Business Regulation

How governments promote competition

  • Preventing anti-competitive practices

  • Controlling/preventing some mergers & takeovers that aren’t in the public’s interest

  • Privatisation to open up markets to competition

Each source of market power has a possible solution that will enhance competition and help the market to work more efficiently. This work used to be covered by the Office of Fair Trading but in early 2014 it was replaced by the Competition and Markets Authority (CMA). This is an official body that prevents anti-competitive practices, carries out market studies, and reviews takeovers and mergers to ensure that they are in the public interest (e.g. the potential merger between O2 and Three).

Privatisation is where the government sell off industries in from the public sector to the private sector and open them up to competition – e.g. the Royal Mail was recently privatised!

Business Regulation, figure 1

How the governments regulate natural monopolies via regulators

In a natural monopoly, having more than one supplier involves duplication of resources. Water is the best example because competition would require at least two sets of pipelines. Many natural monopolies were nationalised in the 1940s and after prior to WW2 to optimise resources. Most were privatised in the 1980s and after, with a view to increasing efficiency and encouraging competition but without duplication of resources.

However, they still have potential to charge the consumer more than is needed to ensure the supply. As such, regulators (think of them as government watchdogs) draw up strict rules for businesses in these markets to ensure that they provide a good service at a reasonable price. The outcome is often controversial; you should explore what is regulatory capture (where the regulator and the business are too cosy and thus the regulator fails in its job) and find a topical example!

Example: has the horsemeat and the halal pork scandals shown that the FSA is too cosy with the food retailers? and therefore ineffective?

How the governments protect consumers

You need to understand why consumers need protection and the kind of problems that are likely to occur, but do not need to learn the specific details of the legislation (although you may want to learn about the penalties awaiting guilty parties). The CMA deals with issues relating to unfair contract terms and the use of misleading pricing strategies. There are plenty of relevant examples, such as the way furniture retailers regularly advertise special sales with discount prices, interspersed with brief periods when the ‘normal’ higher price operates. This makes it hard for customers to work out whether the price they are offered really is competitive.

The CMA replaced both the OFT and the Competition Commission in March 2014; the objective was to reduce duplication of effort and streamline the regulation process. In terms of the implementation of competition law, future cases will probably be broadly similar to those of the past, so your topical examples do not have to be very recent but should include a merger investigation and a prosecution or investigation of an anti-competitive practice.

  • Role of the CMA -

  • What penalties can the CMA deliver?

  • Fine up to 10% of revenues, prison sentences and personal fines as well

  • CMA try to work with businesses rather than against them and encourage good practice

The importance of UK employee protection legislation

Employee protection is important because it requires firms to provide a safe environment for employees and to comply with the law on the process of employee dismissal. Where there are few choices about where and with whom jobs are available, employers may have the market power to exploit their employees with low pay and by dodging safety requirements. Although the UK has a very flexible labour market by EU standards, regulation is still important to prevent the worst abuses.

  • Pay – NMW and Equal Pay Act of 1970

  • Safety/conditions – 1993 EC Working Time Directive led to the 48 hour working week. Health and Safety at Work etc Act 1974 - duty on all employers “to ensure, so far as is reasonably practicable, the health,safety and welfare at work” of all their employees.

  • Fair dismissal – unfair dismissal can be claimed and an employment tribunal sought.

  • Further legislation -

The impact of EU competition policy

Globalisation means that, increasingly, cartels, collusion and price-fixing activities involve businesses in more than one country. The CMA collaborates with both the US anti-trust authorities and the EU Directorate General for Competition, which is part of the EU Commission.

The case of Microsoft is perhaps the best known example of collaboration. In the US, anti-trust action will usually be triggered by a market share of around 60%. In the EU, a market share of 38% is taken as evidence of market power. In the UK, a monopoly is defined as 25% of the market but usually a more nuanced approach is taken, with attention being given to whether the market is actually contestable.