Why are competitive markets seen as beneficial for
consumers and the economy as a whole? The Labour Government published its
latest White Paper on International Competitiveness in July 2001. The
introductory section made it clear that the government regards creating a
competitive environment for UK and overseas businesses as a cornerstone of
its supply-side economic policies.
"Vigorous competition between firms is the
lifeblood of strong and effective markets. Competition helps consumers get a
good deal. It encourages firms to innovate by reducing slack, putting
downward pressure on costs and providing incentives for the efficient
organisation of production. As such, competition is a central driver for
productivity growth in the economy, and hence the UK's international
Competitive markets exist when there is genuine choice
for consumers in terms of who supplies the goods and services they demand.
Competitive markets are characterised by various forms of price and non-price
competition between sellers who are bidding to increase or protect their
What are the potential gains from increased market
prices for consumers
greater discipline on producers/suppliers to keep their costs down
in technology with positive effects on production methods and costs
greater variety of products (giving more choice)
faster pace of invention and innovation
to the quality of service for consumers
information for consumers allowing people to make more informed choices
The overall impact of increased competition should be an
improvement in economic welfare.
Opening Up Markets - Liberalisation
Creating more competition in markets involves breaking
down the barriers to competition that invariably exist in each industry.
Perfectly contestable markets are rare. One of the key strategies of
governments over the last twenty years has been to liberalise markets by
cutting the statutory monopoly power of businesses. Two good examples of this
have been in gas and electricity supply, and also telecommunications.
Energy market liberalisation
Liberalisation of energy markets has led to lower costs
through increased efficiency and lower prices for consumers. The UK gas and
electricity markets are already fully liberalised, with all types of customer
able to choose their own supplier. For example: More than 30% of domestic gas
customers and 25% of electricity customers have switched suppliers and
domestic electricity prices have fallen as markets have opened up.
UK consumers have benefited from rapid price falls as a
result of the opening up of the UK market in telecoms: Mobile phone prices
have fallen by 20% in 18 months from the beginning of 1999. And, the cost of
international calls has fallen dramatically over the past decade.
Privatisation and liberalisation of markets has opened
many sectors to greater competition. A second strand to current government
policy is to toughen up the regulation of markets through competition policy.
The Competition Act 1998 prohibits cartels and other
anti-competitive agreements and other abuses of dominant market position.
Firms which breach the prohibitions in the Competition Act can be subject to
penalties of up to 10% of UK turnover in the relevant market, for up to
three years of an infringement. They also face the prospect of actions for
damages against them by third parties that have been harmed by their illegal
acts. The Office of Fair Trading is now responsible for taking decisions on
day-to-day competition cases.