A World Class Competition Regime

6

INVESTIGATING MARKETS

  		• The Government will reform the monopoly provisions ­ replacing them with a new power to investigate markets ­ where the overwhelming majority of decisions will be taken by independent competition authorities.
  		• Under the new regime, the OFT will work pro-actively to keep markets under review ­ where it appears that markets may not be working well, it will be able to refer them to the Competition Commission for further investigation.
  		• The Competition Commission will carry out a full investigation ­ assessing the market against a new competition-based test.
  		• The Competition Commission will itself determine what remedies are necessary. If appropriate, it will ask the OFT to negotiate undertakings on its behalf.
  		• Occasionally, even though there are adverse competition effects, the way a market operates may bring countervailing benefits to consumers. If this is the case, then the Competition Commission may decide to take no action or modify its remedies.
  		• Ministers will retain the power to decide the very small minority of cases where clearly defined exceptional public interest issues arise.
  		• There may be a case for Ministers retaining a limited role in relation to divestment remedies recommended by the Competition Commission.

    6.1      The ability to investigate markets as a whole is an important feature of our competition regime. Where a market is not working well, the complex monopoly provisions of the Fair Trading Act 1973 provide a very effective means of taking action, complementing powers under the Competition Act 1998 and EC law.

    6.2      Economic evidence shows that in markets where competitors engage in parallel behaviour, competition is often reduced to the cost of consumers. In many cases, such practices may just emerge and become widespread in a market ­ but still have a detrimental effect.

    6.3      The complex monopoly provisions allow broad investigations into markets to see how they are working, what the problems might be, and how to solve them, without necessarily attaching any blame to the participants.

    6.4      These important provisions are in need of modernisation. It is one of the Government's principles that competition decisions should be taken by strong, pro-active and independent competition authorities. Under the monopoly provisions, decisions are still taken by Ministers.

    6.5      The Government intends to reform the monopoly provisions ­ replacing them with a new power to investigate markets ­ where the overwhelming majority of decisions will be taken by independent competition authorities.

    INTERACTION WITH EUROPE

    Collective dominance

    6.6      European community law is developing in a way which, in due course, may make it possible to tackle some of the practices covered by our complex monopoly provisions. For example a concept of "collective dominance" is developing through case law, which may allow action against a group of firms who collectively abuse their dominant position without actually colluding. The Competition Act will ensure that as European case law develops the extent of powers available to the European Commission under Article 82, these are automatically available to the OFT.

    6.7      Our domestic monopoly provisions currently allow us to tackle a much larger range of market failures than does Community law. The new power to investigate markets will also do so (regardless of the development of the concept of collective dominance). Although there will continue to be some overlap, our new domestic provisions are intended to be complementary to the emerging concept of collective dominance.

    6.8      A distinctive feature of the Fair Trading Act regime is that where a market is found not to be working well, the firms might be prohibited from particular practices for the future, but they face no retrospective penalties nor do they face the prospect of third party actions for past abuses.

    Modernisation

    6.9      Under modernisation, the European Commission proposes that Article 81 should apply to agreements to the exclusion of domestic competition law. It also intends that where firms infringe the Article 82 prohibition, other domestic competition law should not apply.

    6.10      These proposals are contentious among some Member States as they would limit the use of their domestic competition law which may not mirror Articles 81 and 82 as UK law does. The UK Government believes the Commission's proposals could mark a welcome improvement ­ with greater consistency across Europe. However, the Government wishes to ensure they do not undermine the effective working of the complex monopoly regime and its successor.

    6.11      The European Commission will need to work closely with Member States over the coming months to revise its proposals. The Government is committed to ensuring that the outcome maintains the effectiveness of our regime for investigating markets.

    THE NEW REGIME FOR INVESTIGATING MARKETS

    6.12      The new regime for investigating markets will have a similar scope to the existing monopoly provisions, but will operate along the same lines as the new merger regime. It will be used for market wide inquiries. It is not Government's intention that it will be used to deal with scale monopoly problems except in exceptional circumstances (see paragraphs 6.58 to 6.59 below).

    • The OFT will work pro-actively to keep markets under review ­ where it appears that markets may not be working well, it will be able to refer them to the Competition Commission for further investigation.
    • The Competition Commission will carry out a full investigation ­ assessing the market against a new competition-based test.
    • The Competition Commission will itself determine what remedies are necessary. If appropriate, it will ask the OFT to negotiate undertakings on its behalf.
    • Occasionally, even though there are adverse competition effects, the way a market operates may bring countervailing benefits to consumers. If this is the case, then the Competition Commission may decide to take no action or modify its remedies.
    • Ministers will retain the power to decide the very small minority of cases where clearly defined exceptional public interest issues arise.
    • There may be a case for Ministers retaining a limited role in relation to divestment remedies recommended by the Competition Commission.

    MAKING REFERENCES

    6.13      The Fair Trading Act enables a reference to the Competition Commission to address complex monopoly questions when:

    • it can name or define companies in a market who collectively have a share of supply of 25% or more; and
    • it appears that the companies, whether voluntarily or not, and whether by agreement or not, so conduct their affairs as in any way to prevent, restrict or distort competition.

    6.14      The Government believes that this test should be changed. The first limb is of little value ­ as in almost every market, it is possible to name or define companies who collectively have a share of supply of 25% or more. The second limb is also problematic, as it asks the OFT to make an assessment that is not directly related to the substantive test applied by the Competition Commission in its subsequent inquiry.

    A new reference test

    6.15      For the new regime for investigating markets, the Government will develop a more flexible reference test ­ which allows the OFT to refer markets when it believes that conduct, or circumstances surrounding the operation of a market, suggest a Competition Commission investigation would be merited. The Government invites views on the following replacement test:

      The OFT believes (or has a reasonable suspicion) that a market may operate in a manner which adversely affects competition.

    Or, alternatively, and closer to the proposed merger test:

      The OFT believes (or has a reasonable suspicion) that the market may operate in a manner which substantially lessens competition.

    Indirect indicators

    6.16      The Government believes that, in addition to direct observable conduct, other, indirect indicators of a lack of effective competition, thus damaging the consumer interest, should provide grounds for a reference. The new legislation will ensure that such factors can be taken into account. For example:

    • the conduct or practices of the firms in the market;
    • prevailing prices, profit levels or productivity levels;
    • the structure of and barriers to entry into the market;
    • comparisons with similar markets in other countries; and
    • laws or regulations which affect the operation of the market.

    6.17      The Government invites views on these factors and others which might provide a basis for a reference.

    6.18      As at present, it will also be possible for references to be made by sectoral regulators with concurrent powers, and by Ministers. The Government believes that where a reference is made, the reasons should be explained publicly.

    DURING INQUIRIES

    6.19      The current reference procedure can be inflexible. During an inquiry, the Competition Commission can sometimes find that the reference is too wide, too narrow, or not worth making at all. While the Fair Trading Act 1973 does give the Competition Commission the opportunity to seek an alteration to the reference, this is rarely taken. The Government will retain this power for the future and believes that the Competition Commission should become more active in using it ­ to ensure that its inquiry is focused on the markets that most merit investigation.

    6.20      The Competition Commission should also be able to cut short an inquiry if it becomes clear that there is no problem in the market. The current legislation does not allow the Competition Commission to seek a termination of the reference. For the new regime, the Government invites views on whether to introduce a new power for the Competition Commission to drop inquiries subject to the agreement of the OFT1, and a requirement for it to explain publicly its reasons for doing so.

    A NEW COMPETITION-BASED TEST

    6.21      When a market is referred for investigation, a key question that the Competition Commission needs to answer is whether any facts found by the Commission during their investigations operate, or may be expected to operate, against the public interest. The test is concerned with the public interest rather than competition issues.

    6.22      With the advent of the Competition Act 1998, monopolies and restrictive agreements are considered against a competition test. The continued presence of the public interest test in the Fair Trading Act now looks anomalous and outdated.

    6.23      The Government intends to replace the public interest test with a narrower, more focused competition test.

    6.24      In a merger case, the Competition Commission will assess whether a merger will lead to a substantial lessening of competition. A similar analysis may be applicable in a market-wide investigation (ie whether the conduct or performance of any firm or any other aspect of the market has the effect of substantially lessening competition). Alternatively, the test may be based on adverse effects (ie whether the conduct or performance of any firm or any other aspect of the market means that the market operates in a manner which adversely affects competition). The Government invites views on these two approaches. One issue is whether the test should include some degree of appreciability such as 'substantial'.

    COUNTERVAILING BENEFITS

    6.25      Adopting a competition-based test would bring the new regime for investigating markets into line with other aspects of our competition law. The Government believes that inquiries which are required explicitly to focus on competition will best deal with the adverse impact that reduced competition can have on consumers and the economy.

    6.26      There may be cases, however, when it would be wrong to base decisions solely on competition grounds. Few areas of competition law operate by doing so. For example, Article 81(3) allows for the exemption of anti-competitive agreements if they bring wider countervailing benefits. The Competition Act provides a similar power for the OFT. The new merger regime will allow the competition authorities to clear a merger or allow it to proceed with conditions when, even though competition considerations point the other way, they believe that it will bring overall benefits to consumers.

    6.27      For the new regime for investigating markets, the Government is considering whether to follow the merger model or the Article 81(3)/Competition Act model. Under the merger model, benefits to consumers will be tightly defined as price, innovation, quality or choice for consumers who are affected by the merger. Under Article 81 and the Competition Act, the relevant test is broader, and includes whether the agreement contributes to improving production or distribution; or promoting technical or economic progress ­ whilst allowing consumers a fair share of the resulting benefit. European case law demonstrates, for example, that countervailing benefits can be taken to include consideration of the environmental, social and health benefits.

    6.28      Inquiries which look across entire markets may be more likely than merger cases to identify wider countervailing benefits ­ and, therefore, there is a case for following the Article 81(3) model. However, there are also advantages in consistency between the new regimes for mergers and for investigating markets. The Government invites views on which model to follow.

    6.29      Additionally, in a small minority of cases issues of exceptional public interest may arise, and in such cases, Ministers will retain the discretion to take final decisions (see paragraphs 6.41 to 6.48 below).

    REMEDY SETTING

    A new duty to develop remedies

    6.30      Effective remedies which promote competition, although often difficult to devise, are the key to ensuring that consumers benefit from an investigation.

    6.31      The current regime places too little emphasis on the process of remedy setting. The legislative framework does not require the Competition Commission to identify any remedies at all. The Fair Trading Act says that the Competition Commission panel may, if they think fit, include in their report recommendations to remedy the adverse effects found. In practice the Competition Commission does offer its view of remedies. The Commission is itself not responsible for decisions on the remedies to be applied. Government proposals address both these points.

    6.32      Under the new regime for investigating markets, the Government will introduce a new requirement for the Competition Commission to develop remedies which address the problems it has identified through the promotion of competition and the consumer interest.

    Designing remedies

    6.33      The process of determining remedies is complex and difficult ­ and would benefit from greater public debate. In the past the process has often been opaque. In some cases, the Commission may have concluded that there is no evidence of a competition problem, but still seek views on hypothetical remedies. In others, the Commission may have strong evidence of problems, but those asked to comment on hypothetical remedies may have no access to this evidence.

    6.34      In the future the Competition Commission intends to adopt a new procedure for setting remedies. The Commission will, at the end of its main analysis of the market, publish provisional findings on the substantive test and key parts of the analysis. It will then focus its energies on devising remedies to correct any competition problems, doing so in a transparent manner inviting views from the parties and others.

    6.35      The Competition Commission will still be able to alter its findings after the provisional findings are published ­ for example, where new evidence comes to light, or where further analysis suggests the provisional findings need refining. However, the Commission intends that the new procedure will allow it to move more clearly to the remedy stage of the inquiry. Once the Commission has completed its inquiry, it will publish its final report, including remedies.

    6.36      The Government strongly welcomes the decision of the Competition Commission to adopt this new approach to remedy setting.

    Regulations

    6.37      The Government is keen that the Competition Commission should recommend changes to laws and regulations which it judges undermine the effective working of markets during the course of its inquiries. The final decision on how to proceed will be for Ministers who will need to balance competition considerations against other public policy considerations. The Government is committed to making a public response to such recommendations within 90 days (see also paragraph 4.15).

    Monitoring effectiveness

    6.38      Once remedies have been imposed, it is important to monitor how effectively they address the problems which the Competition Commission originally identified. Only by doing so can we be sure consumers are benefiting at least cost to business. The Fair Trading Act already requires the OFT to keep undertakings under review ­ but there is no formal requirement to produce a report, or to publish it.

    6.39      In recent years, the Government and the OFT have agreed that in some cases formal reports should be prepared and published ­ for example on the beer orders and classified directory advertising.

    6.40      From today, the Government will ask the OFT to produce follow-up reports for markets which have been previously investigated by the Competition Commission ­ setting explicit timetables for monitoring the effects of the remedies imposed. Regular re-examination of such markets should help to establish whether more might be done to strengthen competition. It will help to improve the remedy setting process, with a better understanding of what remedies work under particular circumstances.

    ROLE OF MINISTERS

    6.41      Reducing Ministerial involvement is an underlying theme of the changes made to our competition regime. For mergers, the Government has announced that it intends to take Ministers out of the loop except where there are issues of exceptional public interest. Under the Competition Act 1998, decisions are taken on individual cases by the authorities, rather than Ministers.

    6.42      Reducing Ministerial involvement is an underlying theme of the changes made to our competition regime. The Government believes that competition authorities acting on the basis of sound economic analysis are best placed to take decisions in order to correct competition weaknesses, and restore healthy competition for consumers. This view has strong support within our domestic competition community, and internationally.

    6.43      For the new regime for investigating markets, the Government proposes that:

    • Decisions on individual cases will be taken by the Competition Commission ­ which will look primarily at competition factors, but may also consider wider countervailing benefits.
    • The findings of the Competition Commission and the remedies it sets will be final ­ unless specified exceptional public interest issues arise, in which case Ministers will be able to override the Competition Commission's advice.
    • The legislation will set out areas where exceptional public interest issues can arise.
    • The Competition Commission will be able to ask the OFT to negotiate undertakings.

    6.44      In market wide inquiries the issues raised can be wide-ranging and it may not always be clear at the outset whether exceptional public interest issues arise. So, unlike the merger regime, where Ministers will not be able to raise exceptional public interest issues after a reference decision, for market investigations Ministers will be able to register their interest at any stage of the inquiry, and for a short period (eg 30 days) after the report is published. If, during its inquiries, the Commission identifies concerns about matters of exceptional public interest it will raise the issues publicly, so that the Minister may decide whether he or she wants to see them investigated.

    6.45      The new merger regime will specify national security as an exceptional public interest ground. There will also be a reserve power for the Government to list further grounds by secondary legislation subject to affirmative resolution ­ but the Government has no current plans to use this power. To do so would go against the whole thrust of the policy reforms in this White Paper. Government considers the same approach should apply to the new regime for investigating markets, and invites views.

    Divestment

    6.46      The divestment remedy may sometimes be particularly radical in the case of a market inquiry. In merger cases, firms will know from the outset that their transaction may be blocked or reversed if it fails the competition test. Market cases are different since an inquiry can show that the way a particular market has operated for some time undermines competition ­ and therefore that divestment is necessary to restore competition. In such cases, firms may be required to dispose of parts of their business.

    6.47      The Government believes in principle that the responsibility for deciding on, and implementing, such remedies should rest with the Competition Commission. It will be necessary for the Commission to demonstrate that divestment remedies are necessary and proportionate. But the Government recognises that a case can be made for Ministers to retain a role where a major divestment remedy is proposed ­ eg a break-up of a company. The Government invites views on the role of Ministers and in particular whether Ministers should retain a role in relation to major divestment remedies.

    6.48      Because the prime responsibility for remedies should rest with the Competition Commission, the Government believes that if a role for Ministers were to be retained, it should be limited to a power to override the Commission's decision ­ put into effect by passing secondary legislation subject to affirmative resolution. In such cases, the Commission would then be responsible for determining alternative remedies.

    MINOR CHANGES

    6.49      There are a number of other changes to the regime which the Government is considering or intends to make.

    Statutory questions

    6.50      At present, in framing its reports, the Competition Commission is required to answer a number of statutory questions before it makes its public interest findings:

    • Whether there is a monopoly situation and, if so, in favour of whom?
    • Whether any person is taking steps to exploit or maintain the monopoly position, and by what uncompetitive practices or other means?
    • Whether any action or omission is attributable to the existence of the monopoly situation?

    6.51      This requirement imposes a rigid structural framework on the Competition Commission that is difficult to work with. The Government intends to replace the statutory questions with two overarching requirements:

    • Assessing the market against the new competition test.
    • Taking account of any countervailing benefits to consumers and developing remedies which correct the problems by promoting competition and the consumer interest.

    Timetables

    6.52      Under the new merger regime, statutory maximum timetables will apply. The Government is considering whether a statutory timetable is required for the new market investigation regime. If there were to be one, the timeframe would need to be much longer than for mergers ­ as the issues raised can be much more complex.

    6.53      Even without a statutory timetable, there would be an administrative deadline for inquiries ­ set in most cases by the OFT. The Government intends that, in future, extensions should only be possible by agreement with the referring organisation, rather than Ministers. Given this, the introduction of statutory timetables may not add much further benefit. The Government invites views on how to proceed in this area.

    Information gathering

    6.54      For the new merger regime, Government will introduce a new power for the Competition Commission to impose monetary penalties on parties (including third parties) where they do not provide information on time. The Government invites views on whether such a power should apply under the new regime for investigating markets.

    General references

    6.55      The Fair Trading Act includes a power for the Secretary of State to make a general reference to the Competition Commission where she believes that practices have been adopted that are uncompetitive or that result from or are for the purpose of preserving a monopoly situation. This power has not been used for some time (the last case was Collective Licensing in 19882) ­ possibly because it does not carry the possibility of remedies at the end of the inquiry.

    6.56      The Government is considering whether, in the light of the new power to investigate markets, there is any need to retain the power to make a general reference. The Government invites views on this issue.

    6.57      If the power is retained, it should be modernised, so that where the Competition Commission in the course of a general reference inquiry found evidence to justify converting the inquiry into a market investigation it could do so (subject to the agreement of the OFT, and a public statement of the reasons). This would mean that general references could actually lead to improvements in the market. The Government would also extend the power of general reference to the OFT as well as the Secretary of State.

    SCALE MONOPOLIES

    6.58      The Fair Trading Act contains provisions which allow action against scale monopolies. No references have been made since the introduction of the Competition Act's prohibition of abuse of dominant market position, which is the primary vehicle for addressing monopolies.

    6.59      Government policy is that where possible, the OFT should use the Competition Act 1998 or EC law, if empowered to do so, to deal with problems arising from the dominance of a company, save in exceptional circumstances. The Government decided in 1997 that the Fair Trading Act provisions could be used where undertakings engage in repeated breaches of the prohibition, or in regulated sectors with high market power where restructuring may be appropriate. This policy will also apply to the use of the new market investigation powers.

    1 or the person making the reference, which could be a sectoral regulator or a Minister.

    2"Collective Licensing - A report on Certain Practices in the Collective Licensing of Public Performance and Broadcasting Rights in Sound Recordings," Cm 530, December 1988.

     
    previous page contents next page
    We welcome your comments on this site. Prepared 30 July 2001