In some ways, this thinking runs counter to the aims of various aspects of industrial policy.

An example of an apparent contradiction between the two is the establishment by the Labour government in the 1940s of nationalised utilities.

Again, in the 1960s, Labour created the Industrial Reorganisation Corporation (which promoted mergers) whilst the operation of the Monopolies Commission was to assess critically the benefits of mergers.

There are three ways in which policy has been used to promote competition.

• reducing the level of industrial concentration or, more usually, prevent it from increasing (merger policy);
• preventing the abuse of monopoly power by dominant firms (market liberalisation);
• preventing collusion and other restrictive practices by firms in the same industry (anti-trust and cartels).

These three, plus efforts to reduce state aids which artificially distort competition, are the four pillars of policy in the UK and the EU.

In general terms, there are three kinds of mergers:

• horizontal mergers are between firms operating in the same market (e.g. two banks merging);
• vertical mergers occur between firms operating at different levels of a linked production chain (e.g. a clothing manufacturer merging with a clothes retailer);
• conglomerate mergers occur where firms in unrelated businesses merge.

To be eligible for referral and investigation, a merger proposal must result in the new business controlling more than 25% of the relevant market and the acquisition of assets exceeding a certain threshold.

The original reference was to the Monopolies and Mergers Commission which examined the proposal in terms of ‘the public interest’. This was defined in the Office of Fair Trading Act (1973) in terms of:

• maintaining competition between suppliers of goods and services in the UK;
• promoting the interests of consumers in terms of prices, quality and variety;
• encouraging technological change;
• facilitating new entrants;
• location and employment implications;
• the international implications.

The second area of competition policy, the breaking up of dominant firms, has been used more widely in the United States, although UK legislation makes similar action possible.

The rationale is based on the idea that a number of firms of comparable size will create a more competitive environment, but it runs the risk of missing out on economies of large scale production and cost savings.

Tests for dominance relate to entry barriers, price, income and cross elasticities of demand and minimum efficient scale.

In the third area of competition policy, the Restrictive Trade Practices Act of 1956, outlawed cartels and other restrictive and collusive agreements.

The legislation covered agreements between firms with respect to prices, the terms of supply, the quantity or type of product to be supplied, and restrictions on firms or areas to be supplied.

Some conditions for exemption were included in the Act, referred to as ‘gateways’.

These depended on whether the public benefited from a continuance of the restrictive practice, on whether suppliers were in a weak bargaining position with other groups, and finally employment and balance of payments considerations were taken into account.

There has been a series of acts of Parliament since 1945 to ensure markets remains competitive.

Monopolies and Restrictive Practices Act 1948

Established the Monopolies Commission and defined monopoly as one third or more of a market.

Restrictive Trade Practices Act 1956

Established the Restrictive Practices Court with a Registrar of Restrictive Practices.

Resale Practices Act 1964

Prohibited producers from setting the final selling price to consumers.

Monopolies and Mergers Act 1965

Mergers and takeovers to be reviewed by the Monopolies Commission when referred by the Secretary of State for the DTI.

Fair Trading Act 1973

Set up the office of the Director of Fair Trading (DGFT) and the Office of Fair Trading (OFT). Monopoly power threshold reduced to 25%. More emphasis on benefits of competition.

Restrictive Trade Practices Act 1976

Restrictive practices now to be registered with DGFT.

Competition Act 1980

Extended monopoly control to public sector bodies including nationalised industries. Increased the powers of the DGFT to investigate anti-competitive practices.

Competition Act 1998

Reform bringing UK law into line with EU competition policy. Restrictive practices and abuse of market dominance prohibited (Chapters I and II). The MMC becomes the Competition Commission to a) deal with monopoly and merger inquiries and b) a new Appeals Tribunal to hear appeals against decisions and penalties levied by the DGFT. The investigatory powers of the DGFT and powers to levy penalties are greatly increased.

Enterprise Act 2002

Covered a range of measures designed to enhance enterprise by strengthening the UK’s competitive framework, transforming rules for bankruptcy and corporate rescue, and empowering consumers.

The Competition Act (1998) repealed much of the earlier legislation and substituted a new prohibition-based policy. The two main Chapters (dealing with anti-competitive agreements and the abuse of a dominant position) are prohibitions that replace the previous more discretionary approach.

As regards the administration of the law, the Competition Commission replaced the Monopolies and Mergers Commission. Following their general election win in June 2001, the government announced that there would be ‘full independence for better resourced competition authorities’.

The privatisation of utilities such as British Telecoms, British Gas, and the water and electricity industries in the 1980s and 1990s led to the establishment of dedicated regulatory offices headed by their own director general.

The functions of OFTEL, OFWAT, OFGEM, etc. were modelled on the OFT but with specific responsibilities for their own sector. Under the new Competition Act, these regulatory bodies were given the same powers as the DGFT in the enforcement of the prohibitions and they, rather than the DGFT, will apply the Act to their industries.

As before, inquiries are conducted by panels of four or five members of the Commission, with a three months limit for mergers and newspaper inquiries and six months for a utility case.

Monopoly references take between nine and 12 months. The commission still does not have the authority to initiate its own inquiries.

The Act gives the DGFT considerable new powers to tackle anti-competitive behaviour, such as the right to demand specified documents, to mount dawn raids, to enter premises, copy documents, to obtain a search warrant, etc..

The powers to enforce rulings were also strengthened. Not only were infringements of the prohibitions under the 1998 Act ended immediately on the issuing of an order by the DGFT but also penalties for infringements can be up to 10% of UK turnover. (The DGFT also has the power to impose interim measures while an investigation is underway.)

This Act was the most comprehensive and important piece of legislation affecting competition policy since the 1948 Act.

Since March 2000, prohibitions have applied relating both to restrictive practices and the abuse of market dominance. This brings the UK into line with EU law.

The present government, moreover, has tried to defend consumers’ interests with some high profile attacks on food retailers, petrol companies and banks, all thought to be representatives of ‘Rip Off Britain’.

In many respects, these have been the wrong targets, because in parts of the modern economy, less competition (in the sense of fewer players) can mean better value for the consumer.

In food retailing, for example, Tesco, ASDA, Waitrose and Sainsbury offer better value (in terms of prices, quality and choice) than the typical corner shop, benefits to the consumer that are largely the result the size of these retailers which have grown at the expense of the independents.

An economy the size of the UK, however, cannot sustain profitably more than four or five food multiples the size of Tesco and Sainsbury.

The rivalry between these giants will ensure a hugely competitive marketplace is maintained, one which offers consumers a much better deal than a proliferation of small independent shopkeepers but raises questions about relationships with smaller upstream suppliers.

A significant legislative contribution to competition policy was the Enterprise Act, which received the Royal Assent in 2002.

This built on the provisions of the Competition Act (1998), recent insolvency reforms and measures already implemented in a 1999 White Paper, ‘Modern Markets: Confidant Consumers’.

This act also formally created the Office of Fair Trading as an independent statutory body, the Competition Appeal Tribunal (CAT) and its supporting body, the Competition Service.

The main reforms of the Enterprise Act include:

• a change in the tests for identifying mergers for investigation (turnover rather than assets);
• CAT will hear cases by third parties alleging breach of competition laws;
• penalties of up to five years imprisonment for those who operate hardcore cartels;
• directors can be disqualified for up to five years for competition offences;
• more opportunities for consumers to gain re-dress for anti-competitive behaviour;
• for companies in financial difficulties, a streamlining of the procedure of administration. The intention is to promote the rescue culture and encourage entrepreneurship.

Almost 60 years after the first legislation on competition policy, responsibility for UK policy is now shared between four bodies.

The Office of Fair Trading (OFT)

The OFT is charged with making markets work better. Its powers derive mainly from the Enterprise Act (2002), but some powers remain from earlier legislation (such as the 1988 Competition Act). The OFT addresses anti-competitive practices and consumer empowerment, by a mix of enforcement and communication, for the benefit of consumers and producers.

The Competition Commission

The Commission conducts in-depth inquiries into mergers, markets and the regulation of the regulated industries, undertaken in response to a reference made by the Secretary of State for BERR, the OFT or sectoral regulator.

The Competition Appeal Tribunal (CAT)

CAT is a specialist judicial body with cross disciplinary expertise in law, economics, business and accountancy. Under UK law, the function of the CAT is to hear and decide appeals and other applications or claims involving competition or economic regulator issues.

The European Commission (Directorate General for Competition)

The Directorate has exclusive powers to act on certain large mergers with a European dimension. It also has powers to deal with restrictive agreements and anti-competitive practices when trade between EU members is affected.

The unprecedented instability that started in the second half of 2008 was in part related to the UK economy, in part to the global economy and in part to the international banking system.

When survival rather than prosperity is the over-riding economic concern, the role of competition policy is less clear, and the government sponsored merger of Lloyds Bank and HBOS seemed to suggest that the normal rules would be put on hold until the recession was over.

The UK Competition Commission has argued that the existing policy still applies and points to the recent completion of investigations into Groceries, Airports, Railway Rolling Stock and Payment Protection Insurance as evidence that it is business as usual.

It was felt, however, that the banking system was an exception, because of the risk of contagion. If one major food supermarket collapsed, for instance, it would not put the others at risk.

The collapse of one bank, however, could easily spark a panic that puts the whole system at risk. There was a clear need for a fresh look at banking regulation but not so as to exclude the ability of financial institutions to compete with each other.

There was also an awareness that regulators and banks may want to make new entry more difficult in order to restore profitability and in the interests of safety and prudence.

While not suspending policy, the official view is that the competition authorities must not be too doctrinaire and have to accept that parts of merger analysis has to reflect the prevailing conditions, recognising that in genuine instances of firm failure, less reliance has to be placed on expectations of new entry to correct market power.

The task is to hold the line on policy while understanding that asserting the general principle that ‘competition is good’ is a much harder to apply in periods of recession.

The old DTI tried to monitor the effectiveness of the UK’s competition regime (relative to its major international competitors) and sponsored peer reviews in 2001, 2004 and 2007.

In 2001, a survey of experts concluded that the UK was well respected within the OECD and that the competition regime was rated better than the EU and a bit below the US and Germany.

The 2007 review found that although there had been some improvements in the top three regimes, the UK still ranked third but the gap with the US had narrowed and with Germany all but eliminated.

It was perceived, however, that the system could be made simpler for users.