Government intervention to promote competition

In O Level tutorials, we learned that one of the aims of government policies is to have stable prices. We also learned that efficient allocation of resources is very important since economic resources are scarce.

Therefore, promoting healthy competition in the market ensures that the firms try and find out new and efficient ways of producing goods and services. Government can promote competition by restricting the practices used by firms to kill or reduce competition.

Arguments for Government Intervention
Greater Equality – redistribute income and wealth to improve equality of opportunity and equality of outcome
Market Failure – Markets fail to take into account externalities and are likely to under-produce public / merit goods. For example, governments can subsidise or provide goods with positive externalities.
Macroeconomic intervention. – intervention to overcome prolonged recessions and reduce unemployment.

Office of Fair Trading and the Competition Commission

The Competition Commission replaced the Monopolies and Mergers Commission on 1 April 1999. The Commission conducts in-depth inquiries into mergers, markets and the regulation of the major regulated industries such as water, electricity and gas. Every inquiry is undertaken in response to a request made by the Office of Fair Trading (OFT).

The Enterprise Act 2002 introduced new regulations for assessing whether a merger should be allowed to proceed. In allowing most mergers the Commission must determine whether the merger will impact adversely on competition, in other words if it ‘prevents, restricts or distorts competition’ then the merger is likely to be blocked.

The Enterprise Act identifies certain situations which would result in prosecutions for unlawful behaviour if the actions of at least two firms (A and B).
• directly or indirectly fix a price for the supply in the United Kingdom of a product or service by firms A and B
• limit or prevent supply in the United Kingdom of a product or service by both firms A and B
• limit or prevent production in the United Kingdom of a product or service by both firms A and B
• divide between firms A and B the supply in the United Kingdom of a product or service to a customer or customers
• divide between firms A and B customers for the supply in the United Kingdom of a product or service
• fix the terms of a bid in such a way that prevents the normal operation of the bidding process.
The punishment for the operation of a cartel can include imprisonment for up to a maximum of five years and/or a fine.

Europe and USA
In the European Union the European Competition Commission investigates anti-competitive behaviour issuing fines where appropriate. Recent fines issued by the European Competition Commission include:
• April 2007 Dutch brewers: Heineken €219m, Grolsch €31.7m and Bavaria €22.9m for sharing prices
• February 2007 European escalator and lift manufacturers: Kone €142m, Otis €225m, Schindler €144m and Thyssen Krupp €480m for price fixing
• January 2007 manufacturers of gas insulators operating in the EU: Hitachi €52m, Toshiba €91m, Mitsubishi €119m, and Siemens €419m.

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