The Role Competition Authorities Play in Correcting Market Failures and Facilitate Competition - Essay Example

?Critically discuss the role that Competition ities may play in correcting market failures and facilitate competition for a country of your choice. Introduction The business environment of today faces immense pressure from globalization and technological innovation. Firms must be able to adapt to the various challenges coming from the environment and from competitors as well. Basically, this necessitates the vigilance of firms to look for the possible threats that may undermine their business operations. However, on the other hand, this business environment has also presented firms with various opportunities for growth. Moreover, with the promulgation of more liberal trade, consumers can now enjoy better deals from various producers as the myriad of local and international firms increasingly compete on the basis of better pricing and more quality. Moreover, as more and more firms enter the market, companies are really forced to innovate in order to serve their market better. Central to this is competition. Basically, the globalization has greatly helped in levelling the trade barriers wherein the location is now hardly a source of competitive advantage. This has also been greatly helped by the leaps and bounds of technology which has facilitated vast improvements in transportation and communication. However, despite of these innovations, locations remain important when industries cluster on these areas. These industries amass in certain areas which can strengthen the various industries within them in order to be more productive and by directing and concentrating innovation as well as the stimulation of the birth of new business ventures in the area (Porter, 1998). Still, central to this endeavour is the competition or more accurately the presence of competition. Chang and Harrington (2003) recognize the importance of the level of competition that can be brought about by firms that are able to innovate greatly and maintain a global presence. Prior to the dawn of globalization, many companies are snugly operating within their realms and cuddled by their governments. However, nowadays, many multinational firms have far reaching capabilities globally which encourages innovation to bring about quality and at the same time bring down costs. Again, all these are only possible if firms can compete freely and fairly. Hence, there are various competition authorities that tries to ensure that competition remain healthy within a country. Section A Competition Authority Among the foremost issue that most competition authorities try to tackle is the problem of antitrust. In other words, although innovation is greatly encouraged in the free market and that growth of companies are generally favourable to the economy, certain firms can amass greater market and control thru mergers and acquisitions that, if left unchecked, could result to a consolidation of the industry to only one major player. In such a scenario, there is an effective destruction of competition which can lead to inefficiencies. There are cases when cartels are formed or the dominant player induces practices that may hurt competition such as predatory pricing. Ginsburg and Wright (2010) relate about two deterrents to such practices which are the traditional and penalty deterrence. In their analysis, it can be gleaned that the force of penalties and regulation play crucially in order to maintain balance in a market and to ensure the health of the competition within that industry. UK and Competition The United Kingdom (UK) remains as one of the most competitive countries in the world except for a slight respite in the past years when the country was reeling from the effects of the Great Recession. Recently though, the country has reclaimed its spot in the top ten along with other European countries. Looking at the list which includes Sweden, Finland, Denmark, Germany and The Netherlands clearly Europe is a center for competitiveness. Although the UK was temporarily ousted from the top ten, the country was able to bounce back fuelled by its strong performance in the labor market. Furthermore, the country’s performance continues to be buoyed by their large market as well as the sophistication and innovation of the businesses. However, the effects of the previous crisis continually weight down the country most especially its high fiscal deficit and the burgeoning debt of the country which has been exacerbated by a general lack of interest to save (WEF 2011). Clearly, despite the macroeconomic burden being shouldered by the UK, the country remains a bastion of competitiveness. Indeed, ranking as the tenth most competitive economy in the world speaks well of the country’s commitment to competition and free market. In order to ensure that there is fair competition and that the markets and functioning properly, there is the Office for Fair Trading (OFT) which is borne from the Enterprise Act of 2002 and the Competition Act of 1998. Through these laws, the OFT acts as a vanguard to ensure that consumer law is properly enforced and that there are no unfair mergers that will take place which can undermine competition and ultimately the efficiency of competition in the UK market. Necessary for the discharge of its duties is the Competition Commission (CC) which is the one that scrutinizes the different mergers that may take place in the UK market. Moreover, the commission is tasked with regulating certain crucial industries such as the communications and utilities sector. Should complaints be escalated into hearings, there is the special judicial body in order to cater to the needs of competition authorities (Info Provided by BIS UK, 2011). Through the Competition Appeal Tribunal (CAT), the decisions of the various governing bodies are firmly implemented in order to provide adequate treatment to such cases that may arise from the discharge of their duties. In order to do so, the CAT has in its ranks a confluence of discipline ranging from an adept knowledge in business and economics and of course of competition issues. Moreover, members are adept at the law and various regulation rules so that an intelligent and impartial decision can be reached whenever there are complaints against the moves made by the competition agencies (Info Provided by BIS UK, 2011). Through it, the better treatment of competition cases will hopefully lead to an improved understanding of competition laws which is a suitable ground for compliance to take root (Marsden, 2009). Also, even though the UK does not use the Euro currency, the country is a member of the European Union which is the trade bloc in the continent. As such, there are deals and various cross border business transactions that may involve various competition issues. Hence, the Directorate for General Competition of the European Union has been given the authority to oversee the transactions and market movements within the union to ensure that they are free from unfair practices. The agency is also tasked with overseeing trade between members and to ensure that there remains adequate competiton to ensure the efficieny of the market within the realm of the European Economic Area (EEA). Clearly, the expanded trading activities of countries and companies are crucial economic enablers and central to this is the presence of healthy competition in order to ensure that consumers can get the best out of these producers. Also, the presence of these competition agencies prevents more powerful firms from edging out the weaker players through destructive pricing policies and unfair mergers (Info Provided by BIS UK, 2011). In addition, within the continent there are monitoring trustees that oversee these mergers in order to ensure that they are not anti-competition (PWC, 2009). Beyond the realm of competition authorities However, not all industries and companies can be handled by these competition authorities. There will still be industries that will be more efficient in a monopoly market structure such as the London Underground. The subway system can only be cost efficient if run a sole operator. Add another system and it will not be economically sufficient. However, since industries such as these fall outside the realm of competition authorities, there are usually price caps imposed in order to safeguard consumers against unscrupulous practices. Initially starting as a multiple corporations operating the underground railways, this has since long been consolidated and became a wholly owned subsidiary of the Transport for London. This is run by a board appointed by the mayor of London and the railway is regulated by the Office of Rail Regulation or (ORR) which encompasses not only safety but market regulations as well (Info provided by the ORR Website, 2011). Indeed, as in this case there is no doubt that monopolies and even oligopolies will always have a place in an economy because of the inherent need for such market structures. However, it is important that there are adequate reporting mechanisms in case there are needed or forthcoming mergers or takeovers. A wider scope As mentioned, globalization has virtually transformed the whole world into one global marketplace. As such, international organisations and bilateral arrangements ought to be able to integrate the policies such as antitrust in order to ensure that there is adequate competition in the global market. Central to this endeavour are the International Cooperation Network (ICN) and the World Trade Organisation (WTO) (Janow, 2002). As a member of the international community, the UK is also within the boundaries of the competition policies these trade bodies may pursue. As mentioned, the UK is a member of the European Union and is therefore bound by the governing rules and regulations of the trade bloc including various competition policies. . As more and more companies operate internationally, the need to be able to monitor their impacts on the different market segments that they tackle has brought together various Competition authorities to ensure that there is no excesses on the part of these big companies that will greatly undermine competition and economic posterity within and beyond the borders of their country of operations (Parisi, 2010). Section B There is also the Monopolies and Mergers Commission which seeks to regulate the various mergers and acquisitions taking place in the United Kingdom. This is very important since it is important for the commission to ensure that no single firm control more than 25% of the market in a particular industry segment. Hence, whenever there are proposed mergers these are then reported to the commission for proper evaluation. The Director General of Fair Trading will then have to ensure that takeovers resulting to a control of about 25% of the market must then be investigated. This is very important so as not to repeat the near takeover of the distributorship of electricity distribution which happened early 1996 that would have resulted to PowerGen gobbling up Midlands Electricity and National Power taking in Southern Electric. Had these takeovers continued, these would have resulted to a more arduous regulation of the power distribution sector as well as the possible rise in prices that would have burdened consumers (info provided by blacksacademy.net, 2011). True, consolidating these utilities would have been more easier under the management of one entity. It would be a situation somewhat similar to the natural monopolies such as the underground railway system in London. Also, by consolidation, the financial position of the surviving entity would be further strengthened with the assets that will be consolidated into their balance sheets. However, it is important to note that the huge size of the surviving entity will then be able to grant them monopolistic power that in the end can even edge out the other industry players operating within the region. Hence, it is important that these takeovers resulting to such a control by these private firms be prevented in order to avoid market failures emanating from the loss of the competition in an industry. However, it is also important to ensure that these companies as well as those that are owned or controlled by the government do not disrupt the free market forces by upsetting the balance of competition within the market and of course the overall economy of the trade bloc (Buthe, 2005). Moreover, to ensure that there is proper competition, it is also important to watch for exclusive deals that are being awarded to and by different firms. This must be monitored since there is the risk to the efficiency of the market when costs are raised to rivals when the exclusivity arrangements relegate them to more inefficient channels of distribution. This results into an unfair advantage for some firms in the sense that they are now more cost-efficient than their competitors. In the long run, this may edge out the competition which renders the market inefficient. On the other hand, there are improvements that can come from exclusivity deals as this can be valid vertical integration strategies that increases their economies of scale which can make them produce much better and therefore contribute more to the economy. Looking at these two possibilities, competitor authorities are therefore in a quandary to strike a balance in order to reach the optimum policies that can help foster a better market system through balanced competition (Reis, 2009). In the UK, the country has been able to maintain their strong grasp on innovation and the relatively sophisticated businesses operating within the country. It is then important to ensure that such powers are not abused by some firms to gain undue advantage that will offset the economy of the UK and even spill over to its neighbouring economies. Competition: UK and Beyond The recent economic downturn has exposed the weaknesses of the advanced economies and in turn has paved the way for emerging and developing economies to get a bigger share, as well as respect, from the global economy. Indeed, the once proud and enduring market of Europe seems to have been overtaken by these developing economies (Lenoir, 2007). The competition coming from these eager upstarts seems to be upsetting the once formidable foundations of European capitalism. True, most countries in the continent including the UK has regained its prominence even after the economic fiasco. Most of the top ten most competitive nations are from the continent. But, it cannot be denied that China has effectively overtaken the UK. In fact, Townsend (2011) report about the increasing flows of investments by China to the UK. This is a good thing though as these can bring in the needed funding from a country that is awash with cash to a practically cash stripped economy. As mentioned, the debt problems of the country weights down heavily on its economy. Section C Conclusion Competition is an important enabler for free markets to flourish. Without it, markets would be inefficient and the economy as a whole would suffer. Although the presence of monopolies and oligopolies may not be completely eradicated, there must be a certain observance of proper competition within an economy. Currently, the UK has been able to barge back into the top ten most competitive nations actually barely making it back as they are ranked tenth (WEF 2011). The country has been drastically affected by the global downturn towards the end of the past decade. Investments have even contracted mostly due to the unfolding debt crisis within the region (UNCTAD, 2011). Many investors remain spooked and eye the region warily because of the possible spread of the debt crisis crippling some of the European economies. It is encouraging though that China has increased its investments in the UK which is a welcome respite for the country’s economy. Moreover, the other indexes that determine a country’s competitiveness remain strong for the UK which has been instrumental in bringing it back to the top ten after a short absence (WEF 2011). The UK remains a strong player in the global economy and through its Competition authorities; it has maintained the sustainability and efficiency of its market. These competition authorities ensure that the various activities of firms do not result into their undue advantage which can potentially harm their rivals and disrupt competition which is also disastrous for the consumers (Info Provided by BIS UK, 2011). Indeed, the presence of these authorities serves to limit the possible excesses of stronger firms to ensure balance and efficiency in the UK market, its economy and even its neighbours within the European Union. As such, the intervention of the UK competition and authorities in such important issues as the proposed takeovers of the electricity distribution systems serve to maintain a balance in the market preventing the possible market failure resulting into the possible price increases burdening consumers. References BIS UK (2011). Competition authorities. Department of Business Innovation and Skills, UK [online] Available at: http://www.bis.gov.uk/policies/business-law/competition-matters/competition-authorities Buthe, T. (2005). The politics of competition in European Union: The first 50 years. proto-paper prepared for the conference on the State of the European Union, Princeton University. Chang, M.-H., and Harrington, Jr. J.E. (2003). .Multimarket competition, consumer search, and the organisational structure of multiunit firms, Management Science, 49(4), 541-552. Ginsburg, D. and Wright, J. (2010). Antitrust sanctions. The global resource for antitrust and competition policy, Competition Policy International 2010. Info provided by the Office of Rail Regulation (ORR) UK [online] website accessed on December 4, 2011accessed from http://www.rail-reg.gov.uk/server/show/nav.191 Info provided by blacksacademy.net 2011. Definition of a monopoly, UK case, Monopolies and Mergers Commission [online] website accessed on December 4, 2011accessed from http://www.blacksacademy.net/content/3328.html Janow, M.E. (2002). Observations on two multilateral venues: The International Competition Network (ICN) and the WTO. Working draft prepared for the Fordham Corporate Law Institute, 29th annual conference on International Antitrust Law and Policy, October 31 and November 1, 2002. Lenoir, N. (2007). Is the new Europe anti-competitive? Of Counsel, Debevoise & Plimpton, LLP. Mardsen, P. (2009). Checks and balances: European competition law and the rule of law. Draft paper for the 3rd Annual Antitrust Marathon, Boston. Parisi, J.J. (2010). Cooperation among competition authorities in merger regulation. Cornell International Law Journal, 43. Porter, M.E. (1998). Clusters and the new economics of competition. Harvard Business Review, Harvard Business School Press. PWC (2009). Monitoring trustee services in merger control and antitrust. Pricewaterhousecoopers. Reis, A.V. (2009). Decision making by competition authorities in the analysis of exclusive dealing arrangements. School of Business and Public Management, Institute of Brazilian Business and Public Management Issues, Fall. Townsend, M. (2011). A coming wave? Chinese invest flows and UK firms. China Investors.org [Online] http://chinainvests.org/2011/01/15/a-coming-wave-chinese-investment-flows-and-uk-firms/ UNCTAD (2011). World Investment Report 2011: Non-equity models of international production and development. United Nations Conference on Trade and Development. WEF (2011). The Global Competitiveness Report 2011-2012. 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