Competition, Legislation and Regulation

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

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

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’

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

Market Structure

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

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

Market StructureHighly Competitive High Degree of Market Power

Perfect CompetitionFarmingStocksCurrencies

Monopolistic CompetitionRestaurantsSmall BuildersSolicitors

OligopolySupermarketsBanksElectrical Goods

MonopolyGas WaterElectricityTele-communications

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

Legal Framework

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

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

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

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

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

Regulation

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

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