What does Competition Law Prohibit?

What does Competition Law Prohibit

Competition law exists to ensure that businesses operate in open and competitive markets. The law aims to promote healthy competition and fair trading. Businesses need to be aware of the main rules to avoid breaking the law or becoming a victim of others’ anti-competitive practices. There are serious repercussions and heavy penalties for infringements.

UK laws

There are two major UK laws protecting competition:

  • the Competition Act 1998
  • the Enterprise Act 2002

These laws prohibit:

Fix prices

This is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price. This prevents other businesses from being able to compete against them. It also prevents the public from the benefits of free competition.

Limit production

Make an agreement with the businesses in the same market to limit production in order to reduce competition.

Carve out markets

A business can not share out markets with their competitors. In other words they cannot agree on who will bid for which contract, e.g. we’ll take this contract, you take that one; instead of competing fairly.

Cartels

A cartel is an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition[1]. Within a cartel businesses do not compete against each other. By doing so they increase their collective profits by not driving prices down by competitive pricing.

The Competition Act applies to any agreement which limits competition. It generally impacts on large scale businesses but it applies equally to small scale businesses.

These laws apply to the UK, however, for some businesses anti-competitive may behaviour extend beyond the UK to other EU Member States. This is prohibited by Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU)[2].

UK and EU competition law prohibit two main types of anti-competitive activity:

  • anti-competitive agreements (under the Chapter I / Article 101 prohibitions);
  • and abuse of a dominant market position (under the Chapter II / Article 102 prohibitions).

These laws prevent any arrangements of agreements which manipulate competition and impact upon trade in both the UK and EU. It is important to note that currently the UK Government has said it will make no changes to this law if the UK leaves the EU. Following Brexit, UK businesses will still be subject to European Union competition law.

Exemptions

Mutually beneficial agreements.

An anti competitive agreement or arrangement will be assessed on its impact rather than how it has been worded. For example; a verbal agreement or ‘gentlemen’s agreement’ is considered equal to a formal, written agreement. Any arrangement whereby two or more businesses have colluded for the purpose of fixing prices, limiting production and or carving out markets, no matter how it was reached and agreed upon is prohibited by competition law. There are no exemptions to this.

Cartels

Not all agreements which restrict competition are automatically prohibited. Some agreements are permitted a ‘block exemption’ depending on the nature of the agreement and the market sector concerned. For example; two engineering companies enter into an agreement to design a new, innovative wheelchair together as opposed to independently. This would usually be subject to Chapter I article 101 prohibition, as by working together the two companies will be reducing the overall products which are produced. However, the nature of the agreement is to work together for the good of consumers as by working together a better product will be created. This intention offsets the anti-competitive effects.

Abuse of dominant market position

There is no similar exemption for anti-competitive agreements in this instance. However, a business may have some justification in certain circumstances. For example, a phone company may cut off a customer who has failed to pay their bill. This is a legitimate reason and protects the business interests. In contrast if a phone company raised its charges unexpectedly and disproportionately to the market and then cut off a customer for failure to pay their bill, this would be an abuse of their position. Therefore it is only when behaviour goes beyond what is necessary to protect the business’ interests that this would amount to abuse.

You can view our Competition Law online training course here.

[1] Oxford English Dictionary

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT