Chapter 14: External Regulation of Business Flashcards
Why do governments regulate competition?
If there is no effective competition in a market then it becomes unfair for consumers - there is nothing to stop suppliers from charging whatever prices they wish for their goods or services. Governments therefore act to prevent market share becoming concentrated in the hands of a few producers.
What is the CMA?
The Competition and Markets Authority (CMA) is an independent public body set up by the Competition Act 1998 and the Enterprise Act 2002
What does the CMA do? What are they responsible for?
The CMA will investigate breaches of the Competition Act when matters are referred to it by other authorities (such as the OFT, or sector specific regulators). The CMA looks into mergers, takeovers, markets and the regulation of major industries. It has no powers to instigate its own investigations.
The CMA is responsible for making decisions on competition issues and recommending and enforcing appropriate remedies.
What are the Anti-competitive agreements (Ch 1) of the Competition Act 1998?
Chapter I deals with restrictive practices engaged by companies operating within the UK that distort, restrict or prevent competition. These are primarily in the form of horizontal agreements (agreements to collude between firms on the same level of the supply chain such as retailers or wholesalers). These agreements could be to limit output, collusively share information, fix prices, tender collectively and share markets out.
Exemptions from prohibition are available if the firm can demonstrate that these practices are in the interest of the consumer through increasing market efficiencies or advancing technical progress.
What does Chapter 2 of the Competition Act 1998 deal with?
Chapter II deals with the abuse of a dominant position by a firm who uses practices such as predatory pricing, excessive prices, refusal to supply, vertical restraints and price discrimination to maximise profit, gain competitive advantage or otherwise restrict competition.
If Chapter 2 of the Competition Act 1998 is breached, what happens?
In investigating alleged breaches of chapter II a two-stage process is involved. Firstly it must be identified if the firm actually possesses a dominant market position. Generally if a firm is found to have a market share in excess of 40% then it is considered a threat to competition.
There are no exemptions to chapter II as by its very definition as “abuse” of a market position, one must be guilty of wrongdoing for the chapter to apply.
What are Cartels?
Cartels are a particularly damaging form of anti-competitive activity. Their purpose is to increase prices by removing or reducing competition and as a result they directly affect the purchasers of the goods or services, whether they are public or private businesses or individuals. Cartels also have a damaging effect on the wider economy as they remove the incentive for businesses to operate efficiently and to innovate.
What did the Enterprise Act 2002 do?
The Enterprise Act 2002 made major changes to UK competition law with respect to mergers and also changed the law governing insolvency and bankruptcy. It made cartels illegal and stated that the level of competition in a market should be the basis for investigation.
What may Cartels agree to?
- Price fixing: the price they will charge or the discounts/credit terms they will offer their customers for goods or services
- Bid rigging: deciding who should win a contract in a competitive tender process
- Output quotas/restrictions: limiting the levels of products or services supplied to a market in order to increase the price
- Market sharing: choosing which customers or geographic areas they will supply, or preventing competitors (eg., foreign markets) from entering the market
Where is a cartel more likely to exist?
- In an industry where there are few competitors
- The products have similar characteristics (which leaves little scope for competition on quality or service)
- Communication channels between competitors are already established (eg., trade associations)
- The industry is suffering from excess capacity or there is general recession
Why should cartels be broken up?
Cartels allow businesses to achieve greater profits for less effort to the detriment of consumers and the economy as a whole. For the purchasers of their goods or services this means:
- Higher prices
- Poorer quality
- Less or no choice
How may a business respond to regulations?
Non-response: The business simply ignores the regulations. This may save costs and be an advantage in the short term but may lead to fines, damaged reputation and even potential closure in the medium to long term.
Mere compliance: The business does the minimum needed to comply with regulations and passes the costs of doing so onto the customer
Full compliance: The business adapts their products and processes to fully comply with any and all regulations
Innovation: Regulation could encourage businesses to innovate to create new, better products and methods of doing business
What is insider trading?
People commit a crime under the Criminal Justice Act 1993 if they use knowledge available to them as business insiders to make a profit or avoid a loss ahead of the information being generally known.
What is market abuse?
If you work in the stock market you must observe the standard of behaviour expected of someone there - and so you must not:
- misuse information as an insider
- distort market prices
- create a false or misleading impression about supply, demand or market pricing
- recklessly make false, misleading or deceptive statements
- act in a misleading way to induce another person to act in a particular way in the market.
What is fraudulent trading?
If directors of a company know that it does not have enough money to pay its debts, but keep it trading for any fraudulent purpose, then they have engaged in fraudulent trading.
This means that they can be made personally liable for the company’s debts under the Insolvency Act 1986, as well as facing criminal sanctions.
