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Why Does Competition Law Exist?

Compliance Knowledge Base | Competition Law

Posted by: Morgan Rennie Published: Mon, 10 Sep 2018 Last Reviewed: Mon, 10 Sep 2018
Why Does Competition Law Exist?

The scrutiny of business practice and the monitoring of the market dates back to the Roman Empire, and since then this practice has evolved and become the basis of the UK's competition law. Competition law exists within the UK as the legislative force which ensures that competition remains within the market, to allow the production of the best possible products and services. It has become an essential regulatory force within the UK market.

What are the origins of competition law?

The principles of competition law have been prevalent within the UK since the Roman Empire and are evident within the reigns of King Henry VIII and Queen Elizabeth I. The precursor of UK competition law was the English Law of Restraint of Trade. Competition law has evolved with the changing business conditions in the UK over the centuries to tackle the appropriate issues.

The American attitude towards competition law, which they refer to as anti-trust law, has also been a key influence upon the UK's competition law. The American anti-trust law was inspired by the Sherman Act of 1890 and the Clayton Act of 1914, both of which were created by presidents who had a vested interest in reducing the power of big businesses, as they were a perceived threat to the government. Consequently, the US government established anti-trust laws with the purpose of preventing the trust arrangements which were occurring between big businesses.

Why Does Competition Law Exist?

The mid twentieth century witnessed legislative intervention upon monopolies in the UK which had not been exercised during the reigns of King Charles I and Charles II, as monopolies continued as a means to raise revenues. However, the legislation which arose in the twentieth century lacked coherence, and the eventual establishment of the Competition Act 1998 and Enterprise Act 2002 established the precedent of competition law in the UK business market.

Essentially, competition law exists in the UK because of the British classic trade theory on competition. This theory states that agreements and certain practices can be regarded as unreasonable due to the restraint which they can pose on tradespeople. According to Adam Smith, a Scottish economist, market and trade are positive as long as there is competition involved, as well as legislation which prevents dominant and greedy forces from taking hold.

What does competition law provide for the markets?

Competition law ensures that competition is prevalent within the market, as over the centuries it has proved to be a vital component that is required for the market to prosper. Once there is competition, it encourages businesses to think of new creative approaches to business to ensure their products and services are refreshing on the market. This encourages modernisation within markets as there is a concerted effort from different businesses to create an efficient service.

In 2014 the Competition and Markets Authority (CMA) was created to enforce competition law. This is a non-ministerial government department with the responsibility of strengthening competition in the market and ensuring that anti-competitive practice occurs as little as possible.

In August 2018 Royal Mail were fined £50 million following an investigation conducted by Ofcom which discovered that the Royal Mail were guilty of a serious breach of competition law. Royal Mail had abused their dominant position with the delivery of bulk mail through a price increase which penalised their market rivals. It was thought this behaviour effectively denied postal users the choice or benefit of competition within the market as Royal Mail had dominated the market space.

The £50 million fine which Royal Mail were subject to is the highest penalty in Ofcom's history, but it was not the highest penalty that Ofcom could have inflicted upon Royal Mail. For opposing competition law an organisation can be subject to a fine that is worth 10% of turnover, therefore the potential fine could have been a lot higher for Royal Mail. Following this incident, shares had dropped by 1.8% in August 2018. A lack of compliance with competition law not only creates financial repercussions but also has the potential to tarnish an organisation's reputation.

Competition law exists to ensure that businesses encourage competition within the market. It aims to ensure consumers benefit from the opportunity to choose from the best range of products and services. To avoid the repercussions which will be administered for a lack of compliance with competition law, organisations should conduct training in this law.

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