Definition of Competition Policy: Government policies to prevent and reduce the abuse of monopoly power.
Abuse of monopoly power can lead to market failure and be against the public interest. Therefore Governments are concerned to intervene and protect the interests of the consumers
1998 Competition Act sought to bring the UK into line with EU competition policy
The OFT is responsible for investigating suspected abuses of monopoly power and engaging in prohibited practices. There are 2 main types of behaviour they investigate:
- Collusive Behaviour
- Abuse of Market Power
This occurs when firms enter into agreements to fix prices and or output. This enables firms to make higher profits at the expense of consumers.
Collusive tendering. This occurs when firms enter into agreements to fix the bid at which they will tender for projects. Firms will take it in turns to get the contract and enable a much higher price for the contract.
Collusive behaviour is illegal and can be investigated by the OFT.
Abuse of Market Power
If a firm has more than 40% of market share it is considered to have market power. The OFT are more likely to investigate firms with a dominant market position. Though they can also investigate people with less market share. Abuse of Market Power may include:
- Predatory Pricing – selling below cost with intention of forcing a rival firm out of business
- Charging Higher prices – a Monopoly is able to set high prices. The OFT may consider this abuse of monopoly power if it leads to excess profits.
- Vertical Restraints – Firms may use market power to pay lower prices to suppliers (e.g. Supermarkets have been criticised for paying low prices to farmers.
- Tie in Sales. E.g. A printer which makes people may its own brand very expensive ink.
The OFT can recommend mergers be referred to the Competition Commission – to see whether the merger is in the public interest.
Examples of Competition Policy
- Investigation into grocery market – largely cleared big supermarkets of unfair practises.
- Merger between HP foods and Heinz accepted by Competition Commission