Competition in the UK Market - Assignment Example

Competition in the UK Market Table of Contents Introduction: Market Competition and its Importance 3 Injecting Competition in the UK market economy 4Conclusion 7 References 7 Introduction: Market Competition and its Importance For an economy to grow and develop efficiently it is very important for a certain amount of competition to be present in the market. A competitive environment is beneficial for the society as a whole, comprising of both the consumers and the producers. Now, competition can be price as well as a non-price one. Price competitions are those that desperately aim to hike the sales through curtailing price whereas non-price competition is that which aim at differentiating those features other than price of the product from those produced by other competitors, in order to increase the profit margin and the total turnover of the firm. The benefits of market competition are – 1. A variety of products in the market will offer a vast range of choices to the consumers. 2. Since the number of products available will be huge, so the individual producers will also be concerned about the price they set for their products. Unless he can prove a difference somewhere in the product quality of his commodity and those produced by others, the producer cannot simply charge a price higher than that charged by his rivals, since that will ultimately affect negatively his own revenues. 3. The consumers will be treated with extra care and interest as the only way in which a producer, who does not really have any difference in the product quality from the rest of the lot, can earn customer loyalty. 4. Market competition compels a producer to make substantial investment in research and development in order to innovate newer features to add to their product if not improve the total quality of the commodity. This step might be a bit costly, but that is where the difference lies between various producers. Those who can afford to make such investments, grow bigger and bigger and keep earning higher revenues than the remaining others. Moreover, a higher degree of innovation will be advantageous for the consumers as they can derive more benefits from the same product and that too at affordable prices. 5. With the level of competition high, the producers will always try to invent new ways to cut down their costs of production. This will make them more disciplined as they will no more squander away an economy’s resources, especially those that have to be paid for. Since most of the natural resources in the world are no more free, so the introduction of market competition indirectly helps in conserving such natural resources, many of which are exhaustible, e.g., coal, oil, etc. () Keeping in mind the advantages associated with market competition the UK government has taken certain measures to introduce competition in the product market of the economy. Mostly it is non-price competition that is found in the UK market. This paper will try to discuss the measures undertaken by the government for the purpose. Injecting Competition in the UK market economy The government of UK in 2001 made it clear that it intended to implement steps for introduction of competition into the market to enhance the economic growth on the basis of supply-side policies. The UK government has basically tried to turn its focus towards non-price competition because price competition is after all a very desperate measure and can even lead the producers to face tremendous losses in their spree of reducing prices, thus adversely affecting the overall economic conditions. Price competition becomes more like a gamble after a certain point of time and hence must not be encouraged. So, the best way to incorporate competition in the market is through injecting measures of non-price competition. Various measures undertaken by the UK government are – 1. Privatisation The first and foremost step that the UK government undertook was that of privatising the nationalised units of production. Privatisation is a step that helps to enhance competition in the market since the market no more remains in the hands of the government, which often has to abide by non-profit motives. The government has to remain concerned about many of the prevailing social issues like unemployment problem or the demographic features of the nation, which often compel it to use low-profit yielding methods of production and still making the products available at affordable rates. However, the same firms when privatized would be operating under profit motives in private hands and thus would be employing better skills and low cost techniques to enhance their profit margin and thus contributing to the economy’s income. The privatisation move undertaken by the British government could be distinguished into three types which were – (i) The introduction of a new scheme – the Private Finance Initiative (PFI) – that was more like a public-private partnership and was intended to employ profitable modes like skilled labour, etc. to build up better public infrastructure, e.g., roads, bridges, etc. throughout the country. Obviously, the government would be allowed to use them at concessional rates for allowing the right to the private houses to enjoy the entire profits coming up from those projects. (ii) Partially selling off the ownership of a public enterprise to one or more private entrepreneurs through floating shares. (iii) Completely transferring the rights of an enterprise to one or many strategic businessmen. Some of the sectors where the UK government implemented this privatisation move were – the oil industry (British Gas Corporation was partially privatised to form Enterprise Oil), electricity (two privately owned competing firms National Power and PowerGen were the result of a privatisation bid from the centrally owned monopoly Central Electricity Generating Board), etc. (Implementing Privatisation: The UK Experience, n.d., pp1 & 5). 2. Liberalising the market Liberalisation or opening up of markets is a well known measure that is undertaken to break down the barriers to entry in a market. This measure allows everyone the right to operate freely in the market. Obviously some amount of rules and regulations must be there but their existence is more like a formality than a barrier to entry. The UK Government has in fact made legalized the Competition Act in 1998, according to which it is strictly unlawful for firms to enter into cartels and other anti-competitive measures that might result to the creation of a dominant market position by the firm or group of firms. Any firm or group of firms that disobeys this rule might be penalized by a fine of upto 10% of the total turnover in the market it is operating in and even upto three years of imprisonment. The UK government has also established a legal body – The Office of Fair Trading – that looks into the matter of such cases dealing with market competition and the rights of the operators in the market (Benefits of Competitive Market, n.d.). This move of liberalising the economy was first noticeable in the telecom industry and the energy market. The liberalisation move taken in the energy market, to be more precise the electricity industry has allowed the customers to choose among various players operating in the market now. The electricity industry has witnessed more than 25% of its customers switching their business among various electricity producing firms. On the other hand, the domestic gas industry has also been opened up and now almost 25% of its customers have changed their suppliers. This rise in the number of operators has also benefited the customers in having reduced the prices of the commodities. This change is also hugely noticeable in the telecom industry of UK that was opened up in 1999 and today has resulted to an immense fall in the cost of making international calls. Also the price of mobile phones have reduced devastatingly with the price falling by 20% just 18 months after the liberalisation move, thus making it affordable for a larger section of the population (Davis S., Coles H., Olczak M., Pike C. & Wilson C., July 2004, pp 9 & 10). Conclusion It is very obvious that the moves to introduce competition in the market are like blessings for the general public as a whole. However, competition may be of two types as already discussed. While non-price competition is a beneficial move for the economic improvisation, price competition can be devastating and there are even stories which say that many firms went bankrupt while in the mood of reducing their prices more sharply to beat their competitors. Hence, the price competition can be very devastating. But unless the government of an economy does not incline towards it, competition is a fairly good strategy for economic development. References Benefits of Competitive Market, n.d.[Online]. Available at http://tutor2u.net/economics/content/topics/competition/competition_importance.htm [Accessed on August 19, 2009] Davis S., Coles H., Olczak M., Pike C. & Wilson C., July 2004, The Benefits from Competition: some illustrative UK cases [pdf]. University of East Anglia. Her Majesty’s Treasury, n.d., Implementing Privatisation: The UK Experience [pdf]. Available at http://www.wto.org/english/tratop_e/serv_e/symp_mar02_uk_treasury_priv_guide_e.pdf [Accessed on August 19, 2009] Bibliography Hans-Hermann Hoppe, 2006, The Economics and Ethics of Private Property, Kluwer Academic Publishers (Springer). Read More