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Analyse the economic rationale for a competition policy, such as that in the UK, which is intended to limit potential abuses arising from the exercise of monopoly power or anti-competitive practices

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Introduction

Analyse the economic rationale for a competition policy, such as that in the UK, which is intended to limit potential abuses arising from the exercise of monopoly power or anti-competitive practices, illustrating your analysis with reference to at least two examples of competition policy. The prevention of monopolies arising in the UK market is essentially for the purpose of the consumer. If monopolies were to form then prices would rise beyond recognition as there would only be one supplier of possibly essential goods leaving no option for the customer to pay the extortionate prices they are asked to pay. There are two types of monopoly, the pure monopoly and the natural monopoly. The difference between the two being that a pure monopoly is the only supplier in that field of output, with no close substitute and no threat of competition, whereas a natural monopoly is a company which once it is established can produce at an increased level of output at a lower cost therefore forcing its smaller competitors out of business. Another form of market domination is in the form of an oligopoly, which is the cooperation of several companies to achieve the same scale of market domination. Such as the collaboration between Lloyds and TSB. The reasoning behind the possibility of market domination is due to an almost inelastic demand for certain products, i.e. ...read more.

Middle

This meant that JJB continued to fix the price of kits at around �40 for adult and around �30 for junior sizes with barely any competition. The office of fair trading extended its investigation to all the major sports retail outlets across the U.K. with 2 out of the 10 investigated being fined. The fines incurred by all the parties concerned amounted to �18.6 million. The fines were allocated as follows:- -JJB sports were fined the largest amount of all concerned with a total of �8.373million -Umbro the main manufacturer involved were fined �6.64million -Manchester United plc were the most heavily fined of the clubs involved with fines totalling �1.652million -the remainder of the �18.6million fines was put onto the FA and the other clubs involved. The office of fair trade was aided in its quest to punish the involved, by an act put in place allowing them to punish any company thought to be practising unfair trade with a fine of unto 10% of the company's annual turnover. This act was known as the competition act. The Competition Act 1998 gives the Office of Fair Trading the power to investigate and intervene in circumstances where an organisation has practices which have the object or effect of preventing, restricting or distorting competition in the UK. ...read more.

Conclusion

This could easily cause a widening of the gap between the rich and the poor. The reasons why monopolies are bad for an economy are:- -resource misallocation -increased costs -redistribution of income from consumer to monopolist -restricted consumer choice -price discrimination Despite these reasons against allowing monopolisation to occur monopolies do bring some advantages to the market:- -economies of scale i.e. monopolies may benefit from price reductions not available to smaller companies. -high expenditure on research and development Overall though the cons still outweigh the pros of a monopoly economy. The regulators such as the oft are clearly an essential part of today's economic environment, if competitive trade is to continue. Without such organisations consumers would find themselves purchasing goods in an increasingly declining market. If monopolisation were to in the cigarette industry there would still be the same demand for tobacco as ever but supply would decrease and therefore price would rise shifting the whole demand curve. This is because cigarettes are an inelastic product where consumers will pay what ever is asked of them because it would be seen as an essential product by smokers. The chances of monopolisation in the modern market are particularly low due to the fair trade act and the ability to create competition in areas necessary. This means it is unlikely that we will have to pay high prices because of a lack of competition, but unfortunately we still have to pay tax! ...read more.

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