction - the importance of championing competition

We live in an economic system that is generally good at channelling scarce resources towards meeting consumers' needs. One reason for this is that markets are efficient at processing data. Every day, the preferences of millions of consumers are fed into the market e.g. when we buy biscuit B rather than biscuit A and book holiday D in preference to holiday C.

Our spending preferences act as signals to producers; manufacturers and suppliers respond to consumer choices by seeking to supply those goods and services that consumers most want.

This is a key feature of a mixed-market economy compared to a planned economy, such as Russia pre 1990, where the government decided what to produce.

However, just how well consumers' buying decisions translate into producers' responses largely depends on how competitive a market is.

In a competitive environment, producers will usually do whatever they can within the law to win orders from customers. In healthy markets, firms compete for business by developing better products and/or by offering more attractive terms than their rivals. So, in many instances, increased competition will lead to greater consumer choice and lower prices, which is why many governments favour it.

Markets work well when fair-dealing businesses are in open, vigorous competition with each other. If a market is uncompetitive, producers within it will be in control and may not always do their best for customers. As Adam Smith observed, the food on our dinner plate reaches us not out of the goodwill of butchers and bakers but from their pursuit of their own interests. Left entirely to their own devices, some businesses may act against consumers' best interests, either on their own or in collaboration with other producers. Because of this risk, governments set up regulatory bodies to monitor what is taking place.

When there is competition within a market, consumers have a genuine power of choice. It is important that this choice is informed and that consumers are not misled by deceptive or unfair practices. Again, a regulatory body is needed to ensure that businesses supply consumers with adequate, accurate information.

Office of Fair Trading | Championing competition