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Competition, Legislation
   and Regulation




                      Copyright 2006 – Biz/ed
http://www.bized.co.uk



       Market Structure
• The degree of competition in
  an industry:
 – Concentration Ratio (CR) – The
   proportion of market share accounted
   for by a number of firms in the
   industry
 – A five firm CR of 60% means the top
   five firms in the industry account for
   60% of total sales


                                  Copyright 2006 – Biz/ed
http://www.bized.co.uk



       Market Structure
• Perfect Competition:
  –Large number of buyers and
   sellers
  –Homogenous (identical) products
  –Firms are price takers
  –Perfect knowledge
  –No barriers to entry and exit

                             Copyright 2006 – Biz/ed
http://www.bized.co.uk



        Market Structure
• Monopolistic or Imperfect
  Competition
  – Many buyers and sellers
  – Some degree of control over market
  – Differentiated products
  – Relatively few barriers to entry
  – N.B. Do not confuse ‘monopolistic’
    with ‘monopoly’

                                 Copyright 2006 – Biz/ed
http://www.bized.co.uk



          Market Structure
• Oligopoly – Competition between
  the few – industry dominated by
  relatively small number of large
  firms
  – Barriers to entry
  – Non-price competition
  – Price stability?
  – Homogenous or highly
    differentiated/branded
  – Potential for collusion
  – Potential for high profits


                                    Copyright 2006 – Biz/ed
http://www.bized.co.uk



       Market Structure
• Duopoly – Industry dominated
  by two large firms
 – Market leader
 – Price leader
 – Barriers to entry
 – Non-price competition
 – Potential for abnormal profit


                                      Copyright 2006 – Biz/ed
http://www.bized.co.uk



         Market Structure
• Monopoly – where firm is the
  industry or where one firm
  dominates the market
  – Monopoly power is said to exist if market
    share > 25%
  – Natural monopolies – water, gas, electricity
  – High barriers to entry
  – Abnormal profits
  – Can exercise control over price OR output
  – Monopoly power may be necessary for
    development of some products


                                        Copyright 2006 – Biz/ed
http://www.bized.co.uk



                      Market Structure
Highly Competitive                                High Degree of Market Power




Perfect Competition   Monopolistic Competition   Oligopoly          Monopoly
Farming               Restaurants                Supermarkets       Gas
Stocks                Small Builders             Banks              Water
Currencies            Solicitors                 Electrical Goods   Electricity
                                                                    Tele-
                                                                    communications




                                                              Copyright 2006 – Biz/ed
http://www.bized.co.uk



 Legal Framework for Business
• Legislation - Laws made to
  protect consumers, workers,
  shareholders, environment from
  business activity
  – necessity of observing the law for
    business – adds to cost, red tape
    bureaucracy, etc.
• Covers almost every aspect of a
  business’s activities

                                   Copyright 2006 – Biz/ed
http://www.bized.co.uk



       Legal Framework
• Consumer legislation:
 – Sale of Goods
 – Trade Descriptions
 – Consumer Protection
 – Food Safety
 – Supply of Goods and Services
 – Weights and Measures


                                  Copyright 2006 – Biz/ed
http://www.bized.co.uk



            Legal Framework
• Employee Protection:
  –   Health and Safety at work
  –   Minimum Wage
  –   Discrimination
  –   Unfair Dismissal
  –   Recruitment
  –   Redundancy
  –   Trade Union Legislation
  –   Contracts and terms of work
  –   Working Time Directive
  –   Disabled Persons



                                       Copyright 2006 – Biz/ed
http://www.bized.co.uk



          Legal Framework
• Other aspects affecting business:
  – Employers liability insurance
  – Display screens (VDUs)
  – Fire precautions
  – Data Protection
  – Accessibility legislation
  – Hazards and risks
  – Working environments – heating, lighting,
    ventilation, etc.
  – Patents
  – Licences
  – Planning Laws


                                                Copyright 2006 – Biz/ed
http://www.bized.co.uk



              Issues:
• The extent of the regulation and
  the legal framework within which
  businesses operate all increases
  costs both direct and indirect
  (administration, monitoring, etc.)
• Balance between protection and
  suffocating enterprise/initiative


                               Copyright 2006 – Biz/ed
http://www.bized.co.uk



               Regulation
• Monitoring business activity to act
  in the consumer’s interest:
  – Competition Commission – investigates
    mergers, takeovers, anti-competitive
    behaviour
  – Office of Fair Trading (OFT) – ensuring
    efficient operation of markets within the law
  – Regulation of former nationalised industries
    – OFTEL, OFWAT, OFRR, OFGEM, etc.
  – Advertising Standards Authority (ASA) –
    legal, decent, honest

                                        Copyright 2006 – Biz/ed
http://www.bized.co.uk



            Regulation
• Forms of anti-competitive
  behaviour
 – Price fixing
 – Cartels
 – Collusion
 – Predatory or destroyer pricing
 – Distribution agreements
 – Insider dealing/trading


                                    Copyright 2006 – Biz/ed
http://www.bized.co.uk



        Self Regulation
• Where business/industry
  monitors its own behaviour –
  often through an agreed code
  of practice. e.g.
 – PCC – Press Complaints Commission
 – Portman Group – alcoholic drinks
   industry
 – FSA – Financial Services Authority
 – BMA – British Medical Association

                               Copyright 2006 – Biz/ed

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IGCSE & Unit 3 - Competition Policy

  • 1. http://www.bized.co.uk Competition, Legislation and Regulation Copyright 2006 – Biz/ed
  • 2. http://www.bized.co.uk Market Structure • The degree of competition in an industry: – Concentration Ratio (CR) – The proportion of market share accounted for by a number of firms in the industry – A five firm CR of 60% means the top five firms in the industry account for 60% of total sales Copyright 2006 – Biz/ed
  • 3. http://www.bized.co.uk Market Structure • Perfect Competition: –Large number of buyers and sellers –Homogenous (identical) products –Firms are price takers –Perfect knowledge –No barriers to entry and exit Copyright 2006 – Biz/ed
  • 4. http://www.bized.co.uk Market Structure • Monopolistic or Imperfect Competition – Many buyers and sellers – Some degree of control over market – Differentiated products – Relatively few barriers to entry – N.B. Do not confuse ‘monopolistic’ with ‘monopoly’ Copyright 2006 – Biz/ed
  • 5. http://www.bized.co.uk Market Structure • Oligopoly – Competition between the few – industry dominated by relatively small number of large firms – Barriers to entry – Non-price competition – Price stability? – Homogenous or highly differentiated/branded – Potential for collusion – Potential for high profits Copyright 2006 – Biz/ed
  • 6. http://www.bized.co.uk Market Structure • Duopoly – Industry dominated by two large firms – Market leader – Price leader – Barriers to entry – Non-price competition – Potential for abnormal profit Copyright 2006 – Biz/ed
  • 7. http://www.bized.co.uk Market Structure • Monopoly – where firm is the industry or where one firm dominates the market – Monopoly power is said to exist if market share > 25% – Natural monopolies – water, gas, electricity – High barriers to entry – Abnormal profits – Can exercise control over price OR output – Monopoly power may be necessary for development of some products Copyright 2006 – Biz/ed
  • 8. http://www.bized.co.uk Market Structure Highly Competitive High Degree of Market Power Perfect Competition Monopolistic Competition Oligopoly Monopoly Farming Restaurants Supermarkets Gas Stocks Small Builders Banks Water Currencies Solicitors Electrical Goods Electricity Tele- communications Copyright 2006 – Biz/ed
  • 9. http://www.bized.co.uk Legal Framework for Business • Legislation - Laws made to protect consumers, workers, shareholders, environment from business activity – necessity of observing the law for business – adds to cost, red tape bureaucracy, etc. • Covers almost every aspect of a business’s activities Copyright 2006 – Biz/ed
  • 10. http://www.bized.co.uk Legal Framework • Consumer legislation: – Sale of Goods – Trade Descriptions – Consumer Protection – Food Safety – Supply of Goods and Services – Weights and Measures Copyright 2006 – Biz/ed
  • 11. http://www.bized.co.uk Legal Framework • Employee Protection: – Health and Safety at work – Minimum Wage – Discrimination – Unfair Dismissal – Recruitment – Redundancy – Trade Union Legislation – Contracts and terms of work – Working Time Directive – Disabled Persons Copyright 2006 – Biz/ed
  • 12. http://www.bized.co.uk Legal Framework • Other aspects affecting business: – Employers liability insurance – Display screens (VDUs) – Fire precautions – Data Protection – Accessibility legislation – Hazards and risks – Working environments – heating, lighting, ventilation, etc. – Patents – Licences – Planning Laws Copyright 2006 – Biz/ed
  • 13. http://www.bized.co.uk Issues: • The extent of the regulation and the legal framework within which businesses operate all increases costs both direct and indirect (administration, monitoring, etc.) • Balance between protection and suffocating enterprise/initiative Copyright 2006 – Biz/ed
  • 14. http://www.bized.co.uk Regulation • Monitoring business activity to act in the consumer’s interest: – Competition Commission – investigates mergers, takeovers, anti-competitive behaviour – Office of Fair Trading (OFT) – ensuring efficient operation of markets within the law – Regulation of former nationalised industries – OFTEL, OFWAT, OFRR, OFGEM, etc. – Advertising Standards Authority (ASA) – legal, decent, honest Copyright 2006 – Biz/ed
  • 15. http://www.bized.co.uk Regulation • Forms of anti-competitive behaviour – Price fixing – Cartels – Collusion – Predatory or destroyer pricing – Distribution agreements – Insider dealing/trading Copyright 2006 – Biz/ed
  • 16. http://www.bized.co.uk Self Regulation • Where business/industry monitors its own behaviour – often through an agreed code of practice. e.g. – PCC – Press Complaints Commission – Portman Group – alcoholic drinks industry – FSA – Financial Services Authority – BMA – British Medical Association Copyright 2006 – Biz/ed