Why Competition Policy?

Competitive markets provide the best means of ensuring that the economy's resources are put to their best use by encouraging enterprise and efficiency, and widening choice. 

Where markets work well, they provide strong incentives for good performance - encouraging firms to improve productivity, to reduce prices and to innovate; whilst rewarding consumers with lower prices, higher quality, and wider choice. 

By encouraging efficiency, competition in the domestic market - whether between domestic firms alone or between those and overseas firms - also contributes to our international competitiveness.

Where markets operate freely and effectively competition can be expected to bring all the benefits mentioned above. However, markets can and do fail. Competition policy is therefore used to ensure the efficient workings of markets and to avoid such market failures, most notably to prevent abuses of market power (that is less innovation, higher prices, lower choice, and lower quality than would result from efficient competition). 

Competition analysis seeks to determine whether existing or proposed agreements or practices have led or will lead to abuses of market power, and if so to impose remedies to rectify the problem.

Market power arises when one or a small number of firms dominate a market and it is difficult for other firms to enter. Governments at all levels have an important role to play when this happens. The key to a successful framework for government policy is to focus on market failure to ensure that interventions are targeted on the problem. 

Therefore, the overall aim of competition policy is to encourage and enhance the competitive process to bring the wider benefits to the UK economy.

What the Government is Doing

The Government is committed to modernising and strengthening the UK's competition laws, ensuring that effective and dynamic competition is delivered across the economy, as part of its wider agenda of promoting competitiveness and growth. 

Strong competition provides the best guarantee to consumers of choice and value. But it also makes for strong businesses, providing the spur for them to be dynamic and innovative. It equips them to compete in the global market.

The Government is determined to make the legislation and institutions which safeguard competition fully equipped for the demands of the 21st century. This is key to increasing productivity and competitiveness. And this is why we have undertaken reform of the UK’s competition regime to remove barriers to the effective operation of markets. 

A White Paper published in July 2001 set out our proposals for legislation. These proposals were taken forward by the Enterprise Bill, which received Royal Assent on 7 November 2002. The main competition provisions of the Enterprise Act 2002 which came into effect from 20 June 2003 include measures on:

• Taking politics out of competition decisions
  Instead expert, independent, competition bodies will take decisions on merger and market investigations using competition-based tests.

• More transparent and accountable decision-making by the competition authorities
  The competition authorities will issue comprehensive guidance on the new regime. They will be obliged to consult on and give reasons for all significant decisions. There will be a new right of appeal to the Competition Appeals Tribunals in merger and market inquiries. Inquiries will have to be completed within statutory maximum timetables. Reforms to the Competition Commission's procedures will allow for a more transparent and better informed remedy-setting phase following the publication of provisional competition findings. 

• Criminal sanctions with a maximum penalty of five years in prison to deter those individuals who dishonestly operate hardcore cartels
  Agreements to fix prices, share markets, limit production and rig bids. The offence will be tightly defined ensuring that honest businesspeople will have nothing to fear. US research shows that cartels raise the prices of the affected goods and services by 10 per cent on average.

• Greater opportunities for victims of anti-competitive behaviour to gain redress
  Making it easier to bring claims for damages for losses suffered due to anti-competitive behaviour (there have been no successful actions for 30 years). Consumer bodies will be able to make claims on behalf of individuals who have suffered.

There is a need for modern OFT to reflect a modern economy; an OFT capable of responding quickly to new developments. The Government has therefore implemented measures for a radical restructuring of the OFT to meet the new challenges. Central to these plans for reform was for a board to support the Director General.

Therefore, from 1 April 2003 the office of Director General of Fair Trading was replaced by a new statutory authority, (known as the Office of Fair Trading) and headed now by a Chairman (John Vickers), with a Board of a majority of non-Executive members. They bring greater breadth of experience to the OFT and help to strengthen its independence.

The Enterprise Act 2002 is the second stage in a major overhaul of UK competition law. The first was the Competition Act 1998  (the third and final stage will be the implementation of “EC modernisation”), which was the most significant reform of UK competition law for 25 years and represented a radical modernisation of the UK's competition policy.

The Act came into force on 1 March 2000, and in its first year the number of complaints against anti-competitive practices rose to twice the previous annual rate. On 30 March 2001 the first penalty decision under the new act was made, when Napp Pharmaceuticals was fined £3.21m for abusing a dominant market position (the Competition Commission Appeal Tribunal upheld this decision on 15 January 2002, following Napp's appeal, although the penalty originally imposed was reduced from £3.21 million to £2.2m)

We are determined to open up more activities to scrutiny by the competition authorities. That is why we asked the Director General of Fair Trading in 2000 to undertake a review of restrictions on competition in the professions.

This led to the Professions Report, which was published by the OFT in March 2001. Following on from this the OFT published a further report in April 2002 which reviewed the progress made and what further work needs to be done to liberalise competition in professional services.

And in the White Paper, Opportunity for All in a Time of Change we announced that we are giving the OFT and other regulators a new pro-competition role. We want them to assess existing and proposed laws and regulations and identify those, which create barriers to entry and competition, hold back dynamic and competitive markets and stifle innovation and progress.

We introduced measures, which took effect on 1 September 2000, to bring more competition into the supply and sale of new cars and so help reduce prices. This is in response to a Competition Commission report, which found that prices in the UK have been between 10 and 12% higher than in similar European countries and private car buyers are paying about 10% too much - or £1,100 - for the average car.

We are introducing a fundamental new approach to UK merger control under the Enterprise Act 2002, which is expected to begin to come into effect from 20 June 2003. One which is clear and transparent, with decisions taken by independent competition authorities against a competition-based test. The vast majority of cases will be removed from the political arena. The Secretary of State will only be involved in the small minority of cases raising a defined exceptional public interest issue.

By emphasising the importance of transparency in the competition regime we can provide greater certainty for business. The OFT have already started to publish more details of their advice on mergers.

The Government has also encouraged the European Commission to modernise EU competition rules. As a result, national competition authorities will take over much of the Commission's role in enforcing EU prohibitions on cartels and abuses of dominant position. In April 2003, the Government published a consultation document on how this might work in the UK, including realigning Competition Act procedures to simplify enforcement.

Cartels can add 10-20% on prices for consumers and are increasingly international. We are looking at how we can strengthen co-operation between the OFT and US authorities in this area.