2 a process whereby firms strive against each other to secure customers for their products, i.e. the active rivalry of firms for customers, using price variations, PRODUCT DIFFERENTIATION strategies, etc. From a wider public interest angle, the nature and strength of competition has an important effect on MARKET PERFORMANCE and hence is of particular relevance to the application of COMPETITION POLICY. See COMPETITION METHODS, MONOPOLISTIC COMPETITION, MONOPOLY.
Fig. 25 Comparative static equilibrium analysis. The initial level of national income is Y1 (at point A) where the AGGREGATE DEMAND SCHEDULE (AD1) intersects the AGGREGATE SUPPLY SCHEDULE (AS).
Competition Act 1980 a UK Act that extended UK COMPETITION LAW by giving the OFFICE OF FAIR TRADING (OFT) wider powers to deal with restraints on competition such as EXCLUSIVE DEALING, TIE-IN SALES, etc. Previously, these practices could be dealt with only in the context of a full-scale and lengthy monopoly probe, whereas the Act now allows the OFT to deal with them on a separate one-off basis. See COMPETITION POLICY (UK).
Competition Act 1998 a UK Act that consolidated existing competition laws but also contained new prohibitions, powers of investigation and penalties for infringements of the Act. The Act is designed to bring UK competition law into line with European Union competition law as currently enshrined in Articles 85 and 86 of the Treaty of Rome.
The Act covers two key areas of competition policy: anti-competitive agreements and market dominance.
(a) The Act prohibits outright agreements between firms (i.e. COLLUSION) and CONCERTED PRACTICES that prevent, restrict or distort competition within the UK (the Chapter 1 prohibition). This prohibition applies to both formal and informal agreements, whether oral or in writing, and covers agreements that contain provisions to jointly fix prices and terms and conditions of sale; to limit or control production, markets, technical development or investment; and to share markets or supply sources.
(b) The Act prohibits the ‘abuse’ of a ‘dominant position’ within the UK (the Chapter 2 prohibition). The Act specifies dominance as a situation where a supplier ‘can act independently of its competitors and customers’. As a general rule, a dominant position is defined as one where a supplier possesses a market share of 40% or above. Examples of ‘abuse’ of a dominant position specified in the Act include charging ‘excessive’ prices, imposing restrictive terms and conditions of sale to the prejudice of consumers and limiting production, markets and technical development to the prejudice of consumers.
The Act established a new regulatory authority, the COMPETITION COMMISSION, that took over the responsibilities previously undertaken by the Monopolies and Mergers Commission and the Restrictive Practices Court. Under the Act, the OFFICE OF FAIR TRADING (OFT) has the power to refer dominant firm cases and cases of suspected illegal collusion to the Competition Commission for investigation and report.
The Act gives the OFT wide-ranging powers to uncover malpractices. For example, if there are reasonable grounds for suspecting that firms are operating an illegal agreement, OFT officials can mount a ‘dawn raid’ – ‘entering business premises, using reasonable force where necessary, and search for incriminating documents’. The Act also introduces stiff new financial penalties. Firms found to have infringed either prohibitions may be liable to a financial penalty of up to 10% of their annual turnover in the UK (up to a maximum of three years). See COMPETITION POLICY, COMPETITION POLICY (UK), COMPETITION POLICY (EU), ANTICOMPETITIVE AGREEMENT, RESTRICTIVE TRADE AGREEMENT.
Competition Appeals Tribunal (CAT) a body established by the ENTERPRISE ACT 2002 to hear appeals in regard to ‘disputed’ merger cases. The OFFICE OF FAIR TRADING has the power to refer proposed mergers and takeovers to the COMPETITION COMMISSION for investigation if it believes that the merger/takeover would ‘substantially lessen competition’. If, in the OFT’s view, this is not the case, it can allow the merger/takeover to go ahead without reference. This is where the CAT comes in. An interested party (e.g. a competitor of the companies involved in the merger) may ‘appeal’ to the CAT that the OFT decision not to refer is ‘wrong’. The task of the CAT is to arbitrate and decide if there is indeed a case for reference and can ‘order’ a reference to the Competition Commission if it sees fit.
Competition Commission (CC) a regulatory body established by the COMPETITION ACT 1998 that was originally set up in 1948 as the Monopolies Commission (1948–65), then the Monopolies and Mergers Commission (1965–98) and that is responsible for the implementation of UK COMPETITION POLICY. The basic task of the Commission is to investigate and report on cases of MONOPOLY/MARKET DOMINANCE, MERGER/TAKEOVER and ANTI-COMPETITIVE PRACTICES referred to it by the OFFICE OF FAIR TRADING (OFT) to determine whether or not they unduly remove or restrict competition, thus producing harmful economic effects (i.e. economic results that operate against the ‘public interest’). The Commission is also required by the OFT to investigate cases of ‘illegal’ collusion between suppliers, i.e. cases where the OFT has good reason to suspect that an ANTICOMPETITIVE AGREEMENT/RESTRICTIVE TRADE AGREEMENT prohibited by the Competition Act 1998 is continuing to be operated ‘in secret’. (This task was formerly undertaken by the RESTRICTIVE PRACTICES COURT.)
Under UK COMPETITION LAW, monopoly/market dominance is defined as a situation where at least 40% of a reference good or service is supplied by one firm or a number of suppliers who restrict competition between themselves (CONCERTED PRACTICE or COMPLEX MONOPOLY situation). Mergers and takeovers fall within the scope of the legislation where the market share of the combined business exceeds 25% of the reference good or service or where the value of assets being merged or taken over exceeds £70 million. Anti-competitive practices are those that distort, restrict or eliminate competition in a market.
Cases referred to the Competition Commission are evaluated nowadays primarily in terms of whether or not the actions of suppliers (MARKET CONDUCT) or changes in the structure of the market (MARKET STRUCTURE) are detrimental to the potency of competition in the market and hence prejudicial to the interests of consumers and other suppliers (the so-called ‘public interest’ criterion found in earlier legislation). In cases of monopoly/market dominance, the Commission scrutinizes the actions of dominant firms for evidence of the ‘abuse’ of market power and invariably condemns predatory pricing policies that result in excessive profits. Practices such as EXCLUSIVE DEALING, AGGREGATED REBATES, TIE-IN SALES and FULL-LINE FORCING, whose main effect is to restrict competition, have been invariably condemned by the Commission, especially when used by a dominant firm to erect BARRIERS TO ENTRY and to undermine the market positions of smaller rivals. A merger or takeover involving the leading firms who already possess large market shares is likely to be considered detrimental. (See MARKET CONCENTRATION.)
In all cases, the Commission has powers only of recommendation. It can recommend, for example, price cuts to remove monopoly profits, the discontinuance of offending practices and the prohibition of anti-competitive mergers, but it is up to the Office of Fair Trading to implement the recommendations, or not, as it sees fit.
competition law a body of legislation providing for the control of monopolies/market dominance, mergers and takeovers, anti-competitive agreements/restrictive trade agreements and anti-competitive practices. UK legislation aimed at controlling ‘abusive’ MARKET CONDUCT by monopolistic firms and firms acting in COLLUSION was first introduced in 1948 (The Monopolies and Restrictive Practices (Inquiry and Control) Act), while powers to control undesirable changes in MARKET STRUCTURE were added in 1965 (The Monopolies and Mergers Act). Other notable legislation concerning the control of collusion were the Restrictive Trade Practice Acts of 1956, 1968 and 1976.
Current competition law in the UK is contained in a number of Acts:
FAIR TRADING ACT 1973
(applying
