Competition policy - Business Environment

Whereas privatization has focused on the balance between public and private provision within the overall economy, UK government.

Competition Policy in Business Environment

Competition policy has largely been concerned with regulating market behaviour and in particular with controlling potential abuses of market power by firms acting singly or in concert in specific markets. To achieve these aims, successive British governments have relied mainly on legislation, as well as on a measure of self-regulation and persuasion, and have generally taken a more liberal view of market structures than that taken in the United States, where monopolies have been deemed illegal for over a century.This legislative framework to regulate market activity, and the institutional arrangements established to support it, are considered immediately below. The evolving legislative framework Official attempts to control market behaviour through statutory means date back to the late 1940s with the passage of the Monopolies and Restrictive Practices Act1948. This Act, which established the Monopolies Commission (later theMonopolies and Mergers Commission), empowered it to investigate industries in which any single firm (a unitary monopoly), or a group of firms acting together, could restrict competition by controlling at least one-third of the market. Following such an investigation, the Commission would publish a report which was either factual or advisory and it was then the responsibility of the relevant government department to decide what course of action, if any, to take to remove practices regarded as contrary to the public interest. In the event, the majority of theCommission’s recommendations tended to be ignored, though it did have some success in highlighting the extent of monopoly power in the United Kingdom in the early post-war period.
In 1956 investigations into unitary monopolies were separated from those into restrictive practices operated by a group of firms, with the enactment of the Restrictive Trade Practices Act. This Act, which outlawed the widespread custom of manufacturers jointly enforcing the retail prices at which their products could be sold, also required firms to register any form of restrictive agreement that they were operating (e.g. concerning prices, sales, production) with the Registrar of Restrictive Practices. It was the latter’s responsibility to bring such agreements before the Restrictive Practices Court and they were automatically deemed ‘against the public interest’, unless they could be justified in one of a number of ways (e.g. benefiting consumers, employment, exports). Further extensions to the Act in 1968 (to cover‘information agreements’) and in 1973 (to cover services) were ultimately consolidated in the Restrictive Trade Practices Act 1976. This new Act vested the responsibility for bringing restrictive practices before the court in the recently established Director General of Fair Trading (see below).
A further extension of legislative control came with the passage of the Monopolies and Mergers Act 1965. The Act allowed the Monopolies Commission to investigate actual or proposed mergers or acquisitions which looked likely to enhance monopoly power and which involved at that time the takeover of assets in excess of £5 million. The aim of this Act was to provide a means of regulating activities which threatened to be contrary to the public interest, by permitting government to decide which mergers and acquisitions should be prohibited and which should be allowed to proceed and, if necessary, under what terms. Additional steps in this direction were taken with the passage of the Fair Trading Act 1973 and the Competition Act 1980, the main provisions of which are summarized below:A scale monopoly exists where at least 25 per cent of a market is controlled by a single buyer or seller; this can be applied to sales at local as well as national level and can include monopolies resulting from nationalization.Investigations can occur when two related companies (e.g. a parent and a subsidiary)control 25 per cent of a market or when separate companies operate to restrict competition even without a formal agreement (e.g. tacit collusion). Mergers involving gross worldwide assets of over £70 million or a market share of over 25 per cent can be investigated.
Responsibility for overseeing consumer affairs, and competition policy generally, lies with the Director General of Fair Trading (DGFT), operating from the Office of Fair Trading (OFT). The DGFT has the power to make monopoly references to the renamed Monopolies and Mergers Commission (MMC) and to advise the relevant government minister on whether merger proposals should be investigated by the MMC.
In the latter context, it is worth noting that while there was no legal obligation on companies to inform the OFT of their merger plans, the Companies Act 1989 introduced a formal procedure enabling them to pre-notify the DGFT of merger proposals, in the expectation that such pre-notification would enhance the prospects for rapid clearance in cases which were deemed straight forward. While the question of market share still remains an important influence on official attitudes to proposed mergers or takeovers, there is no doubt that in recent years increasing attention has focused on anti-competitive practices and under theCompetition Act 1980 such practices by individuals or firms as opposed to whole markets could be referred to the MMC for investigation. In addition the Act allowed the Commission to scrutinize the work of certain public sector agencies and to consider the efficiency and costs of the service they provided and any possible abuses of monopoly power, and similar references could also be made in the case of public utilities which had been privatized (e.g. under the Telecommunication Act 1984, the Gas Act 1986, the Water Industry Act 1991).Additional statutory control has also come in the form of EU legislation governing activities which have cross-border implications. Article 81 (formerly Article 85)of the Treaty of Rome prohibits agreements between enterprises which result in a restriction or distortion in competition within the Union (e.g. price fixing, market sharing). Article 82 (formerly Article 86) prohibits a dominant firm, or group of firms, from using their market power to exploit consumers; while further Articles prohibit the provision of government subsidies if they distort, or threaten to distort, competition between industries or individual firms.Moreover, under Regulation 4064/89 which came into force in September 1990, concentrations or mergers which have a ‘Community dimension’ have become the subject of exclusive jurisdiction by the European Commission. Broadly speaking, this means that mergers involving firms with a combined worldwide turnover of more than €5 billion became subject to Commission control, provided that the EU turnover of each of at least two companies involved exceeded €250 million and the companies concerned did not have more than two-thirds of their EU turnover within one and the same member state. Mergers which do not qualify under the regulation remain, of course, subject to national competition law.Since previous editions of this book were published the UK government has acted to bring UK competition policy into line with EU law. Under the Competition Act 1998 which came into force on 1 March 2000 two basic prohibitions havebeen introduced:A prohibition on anti-competitive agreements, based closely on Article 85 of the Treaty of Rome (now Article 81).A prohibition of abuse of dominant position in a market, based on Article 86(now Article 82).These prohibitions, which replace a number of other pieces of legislation (e.g. the Restrictive Trade Practices Act 1976; the Resale Prices Act 1976; the majority of the Competition Act 1980), were designed to be enforced primarily by the DGFT, together with the utility regulators, who would have concurrent powers in their own sphere of operations. Companies breaching either or both of the prohibitions would be liable to fines and may be required to pay compensation to third parties affected by their anti-competitive behaviour. With the passage of the Enterprise Act in 2002, further significant changes have been introduced, including the addition of strong deterrents for individuals involved in breaches of competition law, the modernization of the monopoly and merger rules, and the restructuring and extension of the powers of the competition authorities(see below). Whereas the Fair Trading Act emphasized the notion of the ‘public interest’ in examining anti-competitive practices, the new legislation applies the test of a ‘substantial lessening of competition’ when the competition authorities are called upon to assess an existing or planned meger. To be deemed a ‘relevant merger situation’, one of two thresholds has to met: the value of UK turnover of the enterprise acquired/to be acquired exceeds £70 million (the turnover test); or the share of goods/services in the UK or a large part of the UK that is/will be held by the merged enterprise is at least 25 per cent (the share of supply test).

In a further development in 2004, the European Commission adopted a regulation which gives the national competition authorities and courts additional responsibilities for the application of Articles 81 and 82 (see above). In essence the Office of Fair Trading and the sectoral regulators now have the power to enforce EC competition rules and, as a consequence, the Competition Act 1998 has been amended to bring it in line with the new European system.

The institutional framework
The formulation and implementation of UK competition policy has traditionally involved a variety of agencies, including the Department of Trade and Industry, theOffice of Fair Trading, the Monopolies and Mergers Commission and the Mergers Panel. Of these, the MMC (now the Competition Commission) and the OFT deserve special attention.From its foundation in 1948 until its replacement in 1999, the Monopolies and
Mergers Commission remained a statutory body, independent of government both in the conduct of its inquiries and in its conclusions which were published in report form.Funded by the DTI, the Commission had a full-time chairperson, and around 35 other part-time members, three of whom were deputy chair people and all of whom were appointed by the Secretary of State for Trade and Industry. Such appointments normally lasted for three years at the outset and included individuals drawn from business, the professions, the trade unions and the universities. To support the work of the appointed members, the Commission had a staff of about 80 officials, two-thirds of whom it employed directly, with the remainder being on loan from government departments (especially the DTI) and increasingly from the private sector.
It is important to note that the Commission had no legal power to initiate its own investigations; instead, references requests for it to carry out particular inquiries came either from the Secretary of State for Trade and Industry or theDirector General of Fair Trading, or from the appropriate regulator in the case of privatized industries and the broadcasting media. Where a possible merger reference was concerned, the initial evaluation of a proposal was made by a panel of civil servants(the Mergers Panel) who considered whether the merger should be referred to the MMC for further consideration. The decision then rested with the Secretary of State, who took advice from the Director General of Fair Trading before deciding whether the proposal should be investigated or should be allowed to proceed. Under the legislation, references to the Commission could be made on a number of grounds. As indicated above, these included not only monopoly and merger references but also references concerned with the performance of public sector bodies and privatized industries and with anti-competitive practices by individual firms(i.e. competition references). In addition, the Commission was empowered to consider general references (involving practices in industry), restrictive labour practices and references under the Broadcasting Act 1990, as well as questions of proposed newspaper mergers, where special provisions apply.On receipt of a reference, the Commission’s chairperson appointed a small group of members to carry out the relevant inquiry and to report on whether the company (or companies) concerned was operating or could be expected to operate against the public interest. Supported by a team of officials, and in some cases including members appointed to specialist panels (e.g. newspaper, telecommunications, water and electricity), the investigating group gathered a wide range of written and oral evidence from both the party (parties) concerned and from others likely to have an interest in the outcome of the inquiry. In reaching its conclusions, which tended to take several months or more, the group had to take into account the ‘public interest’, as defined under section84 of the Fair Trading Act 1973, which stressed the importance of competition, the protection of consumer interests and the need to consider issues related to employment, trade and the overall industrial structure. While in most references, issues relating to competition were the primary concern, the Commission was able to take wider public interest issues into account and could rule in favour of a proposal on these grounds, even if the measure appeared anti-competitive.The culmination of the Commission’s inquiry was its report which, in most cases, was submitted to the Secretary of State for consideration and was normally laid before Parliament, where it often formed the basis of a debate or parliamentary questions.In the case of monopoly references judged to be against the public interest, the Secretary of State with the advice of the DGFT decided on an appropriate course of action, which could involve an order to prevent or remedy the particular adverse effects identified by the Commission. In the case of merger references, a similar procedure occurred in the event of an adverse judgement by the Commission. The Secretary of State, however, was not bound to accept the Commission’s recommendations; nor was he or she able to overrule the conclusion that a merger does not operate, or may be expected not to operate, against the public interest. It is important to note that at all stages of this multi-stage process, a considerable degree of lobbying occurred by the various interested parties, in an attempt to influence either the outcome of the investigations or the subsequent course of action decided upon. Moreover, considerable pressure tended to occur, even before a decision was taken as to whether or not to make a reference to the MMC. As a number of recent cases have shown, lobbying against a reference can represent a key step in justifying a proposed merger. By the same token, lobbying for a reference has tended to become an important weapon used by companies wishing to resist an unwelcome takeover, particularly where matters of public interest appear paramount.Following the passage of the Competition Act 1998, the MMC was replaced (on 1April 1999) by the Competition Commission, an independent public body. The chairperson (full-time) and members (part-time) of the Commission are appointed by the Secretary of State for Trade and Industry following an open competition andas in the case of the MMC are drawn from a variety of backgrounds and initially serve for a period of eight years. Organised into a series of panels, the Commission is supported by a staff of about 150, who include administrators, specialists and individuals engaged in support services. Most of these are direct employees; the remainder are seconded from government departments.The role of the Commission is to examine mergers and market situations referred to it by another authority, usually the Office of Fair Trading. It has no powers to conduct enquiries on its own initiative. Under the Enterprise Act 2002, theCommission has been given the responsibility for making decisions on competition questions and for making and implementing decisions on appropriate remedies. It also investigates references on the regulated sectors of the economy, including the privatized public utilities, the broadcasting and media businesses and the financial services sector.
The Office of Fair Trading was initially a non-ministerial government department headed until recently by a Director General, who was appointed by the Secretary of State for Trade and Industry. Under the Fair Trading Act 1973, the DGFT was given the responsibility of overseeing consumer affairs as well as competition policy and this included administering various pieces of consumer legislation, such as the Consumer Credit Act 1974 and the Estate Agents Act 1979.In carrying out his or her responsibilities in both these areas, the Director General was supported by a team of administrative, legal, economic and accountancy staff and had a Mergers Secretariat to co-ordinate the Office’s work in this field.
With regard to competition policy, the OFT’s duties were originally governed primarily by the Fair Trading Act and the Competition Act 1980; in addition, under the Restrictive Trade Practices Act 1976 the Director General had responsibility for bringing cases of restrictive practices before the Restrictive Practices Court. With the passage of the Competition Act 1998, the new prohibition regime has been applied and enforced by the DGFT, and the OFT was given additional resources to root out cartels and restrictive behaviour. The legislation gave the Director General considerable powers to investigate if he/she had a reasonable suspicion that either of the prohibitions was being infringed. Under certain circumstances the DGFT could also grant exemptions from the scope of the two prohibitions and could be called upon to defend her/his decisions before the Competition Commission.Following the Enterprise Act 2002, the OFT has become a corporate body headed by a board which has replaced the role of the DGFT. Under the legislation, the OFT has been given a leading role in promoting competition and consumer interests and is now the main source of reference for mergers referred to the Competition Commisssion.

According to the OFT website, the organisation has three main operational areas of responsibility: competition enforcement, consumer regulation enforcement, and markets and policy initiatives. Its Annual Plan required under the 2002 Act is a useful source of reference on the work of the OFT and on its key objectives.

Some illustrative cases of competition policy
Since it was established in 1948, the MMC/Competition Commission has produced hundreds of reports, covering a wide range of issues and affecting firms of different sizes in a variety of markets. At the outset most of its inquiries concerned monopoliesreflecting its initial role as the Monopolies Commission. In more recent times, its work has embraced not only mergers, which have tended to be its major preoccupation, but also nationalized industries and, more recently, the work of theprivatized large utilities. The examples below provide a good insight into the Commission’s role in competition policy and its relationship with the Office of Fair Trading. Students wishing to investigate a particular case in more detail should consult the appropriate report, a full list of which can be obtained from the Commission’s library in London or via its website. Nestlé, 1991This concerned the claim that the Swiss-based foods group was using its monopoly on the supply of instant coffee in the United Kingdom to keep prices high.Concerned that the company was being slow to pass on to consumers the benefits of a fall in the price of raw coffee beans, the DGFT asked the MMC to investigate the instant coffee market. Following a nine-month investigation, the Commission concluded that, while the company supplied more than 47 per cent (by volume) of the United Kingdom’s instant coffee, there was still effective competition in the market and a wide degree of consumer choice, with more than 200 brands available(in 1989) and the leading super markets stocking on average 30 brands. Despite the facts that Nestlé had higher levels of profitability than its main competitors, and that there was a tendency for branded coffees generally to respond less quickly than own brands to reductions in input prices, the Commission concluded thatNestlé’s monopoly did not operate against the public interest. The DGFT indicated, however, that the operation of the soluble coffee market should be kept under review to ensure that it remained competitive.British Gas, 1992This involved two parallel references to the Commission by both the President of the Board of Trade (under the terms of the Fair Trading Act) and the Director General of Gas Supply (under the Gas Act 1986). The first asked the Commission to investigate the supply of gas through pipes to both tariff and non-tariff customers; the second to investigate the supply of gas conveyance and gas storage facilities.According to the Office of Fair Trading, very little competition existed in the gas industry, since 17 million domestic household customers had no alternative source of supply and BG’s control over storage and transmission facilities inhibited true competition in the industrial market where, theoretically, industrial customers could buy from other suppliers. In the Commission’s report published in August1993, the MMC called for British Gas to lose its monopoly of supply to domestic households by no later than 2002 and for the privatized utility to be split into two separately owned companies.Midland Bank, 1992This concerned two bids for the Midland Bank, made by Ll oyds Bank and the HongKong and Shanghai Banking Corporation, and illustrates the question of split jurisdiction between the United Kingdom and the EU. Lloyds’ bid fell within the UnitedKingdom’s jurisdiction and was referred to the MMC as raising potential competition issues a course of action which caused Lloyds to abandon its proposed merger. In contrast, the HSBC bid was deemed to be of wider concern and was referred to the competition authorities in Brussels. Following clearance by the EU, the HSBC proceeded with its bid and this was accepted by Midland’s shareholders.
Video games, 1995
This investigation concerned the supply of video games to the UK market which was dominated by two Japanese companies, Nintendo and Sega. The Commission found the existence of a monopoly situation which affected pricing and entry by new firms.It recommended the abolition of licence controls which allowed the two suppliers to charge excessive prices and the removal of restrictions on rental of games.
UK car prices, 1999-2002
After persistent claims that UK car prices were higher on average than prices in other European countries, the OFT called for a full-scale monopolies investigation into the relationship between car makers and dealerships. In its most recent report the Competition Commission found that the existing system operated against the public interest, particularly with regard to prices, choice and innovation. It highlighted, in particular, the adverse effects of the selective and exclusive distribution system permitted by the Block Exemption within the EU.
Morrison’s takeover of Safeway, 2003

In March 2003 the Competition Commission was asked to look at the proposed acquisition of the supermarket chain Safeway by four other rival supermarket groups: Asda, William Morrison, Sainsbury’s and Tesco. The key concern was whether the proposed acquisition would lead to a lessening of competition that would adversely affect the consumer. After a lengthy investigation of the likely competitive impact, if any, of the proposed mergers went ahead, the Commission recommended that Asda, Sainsbury’s and Tesco be prohibited from acquiring the whole or any part of Safeway, while Morrison’s bid could go ahead subject to the company divesting some Safeway stores in certain localities.

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