Reforms in Competition Policy in the UK - Essay Example

Introduction In any business environment, competition is a vital element that brings about both positive and negative results. This is because it is seen as a sort of reward for innovation and efficiency, it is also enhances productivity within any given country or region. In addition, competition ensures that customers can get low price and more choices. Besides this, their living standards are raised. Indeed, if competition is supported by the right competition policies, then a country can be well on its way to achieve economical prosperity. (Porter, 1998) In this context, policies in this area are necessary to ensure that trade practices are regulated, undue competition is restricted through legislature and that markets are strengthened so that businesses can become viable in the global market. Competition policies are designed to ascertain that the financial market is opened up. Besides this, it also floats the country’s currency and decreases trade barriers. There are a number of direct benefits that come out of competition policies to businesses; some of these include low costs for utilities like electricity, telephones and other telecommunication charges. Transportation costs are also reduced like rail freights and port. (Khoury, 2004) However, country’s undertaking such policies should be aware that this involves a high cost to them. There are a large number of parties that are affected negatively by this kind of scheme. The first are industries, the second are households, the third are industries and even regions n general. Households are the ones who have to bear the burden of job cuts and consequently loss of income spiralling from competition policies. Reforms in competition policy after 1998 Prime Minister Gordon Brown believes that the function of competition policy is to promote competition and to reinforce markets. He believes that its purpose is to regulate the business environment such that purchasers and challengers can be protected. In addition, incentives in business mustn’t be obliterated; they should still be able to create, invest and take risks. Recent changes in competition policy have been centred along these latter mentioned principles Laws related to mergers The UK parliament has looked at merger laws that were passed in the competition policy of 1998. This merger law has been placed under scrutiny by parliament through the Enterprise bill. This Bill that was passed in the year 2000 was designed to regulate mergers within the business environment. The law stipulates that mergers should be made only when they do not limit competition. Mergers that give such indications are to be taken to the Office of Fair Trading. This body will determine whether the merger should be subjected to further scrutiny under the Competition Commission which has the mandate to halt or allow progress of the merger. (O’Shaughnessy, 1999) These reforms are aimed at providing some additional safeguards against unfair trade practices. Some business owners contemplating mergers may have unfair possession of assets if the mergers are completed thus justifying the need for regulations. There are a number of services that have blockages in regards to mergers. An example of an unhealthy merger that was prohibited in the year 1999 was the Manchester United/ BSkyB merger. Such a merger would present considerable problems to the business environment surrounding media communications. Firstly, the merger was going to give the media Company undue vertical privileges that would inhibit other players in the industry. Consequently, this effect would then trickle down to the final consumer and cause dissatisfaction because only one company has exclusive privileges and will therefore have more market power. (Porter, 2002) Restrictions of competitive agreements and dominant positions in the market Competition policies in the recent past also regulate provision of services that are outside the traditional domain of any business. This has received a lot of emphasis after technological advancements. For example, a media company that has traditionally been broadcasting using television may bring about unfair competition when it starts providing its services through the internet. In this regard, regulation must be incorporated to improve the situation because such behaviour is anticompetitive. Price Caps Price Caps on wholesale prices have also been imposed in industries that posses certain characteristics after the year 1998. Such Companies must; Have adequate market power Have the capability of changing supply prices Perform their trade in non-multiple markets Operate in a market that doesn’t have uncapped substitutes An example of such a policy change was when Britain imposed a price Cap on average prices in the electricity provision sector during the year 2003. The government has exercised caution in the application of this act because it faces the danger of severely impeding business if a market does not follow the above stated conditions. For example if the government imposes a Price Cap on a market that has substitutes that are uncapped, then the effect could be detrimental to business. (Shipley and Neale, 2007) Establishment of Commissions Following the Competition policy Act of 1998, there have been a number of Commissions set up to examine whether competitors are playing according to the rules. For example in the communications industry, unfair competition is kept on check by the Film Distributors Association, while in the energy sector, competition is checked by NETA. The Competition Commission was also set up to ensure that all players within a given industry adhere to fair competition rules. Some of the tasks given to this Commission include investigation of claims that a company is engaging in anticompetitive behaviour or when a merger is questionable in nature. The Commission also examines new entrants in the market and warrants that those new entrants do not interrupt the rules of fair trade. Some of the measures that can be taken by this commission include; prevention of mergers, suggestions on price controls and licence issuance. Licence regulations The government has imposed a number of regulations that are designed to ensure equity in markets and to prevent over concentration of players within a given business environment. In addition, it has also ensured that those with licences are conducting their trade in an appropriate manner i.e. companies must not abuse their positions in the market. Some of the issues which receive emphasis before the issuance of licences and after are; Manoeuvring complex rules in the market Capacity withholding Price bidding schemes Using contractual positions All the above are ways in which Companies can demonstrate substantial market positions. This means that it is possible for companies to affect market demand or the conditions necessary cost change. This may apply to those changes that occur over a large duration of tome or those that occur suddenly but in large amounts. These kinds of licence requirements are especially relevant in the electricity generation and distribution sector. (El-Agraa, 2004) Establishment of a Competition Pro Bono Scheme After the competition policy had been passed, it became necessary to handle cases related to breach of this act. This was done by a number of bodies including the Office of Fair Trading. However, the body realised that it could not solve all these problems presented before it. This was the reason why it established a Competition Pro Bono Scheme. The purpose of this scheme is to ensure that only the cases that are valid legally are received by the Office of Fair Trading. As such, the scheme acts as a sort of platform where legal advice can be dispensed. (Annual Review of European Community Affairs, 1999) Conclusion The passing of the competition policy act has brought about a lot of changes in the sector as it acted as a platform for more reforms. The UK parliament has passed laws that favour fair competition. In 2000, it passed the enterprise bill that was meant to deal with merger and to ensure that these were done with the consumer’s best interest in mind. Any discrepancies were to be solved by the Office of Fair Trading. The government has also regulated new entrants in the market by the introduction of Price Caps especially in the energy sector. Besides this, unfair competition has been prevented by the government especially when Companies seem to be dealing with a portfolio that was not originally assigned to them. There have also been Commission set up to guard against unfair commission and the most notable of these is the Competition Commission. Their purpose is to investigate claims of unfair competition. Lastly, there has been the issuance of licences thus regulating over concentration of players within an industry. (Porter, 1999) Reference Annual Review of European Community Affairs; (1999): Centre for European Policy Studies, Brussels, Brassey's, London. El-Agraa, A. (2004): The Economics of the European Community (4th edition.) Harvester Wheatsheaf, London. Khoury, S.J (2004): Counter trade: Forms, Motives, Pitfalls and Negotiation Requisites; Journal of Business Research. Shipley, D.D. and Neale, C.W. (2007): Successful Counter trading. Management Porter, M. (2002): Governance Crossroads; Chapter in Global Competitiveness Report World Economic Forum; Oxford University Press Decision Porter, M. (1998): The Competitive Advantage of Nations: with a new introduction, Macmillan Business O’Shaughnessy, n. (1999): The Idea of Competitive Advantage and the Ideas of Michael Porter; Strategic Change; Vol.6 Porter, M. (1999): The Competitive Advantage of Nations; Harvard Business Review Read More