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Self-Regulation in the United Kingdom

Buy custom Self-Regulation in the United Kingdom essay

Introduction

Competition law concerns intercession in the marketplace when there is a crisis in the competitive process. It is divided into two segments, the public authority intervention and private enforcement of competition law rights in the courts. Even though, the European Community regulatory authorities generally enforce competition law intervening in the markets, there have been various advancements at the European Community level. Currently, administrative enforcement of competition law is a norm, although, one must accept the existing developments in the private enforcement of competition law, predominantly following the ‘modernization’ of Community law and latest reforms under the United Kingdom competition law. In the UK, the Competition Commission is an independent public authority established through the Competition Act 1998. This essay conducts in-depth inquiries about the merger, ‘pure competition’ objectives, and state regulation of major regulated companies. One of the Commission’s tasks today is to give one major supermarket chain the go ahead to merge with Safeway. The Trade and Industry Secretary referred the proposed possession of Safeway by Morrisons, Asda, Tesco, and Sainsbury to the Competitive Commission under the Fair Trade for further scrutiny. The Commission’s mandate was to determine whether the prospective mergers are for or against the interest of the public. In order to come up with a clear conclusion, the commission put into consideration the opinions by all the parties involved. This paper studies how the Competition Act 1998 regulates competition in the UK Supermarkets Chain today. In answering the question, the paper will also look at both the advantages and disadvantages of such a regulation in the UK supermarket chains (Coleman, 1999).

In order to understand the logics behind mergers and decisions of the competition commission in the UK, it is important to highlight the procedure of mergers in the UK. In that respect, one must understand how they have managed to address issues of mergers and competition in the marketplace. Of course, this must be in the interest of stakeholders, employee, suppliers, and most importantly the customers. There are several examples of competition law authorities’ interest. If one reflects back to the late 1980s, it is obvious that there was a controversy supported by a various reasons, during the protracted takeover of Distillers PLC by Guinness PLC. During this time, the UK merger control played a very important role, given the fact that Guinness and Distillers were the main drink companies in the United Kingdom (Coleman 1999). Though the authorities’ role was unlimited, they later allowed for the takeover bid. It should be accepted that the ‘old’ UK merger control system aided in creating ‘pure competition’ policy and provided reasons for the prohibition of takeovers and mergers. Another instance was the proposed takeover of Manchester United football club by BSkyB that was controversially blocked after the Competition Commission (CC) recommended that it would be against the interest of the society.

The Final example that forms the basis of the paper took place in 2003 where there were two high-profile UK merger investigations of the proposed takeover of supermarket chain Safeway by several other supermarket chains, such as Morrisons, Asda, Tesco, and Sainsbury. The Secretary of State accepted the conclusion presented in the report drafted by CC; and, on 26 September 2003, he disallowed the prospective acquisition by Sainsbury, Tesco, or Asda (Paul, 2003). On the other hand, the way for prospective acquisition by Morrisons was cleared for the reason that it was likely to negotiate undertakings, relating to the need of divesting the 53 stores that saw Tesco buy ten new stores. The CC concluded that, without a partial divestiture of the proviso, it would operate against the interest of the public. The reason why CC prohibited the acquisition by the other three businesses was justified by the claim that they were likely to operate against the public interest, both at the international and local levels.

Paul (2003) stated that Competition Commission further indicated that if the other three supermarkets operated against the public interest in both local and national level, it would be difficult to remedy the situation via any divestiture in the future. In most cases, it appears that the UK authorities are usually concerned with the competitive effects within the local markets. This was made exemplified through the report provided by the CC in February 2006, in the case of the proposed acquisition of six multiplex cinemas by Vue Entertainment Holdings (Ltd) in the United Kingdom. In this particular instance, the CC concluded that Vue Entertainment Holdings (Ltd) would be required to sell one of two stores in Basingstoke, the one that was under Vue’s ownership and the acquired one (Paul, 2003). The Competition Commission demanded that this should be done in order to avoid fluctuation in prices. Another reason for that proviso was to reduce choice for their clients in that locality as a result of the merger. This case obviously is alike to the case of the supermarket chains, when Morrisons was required to sell some of their acquisitions.

In addition, it is important to appreciate the objectives of the competition law. Before appreciating the objectives of the Competition Commission in the UK, one must be aware of the economic background of the policy of competition. We must also understand the role played by economic theories in relation to the market structures. This is because the economic theories predict that perfectly competitive markets are likely to result in both acquisition and prolific efficiency (Douglas, 2003). The locative competence is only achieved via allocation of resources in accordance with the demand of the clientele. This can only be implemented through perfect competition, whereby the manufacturer is the ‘price-taker’, the price of the commodities or services are then determined by the aggregate output of the industry and the demand of consumers. This is usually supported by the law of supply and demand, since it is the foundation that stresses on the magnitude of consumer interest in law of competition, both procedurally and practically.

Douglas (2003) affirms that the development of the current UK competition is essentially statute-based. The reason why it is statute-based is that it was a notable feature of the advancement of the common law, which was abstained from issues of competition in the marketplace. These competitions are usually effective if they are healthy. Through healthy competition in the marketplace, the producers and some companies are likely to reap competitive advantages over other businesses. This, in turn, calls for a regulation to be put in place to ensure that the advantaged firms do not exploit their disadvantaged counterparts. The regulation is important in ensuring that the consumers do not suffer in case the competition is ineffective. However, it is important to note that self-regulation of supermarket chains in the UK has both negative and positive aspects.

The Effectiveness, Positive and Negative Aspects of the Regulation

Self-Regulation in the supermarket chain market includes various issues that need further scrutiny both at the international and local levels. In order to understand the regulation process, it is vital to study the effects of any prospective acquisition to both suppliers and consumers. In this case, the Competition Commission gave Morrisons the go ahead over the other prospective buyers, like Tesco, Sainsbury, and Asda (Douglas, 2003). The move was caused by various financially viable reasons. Even though, a number of these supermarkets was not struggling, Safeway and Morrisons signed an agreement that allowed them to merge since the merger between the two was considered to be advantageous. Morrisons was looking forward to record far more quick growth, and in turn, it was capable of funding an acquisition in order to achieve competitive advantage within a short time.

The question how effective the bid for Morrisons to take over Safeway was then arises. The successful bid by Morrisons to take over Safeway was a clear indication of success, since Morrisons was likely to become a significant and strong national player in the marketplace. Overall, the merge should at least exert a positive and competitive effect on the retail supermarkets. Moreover, the move must also be beneficial to customers and must not be against the public interest. According to Douglas (2003), the bid of Morrisons was found to be against the interest of the public in some localities where the number of other competing supermarkets was abridged to a manageable number. This was subject to divestment of a number of stores in such areas. However, the bid by Morrisons to take over Safeway proceeded successfully.

In this particular case, the Competition Commission was given well over four and half months to study the matter of the four mergers situation. The Competition Commission was mandated with the obligation of investigating whether the merger is likely to have an impact on competition or not. The main aim of investigating these four mergers situation was to determine which one would be of the bigger economic importance. The Competition Commission resumed its duty and partially used isochronal analysis (Lawrence, & Moffat, 2004). This is the mapping and positioning of stores area by looking at the number of the clients they serve. In acting this way, they came up with detailed information on a number of areas that were likely to suffer due to the reduced competition at the local level.

The deal signed by Morrisons, a very fast-growing, medium-sized British supermarket chain takeover of the UK rival, Safeway, amounted to a total of $ 2.9 billion (Lawrence, & Moffat, 2004). The combination’s objective was to gain competitive advantage at the expense of Asda, Tesco, and Sainsbury, the giants of the United Kingdom supermarket sector. By the time of Morrisons takeover, it had acquired 598 stores, with a turnover of $ 12.6 billion and a market share of 16 per cent (Lawrence, & Moffat, 2004). In the recent years, both Safeway and Morrisons have been very successful. However, today, the supermarket sector suffers from low margins and fear of slowing down of the spending growth. The operations of the two firms, Morrisons and Safeway, are likely to be complementary, because Morrisons is strong in northern England, while Safeway is strong in the South and Scotland. The provision of the green light by the Commission to Morrisons-Safeway merger would develop another major national player in the market, and this is very essential for the supermarket sector in the UK. Nonetheless, the negative impact of the merger is likely to cause loss of thousands of non-store jobs. This will be a result of the businesses’ merge, who seek to eliminate the overlaps in the company. It is clear that people will lose their jobs in areas where the companies seek to eliminate the overlaps. In the future, however, the supermarkets are likely to create new jobs, to counter the lost head office jobs (Lawrence, & Moffat, 2004).

In fact, concerning Morrisons northern-based stores accompanied with Safeway’s strength in other regions, it is evident that the existing competition will diminish from five to four major players in the market (Lawrence, & Moffat, 2004). In addition, this will call for a strong fourth force, to take on the big three. According to the Competition Commission, there are various negative impacts created through this merger. One of them is that it is likely to cause higher prices in shops and for the already stretched suppliers; the prices are likely to be lowered. In that line, the Competition Commission should have played a role in avoiding the possible fluctuation of the prices in shops by denying Morrisons the bid to merge with Safeway. It would have turned down the bid on the grounds that it would be proper to have five store groups controlling ninety per cent of the supermarket sales in Britain instead of having the four; Asda, Tesco, Sainsbury, and the joint merger of Morrisons and Safeway. Most business advisers were against the move of Safeway to go along, because it was impractical decision. Lawrence & Moffat (2004) confirm that various companies have gone through a similar situation in the past; Tesco and Asda are among these businesses. The above two companies suffered the challenge of changing the top management team, being taken over by some firms outside the supermarket sector.

When looking at the market share and significance of all the other three supermarkets, it is clear that Tesco controlled the market and influenced the other supermarkets. This was evident in 1995 when it overtook Sainsbury as the UK’s largest supermarket. Looking at the recent developments, it is obvious that, in 2001, Tesco occupied 15.6 per cent of the UK’s grocery retail market, and thus, it became the market leader with advantage of 6%. By 2004, it increased its market share by 28%, which was 12% more than its nearest competitor, Asda, possessed (Lawrence, & Moffat, 2004). It is subject of argument that if Tesco’s share of the convenience store market is squarely considered as a separate sector by the UK competition authorities, in this instance, Tesco can be said to control 34% of the entire grocery market in the country today. This is an achievement, considering the fact that the “supermarket” market is highly concentrated. The efforts by Asda to achieve competitive advantage and to offer better services to its customers in the market was dwindled by the efforts of the Competition authorities, who stepped in and claimed that Tesco employed anti-competitive practices. However, through the favoured market share of Tesco, it has managed to attain a considerably impressive share of the total retail market share. They have just allowed Tesco develop and flourish through increasing its share in the market. Notably, in September 2004, following the acquisition of Safeway by Morrisons, Tesco got the privilege of buying 10 of the 52 Safeway stores (Lawrence, & Moffat, 2004). This was in concurrence with the Competition authorities’ demand to sell some of the stores.

The significance of maintaining huge numbers of supermarkets in the market demonstrates that the competition becomes healthy, and consumers are not subjected to any inconveniences. The importance of ensuring that there are various supermarkets is enshrined in the Act that should have guided the Competition Commission in making decisions. In addition, when looking at the conclusion of the Competition Commission, it is clear that there is complexity for new businesses entering the marketplace. New businesses are important in making sure that there is fresh competition due to the existence of economies of scale and the effect created by stringent planning regulations in regard to construction of the new stores (Maher, 2000).

Another disadvantage of self-regulation of supermarkets in the UK is that, in case Morrisons decides to buy Safeway; it will likely weaken the market as a whole. In acting this way, conditions for a takeover by one of the other three, Asda, Tesco, or Sainsbury. Maher (2000) ascertains that the Competition Commission confirmed that supermarkets conspire and increase the prices of their products through “coordinated behaviour.” In this coordinated behaviour, supermarkets only recognize the interest of avoiding price cuts. It is important that the Commission investigate this behaviour in order to create a competitive environment that is favourable for all the supermarkets in the marketplace. This is a very sensitive sector within the marketplace, and the Commission must keep watch of the relations and cooperation of the businesses.

Conclusion

It is obvious that the recommendation of the Competition Commission report to accept the bid of merger between Morrisons and Safeway was issued, in order to protect the interests of the clients. Even though, the merger is likely to reduce the number of supermarkets to four, it will still create a national player. This move is likely to make the big four to have competition for lower prices in the supermarket industry in the UK. The competition will exist mainly between four supermarkets, Tesco, Asda, Sainsbury, and Morrisons/Safeway. The main concern will be the loss of a number of employees, because they are the major stakeholders. The branches of Safeway are likely to suffer from the loss of jobs. Roger and MacCulloch (2000) repeat the words of Morrisons Chairman that a number of jobs are likely to be created, “We will be creating probably 3,000-4,000 jobs in the next 12 months.”

Overall, the Competition Commission had a difficult duty of deciding on takeover bids of those firms interested in the Safeway group of supermarket chains. They decided to accept the takeover bid of Morrisons as the best, because the market needed another principal national player. The Competition Commission investigated the bid of Morrisons and found that it was in the best position for the suppliers, market, stakeholders, employees, and most importantly, the clients. It is, therefore, important to note that in the UK legal system, before the 1998 Act was enacted, the most significant competition action under tort was that of passing off (Roger, & MacCulloch, 2000). This passing off currently falls under the general principle against unfair competition in the marketplace. It should also be noted that the Competition Act 1998, as deliberated in this essay, facilitates claims being brought before the Competition Appeal Tribunal or the courts for breach of prohibitions as enshrined in the document.

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