Different Types of Market Structure

Introduction

This report will look at the competition policy within the UK and
state what it does within the different market structures. With this
the report will show two examples of where the competition authorities
have had to investigate. Also the report will use the supermarkets as
an example and show how they are able to meet their company's
objectives within their market structure.



The different Market structures
===============================

In this section the report will look at the different market
structures and show examples of the types of companies, which trade
within them. Also the report will look at the advantages and
disadvantages to each of the market structures.



Perfect competition
===================

This market structure has a vast amount of companies with no barriers
to entry new companies can join easily. Product pricing rarely
changes, and is usually low, as no one company has the resources to
develop the product or business image. E.g. advertising.

The downside to this type of market is that there is little reason for
competition, as the price will not have a significant difference when
consumers go to a different company. Another is that there is no
chance of the market being able to innovate as all business in the
sector are small and cannot afford a research and development.

Oligopoly Market

An oligopoly market has a small number of firms, which are all able to
make supernormal profits. The advantages are that these companies have
the resources to reduce the price of their products, this can
sometimes lead to price wars such as in the case of the big
supermarkets. Also the supernormal profit can help innovate the market
through research and development programs. As there a fewer firms the
more market share there is between them and the more influence they
can have on the market. Another advantage is that these companies do
not always compete on price and sometimes try to entice customers into
their shops through:

· Advertisements - showing their level of service is better than
competitors.

· Celebrity endorsement - Jamie Oliver helps Sainsbury's through
special advertisements and exclusive products with his name on.

· Loyalty card - Giving something back to the consumer every time they
shop at their store.

The downside is that the barrier to entry is very high and any company
coming into the market would need a big backer or they would run the
risk of being squeezed out. Another real threat is the risk of two or
more companies wanting to form collusions, which would affect the
balance of market power in their favour.



Monopolistic Market
===================

A company is classified as having a monopoly when it is either the
only company within its market or holds over 70% of the market share.
E.g. Microsoft is affectively a monopoly as almost every computer uses
their Widow's operating system. The advantage to monopolistic company
is that it is able to price its products at what ever it wants as no
company can compete with them. Even though innovation is slow the
company will still have a research and development section of their
business.

The downside to this is that there is almost no entry for new
companies to join the market and the monopolistic company can be very
wasteful. By this the report means that the company could be wasting
money through slack working practises, bad deliveries, bad after care
service, etc…

Looking at the different markets that businesses are in the report has
found that for a company to succeed it needs a good amount of
competition to keep the company working efficiently. The barriers of
entry need to be low to allow new companies to enter, as they will
bring in new competition and innovation. The amount of profit a
company is able to receive should be high enough to allow them the
chance to innovate the market with new products.

The structure of the U.K. competition policy

The Competition Act 1998 came into force on the 1 March 2000. When it
was introduced in March the act added two main prohibitions:

1. Chapter 1 - prohibition of anti-competitive agreements, based
closely on Article 81 of the EC treaty.

2. Chapter 2 - prohibition of abuse of a dominant position in a
market, based closely on Article 82 of the EC Treaty.

The key aspects of the new legislation are:

· Anti-competitive agreements, cartels and abuses of a dominant
position are now unlawful from the outset.

· Businesses, which infringe the prohibitions, are liable to financial
penalties of up to 10% of UK turnover for up to 3 years.

· Competitors and customers are entitled to seek damages.

· The Director General of Fair Trading has new powers to step in at
the outset to stop anti-competitive behaviour.

· Investigators are able to launch 'dawn raids', and to enter premises
with reasonable force.

· The new leniency policy will make it easier for cartels to be
exposed.

The intention is to create a regulatory framework that is tough on
those who seek to impair competition but allows those who do compete
fairly the opportunity to thrive. (Information above retrieved from:
http://www.dti.gov.uk/ccp/topics2/competition_act.htm)

There are three main areas where the competitions authority will
usually intervene with a business. These areas are:

1. Collusion - A secret agreement between two or more parties for a
fraudulent, illegal, or deceitful purpose. This is usually on
price of products and is done to stop the amount of competition
between the companies and allow them to gain more market share
over the companies not involved in the collusion. If companies are
found to be colluding it means they are in breach of the chapter 1
prohibition in the Competition Act 1998. This means that the OFT
(office of fair trading) has the power to impose fines of up to
10% of each companies turnover found to be colluding.

2. Abuse of market power - Where a company takes it on themselves to
force their smaller suppliers to cut their prices, as they are
more powerful. Having a healthy sum of market power is not
unlawful and usually there is always one market leader in any
given market. It becomes illegal when a company starts to abuse
its power by means of discrimination to suppliers, predatory
pricing, etc… By abusing their market power company's are in
breach of Chapter 2 of the Competition Act 1998. If found in
violation of this through investigation the OFT have the power to
impose a fine of a maximum of 10% of the company's turnover.

3. Mergers - The union of two or more commercial interests or
corporations. This can sometimes be beneficial to the market as it
could generate more competition within the market. This was the
case when Morrison's took over Safeway. As a result there are now
four big players in the supermarket sector rather than 3 with one
big market leader. With this though there are some mergers that
make the amount of competition limited and this is where the OFT
step in and start an investigation into whether or not it will
affect the level of competition. In this area the OFT have the
power to block the merger going ahead or impose key steps that
both companies have to take before the merger can take place.

Two examples of the OFT using their powers

Here the report has shown two real examples of where the OFT have been
informed of illegitimate trading and have establish an investigation.
A copy of each example can be found in the appendix.

1. Record fines for toys price fixing

(A copy can be found under appendix 1.0)

This is a good example of Argos and Littlewoods forming a cartel,
along with Hasbro (the toy manufacturer). The companies were found to
have entered into an agreement to fix the price of Hasbro toys. By
doing so it gave them a bigger amount of profit and market share from
1999 to 2001. From their investigation, the OFT found that they were
in breach of chapter one of the competition act 1998.

OFT took the action of fining both, Argos (£17.28 million) and
Littlewoods (5.37 million), but Hasbro was granted full leniency and
did not have to pay any part of their initial fine of 15.59 million
due to their co-operation with the OFT's investigation.

Although Hasbro had been given full leniency from the initial
investigation they were still fined 4.95 million in November 2002 for
their agreement with 10 distributors to not sell their toys below list
price.

2. Scottish Newspaper group fined for predatory pricing

(A copy can be found under appendix 2.0)

Here the OFT were contacted to look into the Aberdeen Journal, which
was, according to its competitors, to be predatory pricing its
advertising space to cut out their only competitor of the market The
Aberdeen & District Independent.

The OFT found that the predatory pricing by the Aberdeen Journal had
been going on since the Aberdeen & District Independent had been
launched back in 1996. The predatory pricing was still taking place in
2000 with the Aberdeen Journal making losses. At this point the OFT
were able to use their powers from the Competition Act 1998 as the
newspaper had affectively broken both chapter 1 and 2 of the act. The
OFT proceeded to use their powers and fined Aberdeen Journal £1.328
million in July 2001.