In the UK, competition policy has tended to be less rigid than in the USA, where there seems to be a natural tendency to distrust monopoly. Policy has therefore been conducted in such a way as to take account of the issues discussed earlier. This has meant that cases of monopoly or concentrated markets have been judged on their individual merits, on a case-by-case basis.
This pragmatic approach was embedded in UK legislation from the start – which was the 1948 Monopolies and Restrictive Practices (Inquiry and Control) Act. This Act set up the Monopolies and Restrictive Practices Commission to investigate markers in which single firm (or a group of firms in collusion) supplied more than one third of the market. The Commission was asked to decide whether such a market was operating in the public interest, although at this stage the legislation was not very precisely defined.
Since then the legislation has been steadily tightened through a sequence of Acts, the most recent of which are the Competition Act of 1998 and the Enterprise Act of 2002. The Competition Act is in two chapters, one dealing with anti-competitive agreements between parties, and the other dealing with anti-competitive practices by one or more parties – that is, the abuse of dominant market position.
Cartels are also covered in Chapter 1 of the 1998 Act, but less formal agreements between firms are also within the scope of the Act, for example price-fixing, agreements to restrict output or agreements to share a market. The Enterprise Act elevated the operation of a cartel to a criminal offence as opposed to a civil offence.
The conduct of policy is entrusted to two agencies: the Office of Fair Trading (OFT) and the Competition Commission (CC). The OFT has the preliminary responsibility for investigating a proposed merger, and then has the power to either impose sanctions directly or to refer the market to the CC for a full investigation.
A merger is subject to OFT investigation if the firms involved in the proposed merger or acquisition have a combined market share in the UK of more than 25%, and if the combined assets of the firm exceed 70% worldwide. The mission statement of the OFT states:
The OFT is responsible for making markets work well for consumers. We achieve this through promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive
The possible results of an OFT investigation are:
- enforcement action by the OFT’s competition and consumer regulation divisions
- referral of the market to the Competition Commission
- recommendations for changes in rules and laws
- recommendations to regulators, self-regulatory bodies and others to consider changes in rules
- campaigns to promote consumer education and awareness
- a clean bill of health
The last of these indicates that there is no presumption that the OFT will find anything wrong with the market. Indeed, on a number of occasions the OFT have launched a consumer awareness campaign, having found that the problem with the market was the way consumers understood its workings, and not with the market itself.
The first step in any investigation is to identify the relevant market. Until the scope of the market is defined, it is not possible to calculate market shares or concentration ratios.
How should the market be defined in this context? In other words, what products should be included? Or over which region should the market be defined? Take the market for sugar – is this defined as the market for all sugar, or just granulated sugar? Is organic sugar a separate product? Or, regarding the market for rail travel in Scotland, do bus services need to be considered as a part of the Scottish market for travel?
One way of addressing this question is to apply the hypothetical monopoly test. Under this approach, the product market is defined as the smallest set of products and producers in which a hypothetical monopolist controlling all such products could raise profits by a small increase in price above the competitive level. As such, a relevant market is a market to be investigated under competition law, defined in such a way that no major substitutes are omitted but no non-substitutes are included.
It is also important to consider the question of substitutes on the supply side i.e. whether an increase in price might cause others to join the market. Supply-side sustainability is related to the notion of contestability, in the sense that one way a market can be seen to be contestable is if other firms can switch readily into it, i.e. they are seen as potential substitutes