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 competitiveness"

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 market share.

What are the potential gains from increased market competition?

• Lower prices for consumers
• A greater discipline on producers/suppliers to keep their costs down
• Improvements in technology with positive effects on production methods and costs
• A greater variety of products (giving more choice)
• A faster pace of invention and innovation
• Improvements to the quality of service for consumers
• Better 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.

Telecommunications

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.

Tougher Regulation

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.