Protection of Customers’ Interests under the Terms of the Competition Act 1998
Introduction
Effective competition is considered to be the crucial factor both for protection of consumers’ interests and for business sector development. Protection of consumers’ interests is the key issue for the development of effective competition policy. Maintenance of effective competition in the UK markets is important to achieve necessary balance between prices and supply of goods.
The first part of this essay is devoted to the competition issues, detailed analysis of practical implications of the Competition Law 1998, protection of consumers’ interests, and analysis of the lawsuits with regard to the Act.
The second part of the essay relates critical evaluation of the Competition Act 1998, goals of competition policy, main features of the Act, and analysis of impact of the Act on the UK economy.
Effective competition is the process when two or more competitors vie in the same market.
Competition is considered the main leverage of economic and welfare growth favoring setting fair prices, customer satisfaction, and poverty reduction. It fosters productivity and innovation, encourages companies to improve quality of their goods and to offer more services for the customers (Barr, 2005). Effective competition cannot be achieved automatically, hence government regulation is needed. An effective competition must be provided by government legislation in order to regulate and control the process of achievement of effective competition in the market (Godfrey, 2008).
Kjaer and Schäfer (n.d.) consider that European market competition is an illusion. Many of the markets, especially those traditionally belong to the public sector of economy, such as electricity, gas, transport, and education. For example, electricity and gas markets are highly monopolized. Establishing an effective competition in these markets is a difficult task (Kjaer and Schäfer, n.d.).
A primary goal of effective competition is to provide consumer protection. Protection of consumers is tied to setting certain guaranteed quality specifications and safety standards of goods and services. The relationship of consumers and producers towards each other is controversial (Davey, 2011).
The aim of competition policy is to ensure the optimal quantity of producers so no one of them could attain a dominant position except for separate industries where such conjuncture is impossible. Besides, competition policy is directed on averting formation of cartels, prohibition of collusive pricing, and elimination of agreements attempting to reduce supply. Also, competition policy is aimed at regulation of the mergers and acquisitions activity (Davey, 2011).
There is a need to trace the impact of The Competition Act 1998 (the Act) on the U.K. companies in order to evaluate its efficiency (Davey, 2011). As a matter of fact that The Competition Act 1998 was defined as a “remarkable shift in the UK competition law framework” (Rodger, 2001). Rodger (2001) considers it controversial. Besides, UK companies have to comply both with national and EC competition legislation. Rodger (2001) noted that several companies operating in the UK market, such as Microsoft and British Airways, fell into inspection process of the European Commission while other numerous companies were overlooked by the competition authorities. This is the reason of UK competition policy criticism. Though the number of investigations has been increasing since 2008, only several mergers are investigated each year. Besides, it is sometimes difficult to prove tacit collusions between parties concerned despite of the threat of significant fines. Another problem is a probability of regulatory capture which takes the form of a confidential agreement between regulator and regulated industry. Another point of concern is finding loopholes in the competition legislation, such as making an affect on one market by moving into a contiguous market to avoid regulation (Barr, 2005). For example, competition legislation imperfection allowed Tesco entering an adjacent market of convenience stores and gain 6% of the market while it was operating in grocery store market (Anon., n.d.).
In accordance with the data analysed, there are three reasons of compliance with The Competition Act 1998: investigations and fines, deterrent effect, and the Office of Fair Trade (OFT) guidance (Anon., n.d.).
In 1999 OFT elaborated and conducted a survey which aimed to reveal the awareness and compliance with the Act. Numerous infringements as the result of ignorance were the reasons of conducting this survey. UK companies with the turnover of £10 million were surveyed covering approximately 96% of the Listed Market Capitalization of UK (Anon., n.d.). In accordance with the survey results many of the companies were not aware of the Act at all. As such, for only 2% of the respondents the awareness of the Act was spontaneous, the rest of the companies surveyed (approximately 92%) replied that they did not know much about the Act. Notable, the response rate for 141 questionnaires sent was disappointing (only 9.5%) (Anon., n.d.). The extent of awareness had essentially increased after OFT implemented several educational initiatives. Awareness of EC rules in accordane with the survey increased up to 84.4%, awareness of The Act increased up to 93.6% including companies that were aware, partially aware and fully aware.
As merger control is presently unaffected, there is a need to improve competition legislation changing the basis of the system of the merger control or to reduce the affect of political decision-making on the merger controlling process (Barr, 2005).
Effective competition on the territory of the Great Britain is regulated by European Union competition legislation and UK competition law. Brusick (n.d.) claimed that competition law must be supported by consumer law and controlled by the same agency (OFT).
In accordance with Davey (2011), protection of consumer rights involves several issues, such as copyright infringement, threat for consumers’ health and safety, false advertising, giving shortweight, cheating on measures; small-claims damage actions, excessive indebtedness of consumers.
Sometimes competition policies effect is not obvious. The necessity of effective regulation implementation is caused by the following threats for consumers: excessive prices, low-quality dumping, negative impact of international competition (restructuring of entire sectors), threat of losing a job as employee even being satisfied as consumer (Brusick, n.d.).
In accordance with Barr (2005), competition policy aims to provide wide consumer choice in the market, ensure implementation of technological innovations, encourage effective suppliers’ price competition, investigate cases of anticompetitive behavior making an impact on consumer welfare.
Riley (2006) argued that the EU and the UK competition policy aimed at elimination of price-fixing agreements (cartels and antitrust) or companies striving for dominant position in a market; market liberalisation (introduction of competition in traditionally monopolistic sectors of economy, such as car retailers, energy supply, air transport, postal services, and telecommunications); merger control (investigation of mergers especially those which set the goal of capturing a larger market share); state aid control (creating artificial competition to keep up appearances).
Many of the UK companies were being investigated on suspicion of breaking UK competition law. Sony, Microsoft, Wal-Mart, and The House of Fraser are in the list for different reasons. Unfair pricing policy and antitrust law violations (mergers) were the commonest reasons.
After the Competition Act 1998 was enacted, private enforcement was a theoretical possibility. The necessity of revision of the Act was obvious after practical application of the Act for several years. Hence, the amendments to the Act (ss47A and B) were introduced with regard to the private parties’ rights to claim damages caused by infringement decisions of OFT and other competition agencies. Since then legal entities and private individuals were enabled to apply to the English courts when being suffered from anticompetitive practices (Lecchi and Cover, 2008).
Thus, JJB Sports was accused in being involved in a price fixing cartel. Consumers’ Association had required rewarding the damages inflicted to 130 consumers by the company claiming 25% of the relevant turnover as compensation. However, the case was adjourned for uncertain period of time in 2007 (Lecchi and Cover, 2008).
Microsoft is considered a good example of application of competition law and the Competition Act 1998 in particular. Whereas the Microsoft case was affected by the EU laws, it partially made an impact on UK on-line trade. Microsoft was charged to carry out an activity in the UK on-line market contained anticompetitive object. Under the terms of the Act, the company had captured a dominant position in the market that fell under prohibitions of Chapter I and Chapter II of the Act (Cockburn, 2000).
Another case which took place in 2006 involved Aria Foods. The OFT had accused nine defendants in setting excessive prices in the Scottish dairy sector. They were charged £15 million damages being one of the first cases with certain publicity involvement (Lecchi and Cover, 2008).
Sometimes it appears to be difficult to establish company’s guilt like in case of Crehan v Inntrepeneurr which had been lasting for fifteen years before a final decision was reached. Mr. Crehan was charged damages resulting from his pub lease anticompetitive terms (Lecchi and Cover, 2008).
Competition law violations involve almost all fields of the UK economy. Thus, lawsuits were initiated against Vitamins cartel, Morgan Crucible, Genzyme Limited, carton board and chemical products manufacturers. Many of the cases were settled (Lecchi and Cover, 2008).
Davey (2011) argued that the primary objective of government competition policy is to give consumers the possibility of making proper decisions choosing goods and services. Deliberate consumers’ demand stimulates competition, investment in innovations and helps business stay in focus and improve quality of goods. Thus, consumer empowerment is a crucial factor of economic growth.
Government regulation must be balanced since excessive regulation could impose restrictions on consumers’ choice leveling their benefits. Loyal government regulation may lead to connivance and corporative dissolution. For this reason, government competition policy must be flexible and aimed at protection of customers’ interests and reassurance of their confidence. The regulation must address the most unprotected consumers who failed to access necessary information and educate them to exercise consumers’ rights (Davey, 2011).
With regard to the Act, the following practices were considered to be anticompetitive: predatory pricing, artificial barriers to enter the market, tacit collusions, vertical restraint. All of the violations were described in details. However, the margins of lawful and unlawful practices were blurred. Thus, every case is unique and requires maximum information and adequate evaluation (Riley, 2006).
Riley (2006) claimed that cartels in the part of price fixing were affected by the regulation most of all. The Act prohibited all forms of price fixing. Under the terms of the Act, companies cannot agree their prices with their competitors, share markets attempting to limit goods volume, cut prices to remove small competitors from the market, offer different prices for different consumers (consumers in another country), and other formal and informal price-fixing agreements. The main task of regulating agencies was to prove that violations took place, particularly if the companies had informal agreements.
On the other hand, government regulation has to protect the interests of the companies because the UK economy depends on their efficiency. Riley (2006) cited that "Ronald Coase said he had gotten tired of anti-trust because when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion". Thus, it is very important to find necessary balance between consumers’ interests and corporations’ efficiency. The Act functions effectively in the part of protection of consumers’ interests, but seems to be extremely stringent for the UK companies establishing strict regulation regime.
According to CompactLaw (2011) research the Act came into effect on the 1st of March 2000.
The Act was a piece of new legislation repealing previous Acts, namely: Restrictive Trade Practices Act 1976, Resale Prices Act 1976, Restrictive Practices Court Act 1976, and Restrictive Trade Practices Act 1977. It also replaced Sections 2-10 of the Competition Act 1980. This reformation mainly targeted compliance with EU laws (Parker, 2000).
The Act entailed changes in competition policy administration. Thus, it replaced Monopolies and Mergers Commission with Competition Commission.
The Competition Act 1998 addressed two fields of anticompetitive behavior, namely: unlawful anticompetitive agreements (Chapter I) and abuse of dominant position in the market (Chaper II). The division of the Act into two parts made the Act more compliant to the EU competition legislation. The Act induced substantial changes in competition legislation. The necessity of a reform was dictated by the numerous allegations in Britain, especially in the area of retail sales and manufacturing.
Anticompetitive agreements caused prevention, restriction or distort of competition in the United Kingdom were prohibited under the Act terms. The Act also covered the situations when common actions of several companies caused the same effect even if there were no actual agreement. Such actions as setting production limits or market development which inflicted damages to customers were considered an abuse of dominant position (CompactLaw, 2011).
The Act suggests significant fines (up to 10% of the UK turnover of the company) in case if violations take place. Besides, the companies that breached the competition law are penalized for null agreements or obliged to compensate damage to an injured party. Cartels are considered an extreme form of anticompetitive agreement. The actions interpreted as cartel price fixing could entail criminal liability (Lesshi and Cover, 2008).
Parker (2000) is concerned with UK economic efficiency since large UK companies benefit from economies of scale.
Geroski (2004) consider competition a mixed blessing since it could encourage companies work better while it could be frustrating for those which do not like to be in dynamic all the time. The Chapter I prohibition demonstrates quite different approach in comparison to previous legislation. The regime established by the Act is tougher due to new penalties introduced. In accordance to Scott (2009), the Competition Act 1998 is considered to be a good basement for a subsequent legislation.
In accordance with the OFT report, UK consumers saved £126 million per year for the period from 2004 to 2007 due to the Competition Act 1998. Savings due to the merger regime introduced made up £92 million per year and savings resulted from market interventions made up £64 million. The OFT estimated saving from £10 million due to scam suppression (OFT, 2007).
In order to trace the impact of the Act implementation, several UK economic areas were chosen. Recently, OECD countries made a decision to enhance competition among mobile telephone operators. The analysis of mobile telephone operators showed that insufficient competition they created is the reason for customers’ protection. UK is in the top ten countries where consumers pay much less than Americans or Canadians for international roaming calls (Anon., 2011).
The situation in the energy market of Britain is much better than that of other European countries. Thus, the percentage of the market share possessed by three largest electricity generators is the lowest in Europe (up to 45%) while this measure in other countries reaches up 100% (Kjaer and Schäfer, n.d.)
In accordance with the results of this research, the Act had positively impacted on competition in the UK. Meanwhile the situation is improving, the problems still arise. The legislation has to be reformed in accordance with UK economy development in order to further regulate monopolistic activity and serve customers’ interests.
Conclusion
The current essay discussed the issue of effective competition in the UK markets and its regulation. The issue of effective competition has become topical since globalization affected world economy. As the research showed, the UK economy is influenced by globalization and strict government regulations. The OFT reported the results of the implementation of the Act which had shown significant improvement of the situation in the UK market in comparison to other European countries. As a whole, the competition legislation in the UK can be considered as effective and well-established.
The Competition Act 1998 is one of the main regulating laws of the United Kingdom legislation. The Act is compliant with European Union competition legislation. The Act is considered to be an improved piece of legislation which replaced all previous restrictions.
The Act is directed on the regulation of two main point of concern: anticompetitive agreements and abuse of dominant position in the market. Both prohibitions are strictly fined. The number of lawsuits aimed at elimination of unlawful agreements and market capture is increasing every year. Several large corporations known all over the world were affected by this law. The analysis of lawsuits showed that any corporation which operates in the UK market could be affected by the law in case of committing violations.
OFT consider the Competition Act 1998 a good basement for further competition legislation.
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