The purpose of competition policy
Competition is an essential element in the efficient working of markets. It brings important benefits to the consumer by:
- encouraging enterprise, innovation, efficiency and a widening of choice;
- enabling consumers to buy the goods and services they want at the best possible price; and
- contributing to our national competitiveness.
Competition policy seeks to encourage and improve the competitive process, and to ensure consumers feel the benefits of that process. These aims are achieved in practice through competition law.
United Kingdom competition law
United Kingdom (UK) competition law is a flexible instrument. With one exception, the legislation is based on the premise that each case should be judged by the actual effect which a practice has on competition and whether it is against the public interest. The public interest has a broad meaning and is not precisely defined in the legislation.
UK competition law involves a range of legislation but at its core there are four principal Acts of Parliament, each dealing with a separate aspect of competition policy.
Fair Trading Act 1973 deals with mergers and abuses of monopoly power in a market.
Competition Act 1980 deals with anti- competitive practices by particular companies.
Restrictive Trade Practices Act 1976 deals with - agreements that restrict persons or companies from competing freely.
Resale Prices Act 1976 deals with attempts to impose minimum prices at which goods can be resold.
Who is responsible for UK competition law?
Enforcement of the law generally falls into the following stages:
- judging the merits of the case;
- recommending suitable remedies;
- deciding whether to implement the remedies; and
- monitoring those remedies which are implemented.
Four principal bodies have interlocking responsibilities for enforcement.
- The Director General of Fair Trading is the independent head of the Office of Fair Trading (OFT), a non-ministerial government department concerned with competition issues. The Director General undertakes all initial investigations. If he has reason to believe that a competition problem exists, he may, either informally or formally (on behalf of the Secretary of State for Trade and Industry), seek to remedy it with the parties concerned. If that is not possible, he usually refers the matter for follow-up investigation by the Monopolies and Mergers Commission or action by the Restrictive Practices Court. For example, if, after his initial investigation into a merger, the Director General feels further action is required he will advise the Secretary of State either to accept undertakings or to make a reference to the Monopolies and Mergers Commission. The Director General has sole responsibility for monitoring any remedies.
- The Monopolies and Mergers Commission (MMC) is an independent tribunal that carries out investigations under the Fair Trading Act and Competition Act at the request of the Secretary of State or the Director General. It reports its findings and, if appropriate, recommends remedies to the Secretary of State.
- The Restrictive Practices Court (the Court) decides whether the restrictions in a registrable agreement are against the public interest. If the Court believes this is the case, it can strike down the restrictions. The Court can only act on agreements referred to it by the Director General.
- The Secretary of State for Trade and Industry does not have an investigatory role. He is mainly concerned with the final decision about whether enforcement action should be taken and what remedies should be implemented after investigations by the other bodies are completed. Agreement has to be reached on, for example, whether a particular merger should be referred to the MMC, and if so, whether it should be prohibited because it is against the public interest or allowed to go ahead on certain conditions.
The Secretary of State is the voice of competition policy in the Cabinet and has responsibility for appointing the Director General of Fair Trading and the members of the MMC.
Under the Fair Trading Act, a merger is said to take place when two or more enterprises cease to be distinct. Once they come under common control, for example, in a situation where a minority stake allows one party to have a material influence over the policy of the other party, the Act sets out two tests to determine whether a particular merger can be investigated.
- The assets tests: that the total gross assets of the company to be taken over exceed £70 million in value.
- The share of supply test(sometimes called the market share test): that, as a result of the merger, 25or more of the supply or purchase of goods or services of a particular description in the UK, or a substantial part of it, comes under common control. An increase in an existing 25share also meets the test.
Companies are not required to notify the Director General of a merger but generally do so. He conducts a preliminary investigation into qualifying mergers and then advises the Secretary of State on whether to refer them to the MMC for further investigation and a report. Only a small minority of mergers examined is referred. If the Director General advises reference to the MMC, the Secretary of State may invite him to seek undertakings from the merging companies as an alternative.
Undertakings commit the companies to take action to correct the adverse effects which have been identified. Such undertakings would generally be the divestment of part of the merging business. Undertakings on the conduct to be followed by the merged business may accompany divestment, or be adopted as an alternative to it.
After the MMC carries out an investigation, it reports to the Secretary of State on whether the merger is against the public interest and recommending what action, if any, should be taken.
If the MMC finds against the merger the Secretary of State, in consultation with the Director General, makes the final decision about what should happen - allow the merger to stand, prohibit it or seek other undertakings from the business.
Where a company or group of companies has a sizeable share of a market, it can have sufficient market power to harm competitors and consumers. Excessive prices and reductions in quality of service are typical examples of what happens when the absence of effective competition allows the exploitation of a monopoly position within a market.
Although a monopolist is often thought of as the sole supplier to a particular market, the Fair Trading Act uses a wider definition. A monopoly is a situation where a company purchases or supplies at least 25of all the goods or services of a particular type within the UK, or part of the UK. A group of companies that together meet the same minimum 25share and adopt a similar practice which affects competition adversely is known as a complex monopoly.
To establish whether a 25market share has competitive significance, it is necessary to define the relevant market. This requires close examination of two factors.
- The geographical limits of the market: this is determined by factors such as transport costs and the nature of the product or service. For example, the boundaries for a market in funeral services are likely to be narrowly drawn but those for insurance are nationwide.
- Substitutability of other products: if there is a close substitute for a particular product, that product will be part of a wider market. Substitutability depends on whether customers would switch after a relative price rise. For example, a price rise in butter might result in a shift to margarine. The two products are then part of the same market.
Having defined the market, the Director General looks at whether the monopolist has power in the market which it can exploit or abuse. Market power does not come from market share alone. It may be gained from a leading brand name, or from ownership of a resource needed by competitors. It also depends on the effectiveness of competition from any other suppliers, barriers to entering the market and possibly the strength of buyers. For example, a firm may seek to drive out competition by selling below cost, aiming to making excessive profits from high price rises once competition is eliminated (know as predatory pricing). To prevent others re entering the market and undercutting it once it starts to raise prices, the firm needs a barrier to entry in addition to market share. This could be high start up costs or a limited resource.
There is no assumption that monopolies are bad in themselves, since the monopolist may not have the power or the desire to abuse its position. Some monopolies may be inevitable because it is more efficient to have a single producer in a particular market, rather than a competitive structure. The railway network is one example of such a natural monopoly. These monopolies normally have their own regulator.
The Director General keeps an eye on all markets and conducts preliminary investigations where concerns arise. If these concerns are justified the Director General may seek undertakings from the monopolist to remedy matters. Alternatively, the MMC may be asked to investigate. The MMC looks at the market generally to determine whether there is exploitation of a monopoly situation and whether it is damaging to the public interest. Its findings are then reported to the Secretary of State who decides what action to take, in conjunction with the Director General.
In a competitive market, companies can be expected to adopt policies intended to give them a competitive edge. This can lead to benefits such as improved efficiency and better quality goods.
Under the Competition Act, an anti-competitive practice is defined as any practice that has, is intended to have, or is likely to have, the effect of restricting, distorting or preventing competition. The Competition Act may appear to replicate the monopoly provisions of the Fair Trading Act, but it allows investigation into the specific conduct of an individual firm or group of firms, rather than a more general investigation of the market, as the Fair Trading Act requires of the MMC.
A company or group of companies must have 25or more of the relevant market and a minimum annual turnover of £10 million for the Competition Act to apply. Practices that may be acceptable in one market where competition is strong may be unacceptable in another where there is less competition. Such practices are often vertical restraints, for example, exclusive dealing arrangements where a customer deals solely with a single supplier.
If an anti-competitive practice is suspected, the Director General can conduct an initial informal enquiry. If these suspicions are confirmed, he can either accept binding undertakings that the practice will stop, or refer the case to the MMC, which examines the practice to determine whether it is anti-competitive and in the public interest. It is not the nature of the practice itself but its effect on competition which is the crucial factor in the MMC's investigation. The MMC then recommends to the Secretary of State what action, if any, should be taken to stop the practice.
Restrictive trade practices
All commerce is based on agreements of one form or another. Some agreements however, may restrict competition. The most obvious are those involving price fixing and market sharing.
The Restrictive Trade Practices Act covers agreements affecting goods and services. The OFT must be notified of all arrangements, not just formal written agreements, made by two or more parties in business who accept specified restrictions on their freedom to compete. Details are then entered in a public register.
Companies must inform the OFT about agreements containing restrictions on:
- prices or charges;
- terms or conditions of business;
- geographical areas of business;
- people with whom business may take place;
- the quantities or types of goods to be produced;
- the manufacturing process to be used.
Although a large number of restrictive agreements are sent in for registration, the OFT continues to discover agreements which, by accident or design, have not been notified. Businesses may not always recognise that an agreement can restrict freedom to compete. If, however, the Director General has reason to believe that any harmful agreement has been concealed deliberately, he almost always refers the matter to the Restrictive Practices Court, which strikes down any restrictions it finds against the public interest.
In most agreements, the restrictions are insignificant and do not warrant reference to the Court. In such cases, the Secretary of State is asked to agree that there should not be a reference. In the occasional cases that warrant investigation by the Court, the parties must satisfy the Court that the restrictions in their agreements are in the public interest, using any of the possible grounds laid down in the Act. Otherwise, the restrictions are again struck down by Order of the Court.
The government is proposing to reform competition law with a new Competition Bill. It will, amongst other things, replace the Restrictive Trade Practices Act with a law similar to Article 85 of the Treaty of Rome (see European Union competition law). Restrictive agreements will be prohibited, rather than able to operate until struck down. Parties to such agreements will be liable for a fine, unless they receive an exemption from the Director General or successfully appeal to a Tribunal or the High Court. There will also be increased powers to secure information on such agreements.
Resale price maintenance
Attempts by manufacturers or suppliers to enforce a minimum price at which goods can be sold by dealers or retailers restrict competition and can keep prices higher than they would otherwise be. Such resale price maintenance is illegal under the Resale Prices Act, unless the goods are granted an exemption. Only books and certain pharmaceuticals are currently exempted.
The Act also makes it unlawful to stop supplies or offer less favourable terms to dealers whom the supplier believes to be price cutting. A supplier is, however, entitled to withhold goods from a dealer who is pricing them as loss leaders (goods sold at a loss in order to attract customers towards profitable items).
The Director General has the power to seek a court injunction to force the parties involved to scrap a retail price agreement, but he usually deals with matters by accepting assurances.
European Union competition law
Article 85 of the Treaty of Rome forbids agreements which may affect trade between the 15 Member States, and which have, as their object or effect, a limitation of competition. This includes price fixing, market sharing, restriction of production or technical development, and the imposition of discriminatory terms of supply.
Such agreements are void unless given an exemption by the European Commission. Grounds for exemption are improvements in production capacity and reductions in costs, whilst allowing consumers a fair share of the benefits. Agreements should not impose restrictions unless they are indispensable to the attainment of these objectives. Nor should they lead to an elimination of competition.
Article 86 of the Treaty of Rome bans the abuse of a dominant position, insofar as it may affect trade between Member States. Such abuse includes unfair purchase or selling prices, discriminatory pricing and refusal to supply. There are no exemptions.
The European Commission is directly responsible for the application of European Union law. The Office acts as the competent authority of the UK in relation to European competition rules and liaises closely with the European Commission. It attends oral hearings and comments on individual cases at meetings of the Advisory Committee of Member States.