AQA Specification focus:
‘The general principles of UK competition policy and some awareness of EU competition policy.’
Introduction
Competition policy shapes how markets function by preventing anti-competitive practices, promoting efficiency, and protecting consumers. It ensures markets remain fair, innovative, and dynamic.
Understanding Competition Policy
Competition Policy: Government measures designed to promote competition, prevent abuse of market power, and ensure markets deliver efficiency and consumer welfare.
The UK competition policy provides the framework for regulating firms to maintain healthy market structures. Its principles stem from the belief that competitive markets maximise economic welfare by encouraging efficiency, lower prices, innovation, and consumer choice.
Key Aims of UK Competition Policy
The main goals of UK competition policy are:
Prevent abuse of monopoly power such as excessive pricing or predatory behaviour.
Promote efficiency through increased competition and reduced barriers to entry.
Protect consumers by ensuring fair access to goods and services at reasonable prices.
Encourage innovation by motivating firms to improve products and production methods.
Ensure resource allocation that reflects consumer preferences rather than firm dominance.
Institutions Responsible
Competition and Markets Authority (CMA)
The CMA is the UK’s primary regulator.
Its responsibilities include:
Investigating anti-competitive practices.
Blocking or modifying mergers that could reduce competition.
Enforcing competition and consumer protection laws.
Sector Regulators
Certain industries (e.g. telecommunications, energy, water) have their own regulators, such as Ofcom, Ofgem, and Ofwat, which operate alongside the CMA.
The General Principles
Prohibiting Anti-Competitive Behaviour
The policy prohibits actions such as:
Cartels (agreements between firms to fix prices, limit output, or divide markets).
Collusion that reduces competition and leads to higher prices.
Abuse of dominant market position (e.g. predatory pricing, exclusive dealing).
Merger Control
Large mergers may be investigated to assess whether they:
Substantially lessen competition.
Create monopolistic or oligopolistic structures.
Harm consumer choice and innovation.
Promoting Market Liberalisation
The policy encourages entry of new firms by reducing barriers, making markets more open and contestable.
Contestable Market: A market where entry and exit are easy, keeping incumbent firms under pressure to behave competitively.
By promoting contestability, competition policy ensures even dominant firms cannot exploit their power without risk of new entrants.
Links with EU Competition Policy
Although the UK is no longer part of the EU, awareness of EU competition policy is relevant for two reasons:
Trade Relations: UK firms trading within the EU remain subject to EU rules.
Policy Alignment: Both systems share common goals of preventing market distortions and protecting consumer welfare.
Types of Market Abuse Addressed
Price Fixing
When firms agree to set prices artificially high, reducing consumer choice.
Predatory Pricing
Charging prices below cost to drive out competitors, then raising prices once dominance is secured.
Restrictive Agreements
Contracts that unfairly restrict competition, such as exclusivity clauses or refusal to supply.
Monopoly Power: The ability of a firm to set prices above competitive levels due to limited or no competition.
Tools Used in UK Competition Policy
Investigation powers: Regulators can demand documents and data.
Fines and penalties: Firms engaging in anti-competitive behaviour may face substantial fines.
Behavioural remedies: Firms may be ordered to change practices that restrict competition.
Structural remedies: For example, requiring divestment of assets in a merger case.
Benefits of Competition Policy
Lower consumer prices due to efficiency and competition.
Greater innovation and product diversity.
Higher efficiency in resource allocation, ensuring goods and services meet demand effectively.
Fairer markets that reduce abuse of power and improve trust.
Potential Criticisms
Regulatory costs: Monitoring and enforcing rules is expensive.
Unintended consequences: Some interventions may discourage investment or economies of scale.
Global competition challenges: National policies may be less effective in dealing with multinational corporations.
Case Relevance for AQA Students
Students should appreciate that UK competition policy aims to balance efficiency with fairness, shaping how firms behave in markets. By learning the general principles, students can analyse market structures, evaluate firm strategies, and understand the role of regulation in promoting consumer welfare.
FAQ
UK competition policy emphasises consumer welfare, fair pricing, and efficiency, with enforcement led by the CMA.
US antitrust policy, while similar in goals, often focuses more heavily on preventing excessive concentration of market power and protecting small businesses.
In practice, UK policy tends to use merger control and behavioural remedies, while US authorities have historically been more aggressive in breaking up firms.
Consumer choice is central because it ensures markets reflect preferences rather than producer dominance.
More choice pressures firms to innovate and improve quality.
It prevents monopolies from restricting supply or exploiting consumers.
Greater variety encourages efficient resource allocation towards what people demand most.
Without consumer choice, markets risk stagnation and reduced efficiency.
Firms in competitive markets face pressure to differentiate their products and processes.
This often leads to:
Investment in research and development.
Adoption of new technologies to cut costs.
Better service quality to attract and retain customers.
By preventing collusion and abuse of dominance, policy ensures innovation becomes a survival strategy for firms.
Fines deter firms from engaging in anti-competitive behaviour.
The CMA can impose substantial penalties, sometimes up to 10% of global turnover, for practices like cartels or abuse of dominance.
These financial risks encourage firms to comply with regulations, creating a culture of fairness and transparency in UK markets.
Pre-emptive investigation avoids harmful outcomes before they affect consumers.
If mergers create excessive concentration, the CMA can block or require changes before integration.
This prevents irreversible damage to competition, such as reduced choice or higher prices.
By acting early, the CMA ensures markets remain contestable and consumer interests are safeguarded.
Practice Questions
Define competition policy. (2 marks)
1 mark for recognising that competition policy refers to government measures designed to promote competition and prevent abuse of market power.
1 mark for mentioning its purpose of ensuring markets deliver efficiency and consumer welfare.
Explain two ways in which the Competition and Markets Authority (CMA) can promote competition in UK markets. (6 marks)
Up to 3 marks for each valid explanation, maximum 6 marks in total.
1 mark for identifying a method (e.g. investigating anti-competitive behaviour, blocking mergers, imposing fines, enforcing consumer protection).
1–2 marks for explaining how this promotes competition (e.g. preventing cartels keeps prices competitive; blocking anti-competitive mergers protects consumer choice).
Reward depth of explanation and clarity.
Maximum 2 methods credited.
