- Advertisements – showing their level of service is better than competitors.
- Celebrity endorsement – Jamie Oliver helps Sainsbury’s through special advertisements and exclusive products with his name on.
- Loyalty card – Giving something back to the consumer every time they shop at their store.
The downside is that the barrier to entry is very high and any company coming into the market would need a big backer or they would run the risk of being squeezed out. Another real threat is the risk of two or more companies wanting to form collusions, which would affect the balance of market power in their favour.
Monopolistic Market
A company is classified as having a monopoly when it is either the only company within its market or holds over 70% of the market share. E.g. Microsoft is affectively a monopoly as almost every computer uses their Widow’s operating system. The advantage to monopolistic company is that it is able to price its products at what ever it wants as no company can compete with them. Even though innovation is slow the company will still have a research and development section of their business.
The downside to this is that there is almost no entry for new companies to join the market and the monopolistic company can be very wasteful. By this the report means that the company could be wasting money through slack working practises, bad deliveries, bad after care service, etc…
Looking at the different markets that businesses are in the report has found that for a company to succeed it needs a good amount of competition to keep the company working efficiently. The barriers of entry need to be low to allow new companies to enter, as they will bring in new competition and innovation. The amount of profit a company is able to receive should be high enough to allow them the chance to innovate the market with new products.
The structure of the U.K. competition policy
The Competition Act 1998 came into force on the 1 March 2000. When it was introduced in March the act added two main prohibitions:
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Chapter 1 - prohibition of anti-competitive agreements, based closely on Article 81 of the EC treaty.
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Chapter 2 - prohibition of abuse of a dominant position in a market, based closely on Article 82 of the EC Treaty.
The key aspects of the new legislation are:
- Anti-competitive agreements, cartels and abuses of a dominant position are now unlawful from the outset.
- Businesses, which infringe the prohibitions, are liable to financial penalties of up to 10% of UK turnover for up to 3 years.
- Competitors and customers are entitled to seek damages.
- The Director General of Fair Trading has new powers to step in at the outset to stop anti-competitive behaviour.
- Investigators are able to launch 'dawn raids', and to enter premises with reasonable force.
- The new leniency policy will make it easier for cartels to be exposed.
The intention is to create a regulatory framework that is tough on those who seek to impair competition but allows those who do compete fairly the opportunity to thrive. (Information above retrieved from: http://www.dti.gov.uk/ccp/topics2/competition_act.htm)
There are three main areas where the competitions authority will usually intervene with a business. These areas are:
- Collusion – A secret agreement between two or more parties for a fraudulent, illegal, or deceitful purpose. This is usually on price of products and is done to stop the amount of competition between the companies and allow them to gain more market share over the companies not involved in the collusion. If companies are found to be colluding it means they are in breach of the chapter 1 prohibition in the Competition Act 1998. This means that the OFT (office of fair trading) has the power to impose fines of up to 10% of each companies turnover found to be colluding.
- Abuse of market power – Where a company takes it on themselves to force their smaller suppliers to cut their prices, as they are more powerful. Having a healthy sum of market power is not unlawful and usually there is always one market leader in any given market. It becomes illegal when a company starts to abuse its power by means of discrimination to suppliers, predatory pricing, etc… By abusing their market power company’s are in breach of Chapter 2 of the Competition Act 1998. If found in violation of this through investigation the OFT have the power to impose a fine of a maximum of 10% of the company’s turnover.
- Mergers - The union of two or more commercial interests or corporations. This can sometimes be beneficial to the market as it could generate more competition within the market. This was the case when Morrison’s took over Safeway. As a result there are now four big players in the supermarket sector rather than 3 with one big market leader. With this though there are some mergers that make the amount of competition limited and this is where the OFT step in and start an investigation into whether or not it will affect the level of competition. In this area the OFT have the power to block the merger going ahead or impose key steps that both companies have to take before the merger can take place.
Two examples of the OFT using their powers
Here the report has shown two real examples of where the OFT have been informed of illegitimate trading and have establish an investigation. A copy of each example can be found in the appendix.
- Record fines for toys price fixing
(A copy can be found under appendix 1.0)
This is a good example of Argos and Littlewoods forming a cartel, along with Hasbro (the toy manufacturer). The companies were found to have entered into an agreement to fix the price of Hasbro toys. By doing so it gave them a bigger amount of profit and market share from 1999 to 2001. From their investigation, the OFT found that they were in breach of chapter one of the competition act 1998.
OFT took the action of fining both, Argos (£17.28 million) and Littlewoods (5.37 million), but Hasbro was granted full leniency and did not have to pay any part of their initial fine of 15.59 million due to their co-operation with the OFT’s investigation.
Although Hasbro had been given full leniency from the initial investigation they were still fined 4.95 million in November 2002 for their agreement with 10 distributors to not sell their toys below list price.
- Scottish Newspaper group fined for predatory pricing
(A copy can be found under appendix 2.0)
Here the OFT were contacted to look into the Aberdeen Journal, which was, according to its competitors, to be predatory pricing its advertising space to cut out their only competitor of the market The Aberdeen & District Independent.
The OFT found that the predatory pricing by the Aberdeen Journal had been going on since the Aberdeen & District Independent had been launched back in 1996. The predatory pricing was still taking place in 2000 with the Aberdeen Journal making losses. At this point the OFT were able to use their powers from the Competition Act 1998 as the newspaper had affectively broken both chapter 1 and 2 of the act. The OFT proceeded to use their powers and fined Aberdeen Journal £1.328 million in July 2001.