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Competition policy refers to the set of government policies designed to promote competition, prevent the abuse of market power, and protect consumer welfare. In the UK, the principal body responsible for competition policy is the Competition and Markets Authority (CMA), established in 2014 by merging the Office of Fair Trading (OFT) and the Competition Commission. This lesson examines the key elements of UK competition policy, the role of regulation, and the debate between regulation and deregulation.
Competition policy exists because unregulated markets may produce outcomes that reduce economic welfare:
| Market Failure | Explanation | Policy Response |
|---|---|---|
| Monopoly power | A dominant firm may restrict output, raise prices, and earn supernormal profit — creating deadweight loss | Merger control, abuse of dominance provisions |
| Collusion | Firms may collude to fix prices, share markets, or restrict output — the same effects as monopoly | Anti-cartel enforcement |
| Anti-competitive practices | Firms may engage in predatory pricing, exclusive dealing, or tying arrangements that exclude competitors | Conduct investigations |
| Consumer exploitation | Firms with market power may exploit consumers through misleading practices or excessive prices | Consumer protection regulation |
Exam Tip: The theoretical foundation of competition policy is welfare economics. The policy aims to move markets closer to the competitive outcome (P = MC, allocative efficiency) and prevent firms from extracting consumer surplus through the exercise of market power. Always link your analysis back to these efficiency concepts.
The CMA is the UK's principal competition and consumer protection authority. Its key functions are:
The CMA investigates proposed mergers and acquisitions that could substantially lessen competition (SLC).
| Stage | Process | Outcome |
|---|---|---|
| Phase 1 | Initial assessment — does the merger raise competition concerns? | Clear the merger, clear with undertakings, or refer to Phase 2 |
| Phase 2 | Detailed investigation by an independent panel | Clear, clear with remedies, or block the merger |
Thresholds for CMA jurisdiction:
| Threshold | Criterion |
|---|---|
| Turnover test | The target firm has UK turnover exceeding £70 million |
| Share of supply test | The merged entity would supply or acquire 25% or more of goods or services of a particular description in the UK |
| Case | Year | CMA Decision | Reasoning |
|---|---|---|---|
| Sainsbury's / Asda | 2019 | Blocked | The merger would have created the UK's largest supermarket with a 31% market share, substantially lessening competition in grocery, fuel, and general merchandise |
| Microsoft / Activision Blizzard | 2023 | Initially blocked, then cleared with restructured deal | Concerns about cloud gaming market; cleared after Microsoft agreed to licence Activision games to cloud gaming rivals |
| Vodafone / Three | 2024–25 | Under review / cleared with conditions | Reduction from four to three mobile network operators raised significant competition concerns; the CMA imposed conditions to protect consumers |
Exam Tip: Merger cases make excellent real-world examples in exam answers. The Sainsbury's/Asda case is particularly useful because it shows the CMA prioritising consumer welfare — the CMA found that the merger would lead to higher prices in local areas where the two chains were each other's closest competitors.
The Competition Act 1998 prohibits agreements between firms that have as their object or effect the prevention, restriction, or distortion of competition. This includes:
| Prohibited Conduct | Explanation |
|---|---|
| Price-fixing | Firms agree to set prices at a particular level |
| Market sharing | Firms agree to divide the market geographically or by customer type |
| Output restriction | Firms agree to limit production to keep prices high |
| Bid-rigging | Firms coordinate their bids in procurement processes |
| Information sharing | Firms share commercially sensitive information (e.g., future pricing intentions) |
Penalties:
A firm with a dominant market position must not abuse that dominance. The CMA assesses dominance using a market share threshold of 40% or more as a starting point, combined with analysis of barriers to entry, countervailing buyer power, and competitive constraints.
| Type of Abuse | Explanation | Example |
|---|---|---|
| Excessive pricing | Charging prices significantly above cost without justification | Pfizer/Flynn — excessive pricing of phenytoin sodium capsules (anti-epilepsy drug) — prices increased by up to 2,600% |
| Predatory pricing | Pricing below cost to drive out competitors | Alleged predatory behaviour by incumbent bus operators against new entrants after deregulation |
| Exclusive dealing | Requiring customers to buy exclusively from the dominant firm | Intel's rebate arrangements with computer manufacturers, investigated by the European Commission |
| Tying and bundling | Requiring customers to buy a secondary product alongside the main product | Microsoft bundling Internet Explorer with Windows — investigated by the European Commission |
| Refusal to supply | Denying competitors access to an essential input or facility | A dominant firm refusing to give competitors access to a critical infrastructure (essential facilities doctrine) |
The CMA can conduct broader market studies to examine whether competition is working effectively in a sector, even without specific evidence of anti-competitive conduct.
| Investigation | Year | Key Findings | Remedies |
|---|---|---|---|
| Energy market | 2016 | Lack of effective competition among the "Big Six" energy suppliers; consumers paying too much on default tariffs | Introduction of a price cap on default tariffs (implemented by Ofgem, 2019) |
| Banking | 2016 | Older and larger banks did not compete vigorously on price; customer switching was low | Open Banking initiative — requiring banks to share data (with consent) to enable comparison and switching |
| Online platforms and digital advertising | 2020 | Google and Facebook hold market power in search and social media advertising respectively | Led to the Digital Markets, Competition and Consumers Act 2024, creating a new regulatory regime for firms with "Strategic Market Status" |
Where competition is not possible (natural monopolies), the government uses regulation to replicate the competitive outcome:
| Regulator | Sector | Key Functions |
|---|---|---|
| Ofgem | Gas and electricity | Price cap on default tariffs; network regulation; promotion of competition in retail supply |
| Ofwat | Water and sewerage | Price controls; service quality standards; environmental regulation |
| Ofcom | Telecommunications and broadcasting | Spectrum allocation; access regulation (requiring BT Openreach to offer network access); media plurality |
| ORR | Railways | Access charges; track safety; performance monitoring |
The most common form of utility regulation in the UK is the RPI − X price cap:
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