Making markets work well with customers

Introduction: A fair deal? The Enterprise Act makes operating anti-competitive cartels a criminal Consumer regulation enforcement (CRE) offence, for which directors can be fined and/or imprisoned. Directors 1 This division enforces a range of laws and encourages Markets exist when buyers and sellers come into contact and make can also be banned from company management for up to fifteen years businesses to adopt good business practice. It works closely with local exchanges. It is important that these markets work well if all parties for engaging in anti-competitive activities. The Act allows for trading standards departments and co-ordinates enforcement action. recognised consumer bodies to make super-complaints to the OFT are to get a fair deal. Consumers must take responsibility for the when they believe that features of a particular market are significantly Key operational areas include: buying decisions they make by shopping around to find the “best harmful to consumer interests. ◗ Tackling scams and trading malpractice – it has the power to seek value for money” for both goods and services. Consumers are court orders against businesses which damage consumers by increasingly aware of their rights, as a result of newspaper Making markets work breaching consumer protection law. coverage, television programmes like “Watchdog” and through the ◗ Unfair terms in consumer contracts - OFT negotiates with 3 work of bodies like The Office of Fair Trading (OFT). businesses to remove such terms. Guidance and information is The OFT is one of several hundred organisations that ensure businesses issued and the OFT can seek court orders, where necessary, against are trading fairly and safely. These other organisations include local This Case Study explains the work of the OFT and shows how it offending businesses. government, trading standards or sector regulators such as and works to create more competitive markets in this country to the ◗ Consumer Credit - OFT regulates the consumer credit market by in some areas, the OFT co-ordinates this regulatory work. benefit of consumers and business. A recent ruling by the OFT to ensuring fair dealing by businesses involved in lending money to consumers, and operates the licensing scheme. stop a newspaper group, Aberdeen Journals Ltd. from limiting In a competitive environment, businesses look to win a greater market ◗ Misleading advertising - OFT works closely with the Advertising competition in its market is examined to show how the OFT can share through superior products, skilful advertising, effective Standards Authority. make markets function better. promotion, special offers, astute pricing etc. Such competition is the ◗ Shopping from home - OFT works to ensure that businesses which sign of a healthy market that is likely to lead to greater consumer choice The Office of Fair Trading (OFT) sell directly to customers, including over the Internet, provide and lower prices. The OFT is dedicated to promoting fair competition. shoppers with clear law-abiding information – for example 2 cancellation rights. The OFT is an independent organisation set up by the government Key areas of OFT activity ◗ International consumer protection – where EU consumer law has and is responsible for ensuring that markets work well for 4 been breached, harming the collective interests of consumers, OFT customers. By law it is accountable for its actions and aims to be The OFT has different divisions: Competition Enforcement (CE); can bring actions against businesses in other European states. open, fair and transparent in its decisions. The OFT states: Consumer Regulation Enforcement (CRE); Markets and Policy ◗ Codes of practice – the OFT can approve business codes of practice Initiatives (MPI); Legal; Communications; Resources and Services. which meet certain essential conditions. Approved codes will be ‘Our goal is to make markets work well for consumers. Markets The CE and CRE divisions conduct the enforcement programme and permitted to carry an OFT endorsed logo signifying OFT’s approval. operate well when businesses work in open and vigorous also intervene in markets. competition with each other.’ The OFT has powers to prevent unfit persons from being estate agents Competition enforcement (CE) and keeps a public register of banning and warning orders made. It can also pursue court orders against traders who contravene legislation. The OFT’s powers come from consumer and competition This division ensures that competition laws are enforced by identifying legislation, e.g. The , designed to ensure that and opposing various forms of anti-competitive behaviour. The work of businesses compete fairly; it outlaws certain types of anti- its seven branches is sub-divided as follows: competitive behaviour. The OFT has strong powers to investigate ◗ Policy co-ordination – preparing OFT guidelines, liaising with the businesses suspected of anti-competitive behaviour, and can European Commission and providing policy advice and assistance impose tough penalties on wrongdoers. The OFT was re-organised on cases. under The Enterprise Act 2002 and now has a board comprising a ◗ Cartels – working across all market sectors, liaising with chairman and six other members (including five non-executive international bodies and conducting on-site investigations. directors). ◗ Mergers – monitoring and testing proposed and recently completed mergers, to see if they may be anti-competitive. If so, they may be referred to the . ◗ Handling complaints and other investigatory work to check that all businesses are complying with the relevant legislation. Market studies 5 The Markets and Policy Initiatives division takes a proactive approach by carrying out research into markets that do not appear to be working well for consumers. The studies can be carried out across a range of industries and their goods and services, for example, doorstep selling.

Key operational areas include: ◗ Carrying out market studies. There can be many reasons why particular markets are not working as well as they should for consumers. The information gathered is used to assess what action, if any, should be taken to address market failure. If several producers compete for trade then the price will generally In September 2002 the OFT ruled that Aberdeen Journals had a ◗ Assessing the impact on markets of new and existing laws and reflect what consumers are willing to pay, whilst providing suppliers dominant position in the market for local newspaper advertising in regulations. with a reasonable profit. Aberdeen and had engaged in predatory pricing. Predatory pricing ◗ Providing economic, statistical and financial analyst expertise for typically involves a firm deliberately making short-term losses in order the whole OFT and carrying out the OFT’s economic research Market adjustments to eliminate a competitor so as to be able to charge higher prices in the programme. plus demand and supply future. Well informed consumers are a key element in preventing suppliers 7 taking unfair advantage of them. Much OFT work, therefore, is If the market is not in equilibrium it normally adjusts and moves The OFT found that Aberdeen Journals was acting unlawfully by devoted to educating people into using their power as consumers. towards the equilibrium. This occurs in either of the following ways: significantly lowering the price of advertising space in its weekly free newspaper in response to the launch of a rival free paper in 1996. The ◗ In the case of excess demand, consumers require more than the practice continued after the Competition Act came into force on 1st market can currently supply. The market will either increase price, March 2000. Aberdeen Journals appealed against the original ruling but to cut off the excess demand, or suppliers will increase the amount the Competition Appeal Tribunal upheld it. A penalty was levied Glossary supplied. against Aberdeen Journals of £1 million. ◗ In the case of excess supply, businesses produce more than Cartel: An arrangement between businesses whereby they agree consumers are willing to buy. The result will be that prices fall to A major function of the OFT is to create markets where prices are to limit the ways in which they compete e.g. by setting uniform remove the excess or businesses will just produce less. determined by demand and supply, rather than by artificial means prices or by carving up territories in which to sell exclusively. such as predatory pricing Both demand and supply measure the amount or quantity that will be Demand: The willingness and ability of consumers to buy a certain demanded or supplied at a particular price. They can therefore be Most markets work well when left alone. However if suppliers work amount of a product at a given price in a given period of time. plotted on a graph. together to exploit consumers, the OFT has the powers to take action. Non-executive directors: Directors not involved in the day to day running of the business, but appointed for the

Price Price Price expertise/experience they can bring to management. Demand Supply e y Demand Supply Regulatory environment: The rules, regulations, laws and codes of practice within which businesses operate. x Quantity Quantity Quantity Super-complaint: A complaint that relates to the operation of a market, and is brought on behalf of a group of customers by a ‘e’ shows the equilibrium position. This is the point where there is no How markets work recognised consumer body. pressure on price to move in either direction. Suppliers are willing to 6 Consumers (buyers) demand goods and services; suppliers supply x amount at y price, consumers willing to buy x amount at y Supply: The amount of a product that suppliers are willing to (businesses) supply these goods and services. Consumers’ desire for a price. supply at a given price in a given time period. particular product creates higher prices that, in turn, stimulates supply. A fair deal in the market place On the other hand, consumers’ lack of interest, will push prices down 8 and may cause suppliers to stop manufacturing that product altogether. Markets work well providing buyers and/or sellers do not take For more information about the OFT please browse: advantage of their position. An example of this is 'predatory pricing' - The point where the amount supplied equals demand (i.e. where there where a business charges consumers artificially low prices in order to are no shortages or surpluses) is referred to as the equilibrium. The reduce or destroy the profitability of competitors. A business is able to www.oft.gov.uk

price at this point is called the ‘equilibrium price’. dominate the market in this way. © Business Case Studies LLP. www.businesscasestudies.co.uk