Competition Policy. Competition policy aims to make markets more competitive to benefit consumers with lower prices, increased consumer surplus and more choice.
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.
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 may allow 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).