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Competition Act 1998 - brief overview

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What is the objective of competition law?

Effective competition between businesses delivers open, dynamic markets and drives productivity, innovation and value for consumers. The objective of competition law is to help businesses provide these benefits by deterring them from engaging in anti-competitive agreements or conduct.

Under our competition powers, we have to consider the effect that anti-competitive practices or behaviour may have on the overall process of competition in markets. Please note that this is not necessarily the same as the effect on individual businesses' ability to compete.

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What is prohibited by competition law?

The Competition Act 1998 is comprised of two prohibitions:

  • The Chapter I prohibition prohibits agreements between businesses that prevent restrict or distort competition to an appreciable extent in the UK.
  • The Chapter II prohibition prohibits conduct which amounts to an abuse of a dominant position.

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The Chapter I Prohibition - what are anti-competitive agreements?

Examples of anti-competitive agreements between businesses which are likely to be prohibited by the Chapter I prohibition includes those which:

  • Fix the prices to be charged for goods or services; for example an agreement between two or more businesses in which all parties agree to sell a certain product or service at the same price.
  • Limit production; for example an agreement between two or more businesses which has the aim of limiting production and output so that demand can be driven up allowing prices to be increased.
  • Carve up markets; for example an agreement between two or more businesses in which all parties agree to share a market, whether it be by territory, type or size of customer. 
  • Sharing certain categories of commercially sensitive information with one or more competitors; for example the exchange of information relating to the parties' pricing policies or elements of them, such as discount levels or the amount or timing of planned price increases or decreases.

It is important to understand that the above list is not exhaustive and that agreements can be formal or informal, written or verbal. An informal understanding or telephone conversation where two competitors agree to match each other's prices will be caught in the same way as a formal agreement.

The prohibition also covers decisions of associations of businesses as well as concerted practices (co-operation which falls short of an agreement or decision).

For more detailed information on how the Competition Act 1998 applies to anti-competitive agreements please download the leaflet Agreements and concerted practices (pdf 103kb). For information on how it applies to trade associations and professional bodies please download the leaflet Trade associations, professions and self-regulating bodies: understanding competition law (pdf 80kb).

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What are cartels?

Cartels are a particularly damaging form of anti-competitive behaviour - taking action against them is one of the OFT's priorities. They are, in short, agreements between businesses not to compete with each other and because they can often be verbal, cartels may be hard to uncover.

As a business, you could be a victim of a cartel or you could be breaking the law. Accordingly, the OFT is prepared to offer lenient treatment to businesses that come forward with information about a cartel in which they are involved. Under our leniency programme, members of cartels may have their financial penalty reduced substantially or they may be able to avoid a penalty altogether.

For further information on cartels and the OFT's leniency programme please see the cartels section.

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The Chapter II Prohibition - Abuse of a dominant position

The Chapter II prohibition prohibits the abuse of a dominant position. Holding a dominant position is not unlawful but it is unlawful to abuse that position. The prohibition therefore relates to the conduct of the company not its position in a market.

When considering a complaint under the Chapter II prohibition it is necessary to first establish whether a business:

  1. holds a dominant position, and if it does
  2. determine if its actions amount to an 'abuse'.

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What is a dominant position?

The assessment of a dominant position is not based solely on the size of the company. Whilst the market share is important (a company is unlikely to be dominant if its market share is less than 40 per cent) it does not determine on its own whether a company is dominant.

A business is only likely to hold a dominant position if it is able to behave independently of the normal constraints imposed by competitors, suppliers and consumers.

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What is the framework for assessing whether a company holds a dominant position?

In order to determine whether a business is dominant we need to first establish the relevant market. In establishing the relevant market we have to determine what the relevant product is and the geographic area. To do this, questions we may ask include:

  • Are there other products available that you could purchase should the price of the product you prefer increase?
    Whilst customers may have a preference for a particular product, we have to consider whether there are any substitute products that a sufficient number of consumers could consider to be suitable alternatives (even though not exactly the same) if they felt that the price of the product in question was too high.

    It is important to note that a substitute product does not have to be identical to the preferred product in order to be included in the same market definition. For example, it is possible that matches and disposable lighters may be considered as part of the same market as they perform the same function even though they are different products.

    Please note it is rare for any company to be found to be 'dominant' in the supply of its own product or brand.
  • Can the product be supplied or purchased from a neighbouring area?
    We have to consider whether customers would switch to suppliers in neighbouring areas in response to a small increase in price from their local supplier.

    So whilst suppliers may operate in a local market, the appropriate market definition may be wider because in any locality prices may be constrained by the possibility that consumers will avoid any local price increase by purchasing from neighbouring localities.
  • What if the product required is a replacement part and it can only be sourced from one manufacturer?
    A replacement part (or secondary product) will only need to be bought if the product that requires the part (the primary product) has already been purchased. The main examples are spare parts and servicing. For example, you would only need to purchase tyres if you had bought a car.

    In these instances the manufacturers of the primary product sometimes have a monopoly or high market share of the supply of the secondary product, so it might be argued that they hold a dominant position and are exploiting that position.

    However, the secondary product is not always the relevant market on which to assess whether a company holds a dominant position. This is because any exploitation in the secondary product can affect the manufacturer's position in the primary market. For example, an aircraft manufacturer may have a monopoly in supplying spare parts for its aircraft, but an increase in the price of spare parts might be taken into account by airlines when purchasing aircraft in the future. Should the airline be unhappy, it is likely it will switch to purchasing aircraft from an alternative aircraft manufacturer.

    A key issue is whether customers take into account the whole-life cost of the product before purchasing. This occurs if customers look at both the cost of the primary product as well as the expected secondary product purchases.

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What amounts to an abuse of a dominant position?

Having established that a company is dominant, anti-competitive conduct which exploits consumers or tends to have an exclusionary effect on competitors is likely to constitute an abuse. Examples of the type of conduct that may fall into this category for a dominant company include:

  • charging excessively high prices
  • offering different prices or terms to similar customers
  • refusing to supply an existing or long standing customer without good reason.

It is important to understand that the above list is not exhaustive. Additionally, in all circumstances, it is important to consider the likely effect of the conduct on customers and on the process of competition when determining whether they would amount to an abuse. 

 

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What is an objective justification?

In some circumstances, behaviour which could restrict competition may not be considered abusive even if carried out by a business which holds a dominant position, as it may be the case that the business in question has an objective justification for acting in a certain way.

For example, a dominant business' decision to refuse to supply a long standing customer may be justified if it is proven that the customer had a poor credit rating and was unable to fulfil their contractual obligations.

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When does the Competition Act 1998 not apply?

Competition law may not apply to some categories of agreement and conduct. Agreements or conduct may be excluded from investigation under the Competition Act 1998 because they are instead subject to examination under other laws. Agreements (but not conduct) may be exempt because they meet certain requirements set out in legislation in respect of certain categories of agreement and are considered not to be anti-competitive.

These exclusions and exemptions are explained in detail in the guidelines Agreements and Concerted Practices (pdf 103kb)and Abuse of a Dominant Position (pdf 149kb).

An agreement that does not fall within any of the excluded or exempt categories may still be lawful if it satisfies certain conditions. You can also find further details on this in the guideline Agreements and Concerted Practices.

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How do I make a complaint?

If after reading this section you feel that your complaint raises potential competition concerns, please contact the Enquiries and Reporting Centre enquiries@oft.gsi.gov.uk. In order to help us consider your complaint, please be sure to include as much factual information as possible.

The OFT considers all complaints about anti-competitive behaviour which it receives. However, it should be kept in mind that strength of evidence is one of the OFT's key criteria for taking an investigation forward.

We should emphasise that whenever the OFT receives a complaint, even if the conduct potentially infringes the Competition Act 1998, as mentioned above we must consider whether the issue falls within our administrative priorities in accordance with our prioritisation principles (pdf 120kb). The OFT will then consider whether further action or investigation is, in the circumstances of a particular complaint, the most effective means of achieving positive outcomes for UK consumers.

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What is the relationship between UK and EC Law?

The Chapter I and Chapter II prohibitions of the Competition Act 1998 prohibit anti-competitive agreements and conduct that affects trade in the UK. Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) are the EU law equivalents of these UK prohibitions and apply where the anti-competitive agreement or conduct may have an effect on trade between EU Member States.

Since 1 May 2004 the OFT has had the power to apply and enforce Articles 101 and 102 of the TFEU (formerly known as Articles 81 and 82 of the EC Treaty) in the UK. When doing this, we must follow case law of the European Court. When applying the Competition Act 1998, section 60 of the Competition Act 1998 requires us to ensure that we act consistently with EU law. For more information on this please see our Guidance on modernisation (pdf 195kb).

The EU law provisions under Articles 101 and 102 TFEU apply to agreements or conduct which have the potential to affect trade between EU Member States. The provisions of the Competition Act 1998 apply without the need for a cross-border element. However, for most practical purposes it is not necessary to distinguish between the EU and UK rules as the substantive provisions are the same.

Where anti-competitive agreements or behaviour have an affect on trade across a number EU Member States, it is likely that the European Commission would be best placed to address take any necessary action under the TFEU. On these occasions it may be necessary to share information with the Directorate General of Competition at the European Commission as well as with other national competition authorities.




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