Microeconomics Term Paper

Critically evaluate the economic rationale for competition policy. Assess the extent to which empirical evidence supports the current approach adopted by UK competition authorities.

Today, the problem of the maintenance of the fair competition in the national economy of the UK is one of the major challenges to the UK competition authorities because the process of globalization of the world economy decreases the opportunities for the competition authorities to regulate effective the national economy. In such a situation, the risk of the unfair competition increases substantially that may lead to the emergence of monopolies, which naturally produce a negative impact on the economic development of the country since they destroy the competition. In this respect, it is important to lay emphasis on the fact that the fair competition is an essential condition of the economic progress of the country since it is only in the fair, competitive struggle companies and national economy can keep progressing, while unfair competition or monopolization of certain industries lead to their gradual degradation. The latter may lead to a profound economic crisis.

In actuality, the UK competition authorities attempt to maintain the fair competition in the national economy. At the same time, it is worth mentioning the fact that under the impact of the process of globalization, the maintenance of the fair competition becomes a serious challenge to the UK authorities. In fact, the problem is that the large multinational corporations strengthen their position on the UK market. In such a situation, smaller and medium enterprises turn out to be in a disadvantageous position because they cannot compete effectively with large multinational corporations. Gradually, they have to disappear or search for new markets, giving in their market share to large corporations.

In addition, the UK is a member of the EU as well as such international organizations as the WTO. This means that the UK tends to liberalize the national economy and to eliminate fiscal barriers. Furthermore, in terms of numerous trade agreements, the UK is supposed to encourage free trade and refuse from the introduction of regulatory policies en masse (Volti, 2005). The latter naturally contributes to the weakening of the position of the state in regard to the regulation of the national economy. In such a situation, it is extremely difficult to regulate competitive policies and maintain the effective competition because the contemporary industries tend to monopolization and concentration of larger share of the market in hands of a few multinational corporations which are the major players in the markets.

Nevertheless, the UK competition authorities attempt to encourage the fair competition, However, today, the UK competition authorities often implement the structure conduct performance approach to the development of competition policies. In actuality, this approach implies that the UK authorities introduce policies which define the business conduct and performance respectively to the market structure (Pine and Gilmore, 1999). In other words, the UK competition authorities do not really create equal conditions for all companies or potential players in the market. Instead, they use the market structure as the basic model and they force companies operating within this market model operate in accordance with common rules which allow to maintain the balance in the current business environment. In such a situation, the major players in the market remain unchangeable, since entering barriers are high and the market is rigid to changes.

Obviously, such a policy cannot be efficient in the contemporary business environment where flexibility of business determines its effectiveness. Instead, the UK competition authorities prefer to maintain the stability in the market, rather than ensure its flexibility and adaptability to changing environment.

In addition, the UK authorities tend to conduct quite liberal policies in regard to monopolies. To put it more precisely, the UK authorities maintain contestable markets, where there are only one company that operates in the market. Such companies naturally occupy a monopolistic position, but the authorities attempt to restrict the advantageous of the monopolistic position of such companies by means of introducing mandated “competitive” pricing (Schmitt, 2001). Thus, through regulation of pricing policies of companies which do not have rivals in their markets, the UK competition authorities attempt to control the market and prevent companies from misusing their dominant position in the market. However, such a policy is rather an artificial substitute to natural competition, which can hardly be as effective as fair competitive struggle because the state regulations do not always mirror the actual situation in the market.

At the same time, with the help of such strategies as the contestable market or structure conduct approach, the UK authorities attempt to prevent abnormal profits of large corporations and major market players. However, the persistent of abnormal profit rather leads to the increase of regulatory policies from the part of the state, which the UK would need to refuse under the impact of globalization and its involvement in free trade agreements. Potentially, such policies may lead to the overall inability of the UK competition authorities to maintain fair competition in the UK because, in many industries, it is maintained by states regulatory policies but not by the fair rivalry between companies.