A market could suffer from anti-competitive practices and abuse of market power by dominant firms, for example: – Artificial Entry Barriers. A firm may advertise a lot to increase the sunk costs and thus dissuade potential entrants from the market. – Collusion. Maybe two or more firms agree to fix prices. – Predatory Pricing. A dominant firm deliberately sets a low price and makes a loss so that potential entrants or incumbent firms make a loss and leave the market. – Price Discrimination. Different consumers are charged different prices for the same good. – Refuse to Supply. Maybe a firm does not sell much to one of its buyers because it fears that buyer will become a monopsony.
Competition policy aims to make markets more competitive to benefit consumers with lower prices, increased consumer surplus and more choice.
In the UK, the Office of Fair Trading (OFT) is responsible for maintaining competition in markets. If the OFT discovers evidence of anti-competitive practices it can either directly impose sanctions on the firm (the OFT can fine firms up to 10% of their turnover) or refer the case to the Competition Commission for a detailed investigation. As part of the 2002 Enterprise Act, anyone found guilty of collusion could be jailed for up to 5 years and face an unlimited fine. Some industries have their own regulators that operate instead of the OFT, these regulators have the same role as the OFT i.e. they can fine firms up to 10% of their revenue and/or pass on the case to the Competition Commission for further investigation. Ofgem regulates the energy markets, Ofwat regulates water markets, ORR regulates rail services, CAA regulates air traffic services and Ofcom regulates communication markets.
The Competition Commission investigates monopolies suspected of abusing their market power and potential mergers that will result in a monopoly. Any merger that results in the firm owning at least 25% of the market can be blocked by the Competition Commission. The Competition Commission mayallow a merger even if it results in a firm becoming a monopoly so long as the monopoly acts in the interest of the consumer (for example, innovation).
Privatization The government could make state-owned industries more competitive through privatization. Privatization is the sale of state-owned assets/enterprises/industries to the private sector.
Regulation Alternatively, the government may regulate private firms and force the firms to be productively and allocatively efficient. Regulation could involve the use of price capping or performance targets.
Price Capping A regulator could impose a price cap on an industry such as . RPI is the rate of inflation measured by the Retail Price Index and x is cost-savings that the regulator believes the industry can make by becoming more efficient. Each year the industry’s price is allowed to rise by only .
Instead, the regulator may set the price cap , where k is additional capital investment the regulator and firm have agreed on to make the firm more efficient in the long-run. Each year the firm’s price may rise by only . Different firms in the same industry may be set a different k.
Performance Targets Regulators could set performance targets that firms must meet and then monitor them. Targets could include: – Increased quality. – Reduced customer complaints. – A minimum level of investment.
Regulators then monitor firms to reward firms for meeting targets or fine firms for missing targets. However, there is no guarantee that firms will meet the targets. Also, firms may meet targets by cutting corners for example, by reducing quality or firing workers.
Deregulation Deregulation is the removal of government controls (red tape, laws and regulations) over markets.
Internal Markets Maybe the government decides that it can produce a certain good or service. An internal market is where public sector providers compete amongst themselves for contracts and jobs. Providers must become more efficient to get new contracts. However, there may be significant administration costs.
Public Private Partnership A Public Private Partnership (PPP) is an arrangement by which a government service or private business project is funded and operated through a partnership between the government and private sector.
The most common form of PPP is the Private Finance Initiative (PFI), this is where a private sector firm designs, finances, builds and maintains an asset or piece of infrastructure. The government then leases the facility back from the private sector on a long lease.