Download - Competition, Legislation And Regulation
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Competition, Legislation and Regulation
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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
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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
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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’
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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
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Market Structure
• Duopoly – Industry dominated by two large firms– Market leader – Price leader– Barriers to entry– Non-price competition– Potential for abnormal profit
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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
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Market StructureHighly Competitive High Degree of Market Power
Perfect CompetitionFarmingStocksCurrencies
Monopolistic CompetitionRestaurantsSmall BuildersSolicitors
OligopolySupermarketsBanksElectrical Goods
MonopolyGas WaterElectricityTele-communications
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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
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Legal Framework
• Consumer legislation:– Sale of Goods– Trade Descriptions– Consumer Protection– Food Safety– Supply of Goods and Services– Weights and Measures
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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
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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
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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
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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
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Regulation
• Forms of anti-competitive behaviour– Price fixing– Cartels– Collusion– Predatory or destroyer pricing– Distribution agreements– Insider dealing/trading
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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