Expectations about Lessening of the Competitiveness within a Market According to the Section 22 of the Enterprise Act 2002
Economics development is regarded as one of the most important policies of any government. Among hem trade is the most important one. Trade gives the countries the opportunity to focus on the lines of manufacture (Furse, 2003: 56). Due to trade, countries have the opportunity to offer their domestic products into the international market making them more competitive. Hazzlitt (2000, 32) asserts that different kinds of trade policies such as tariffs and quotations are implemented by the countries. The governmnets set up the trade tariffs in order to develop and protect industries. The tariffs are the direct source of the government revenues. The government to protect its infant industries uses quotes, they do not help to increase the revenue of the government, but reduce the stability of payment (Miller, 2008: 12). The aim of the present paper is to analyze the result of the Section 22 of the Enterprise Act 2002 and see, using some examples, the way it works and analyze its positive and negative effects, advantages and disadvantages on the example of merger of the two companies.
For the beginning, it will be necessary to give the definition of a fair trade and its main aims. Fair trade is the organized social movement in the world economy that promotes and endorses the standards for international work, conservationism, and social policy. This method of trade was adopted by many countries and supported by different governments in order to achieve better results and raise the state revenues from the trade (Gaughhan, 2010: 35). To attain this vision, the notion of the fair trade aims to change trading practices and policies in favor of the meager and disadvantaged (Rosenbaum, Pearl and Perella, 2008: 34). The main target of fair trade is to promote trading partnerships based on fairness and transparency. Fair trade is surely a bright marketing strategy. There is a wish by the consumers to be sure that growers get really a fair deal. There are quite many admirable aspects of fair trade that include efforts to deal with unstable markets and promote fair cooperation. Nevertheless, the program of fair trade promotion has its limits and disadvantages as well.
The policy of the UK government concerning the development of market and business organizations led to the increased degree of competition within the market. Competition is a result of appearance of organizations conducting the same kind of business (Sherman, 2010: 76). The ordinary price or the free competition price in the particular market segment is the lowest price that the consumer can take. This is the lowest price for which the customers can afford to get the products and let the company to conduct its business further. Due to the existence of the competitive market, the enterprises are ensured to perform well in order to be ahead of their competitors. Where markets perform well, they give the round for strong incentives for good work, encouraging the companies to progress efficiency and productivity, to decrease prices and to make innovations; in the same time competitive markets are able to reward the consumers with the low prices, high quality of products and, consequently, and wider choice and range of production. As Arzac (2007, 65) states, the market competitiveness depends greatly upon the power of individual companies to effect market prices. The less power the individual company has to affect the market where it operates and sells its production, the more competitive power that market has. Market power appears when one or a small number of companies dominate and control a market thus depriving other companies the opportunities to enter the market. In this case, the government of the country should play an important role while solving this problem. The solution of this problem and a result of successful framework for the policy of the government is to concentrate on market collapse to make sure that interventions are forwarded to solve the problem. Therefore, in general, the key target of the competition policy of the government is to support and improve the competitive process to the UK economy some wider benefits. Sometimes, the process of competitiveness on the market can lead to the positive results (Frazer, Hinchliffe and George, 2003, 53). When a great number of companies overcrowd the market, their activities do not give the opportunity for larger companies to develop, thus leading to stagnation of bigger enterprises. In this very case, the natural competitiveness is quite useful as it helps to clean the marker from small companies that are not profitable for the government because of their low level of annual revenues.
According to the section 22 of the Enterprise Act 2002, the government tried to pay attention to the lessening of process of competitiveness and creation as better conditions as possible for the companies to merge for achieving mutual success. Speaking about the Enterprise Act 2002 in general, it has an important impact on the financial breakdown in a great number of spheres of business in the UK (Dennis and Fox, 2006: 27). The Enterprise Act was aimed first of all to create the atmosphere that will be very appropriate for the development of new organizations. According to the Section 22 of the current Act the government provided companies with the opportunity to merger. One of the key points of the section was creation of the conditions for substantial lessening of competition within any market or markets in the United Kingdom for goods or services.
In general, the idea of merger of the companies sounds very reasonable, as this is the opportunity for the companies to help each other in hard market conditions. Due to the merger regime, the government tied to help companies increase their revenues with the help of merger of the assets, hoping that is will help to reduce the competitiveness if the companies will act out like partners and part of the one whole. The merger is rightfully regarded as one of the most effective strategies that the companies can take in order to succeed in the market and reduce the level of competitiveness. Merger is the process suggested and created by the economic theory in order to achieve the reducing of competitiveness and help companies to mutually benefit without changing their policy and ways of conducting business. The process of merger, according to the opinion of Competition Commission permits two companies with the same size, but different cultures to follow the same ideals and principles. Economic theory defines three main goals of the merger that are considered its main principles. As Grauwe (2008, 45) asserts they are as following: sharing resources in relation with economics of scale considerations; leveraging the harmonizing powers in respect to the products and technology to increase effectiveness; preserving separate identities of the brands in order to support an image of a strong brand and its wide base of customers. Each of the companies after the process of merger preserves the right to be responsible for its own actions and operations, having the freedom to support their management style.
The case under consideration is the merger of two companies TESCOs and Saisnsburys AQA. TESCOs is worldwide grocery and general merchandising seller. According to Sanderson (2008), this company is the third-largest seller in the world n respect to the revenues and the second-largest company in the world, measured by its annual profits. Saisnsburys AQA is one more leading food retailer in the territory of UK. Let us consider the merger of two leading companies, its result and see whether the merger helped to reduce the level of competitiveness as it was expected by the economic theory. First f all, the merger of these companies resulted in the increased share price of the new company. From the point of view of benefits, this is very profitable for the company, but on the other hand, the higher market share presents important problems (Fox, 2009: 34). The competition commission is particularly concerned because the new company is likely to obtain more than 25% of the whole market share. Obviously, from the point of view of the economic theory, this merger can lead to the reduction of competitiveness in the market of food products retiles, as both companies act like one whole in this case and it will be irrational for them to act like competitors. Taking into account that both companies are the most famous representatives in this sphere, creation and development of monopoly may become the consequence of such merger. Unfortunately, as any process this kind of merger may lead to different problems.
As Cowell (2008) informs, the raise of monopoly will lead to the decrease of competition and a result in lees choice of products for the consumers. With law level of competition, demand will become inelastic; consequently, the companies will be forced to increase their profits by means of increasing their prices. This will result in a fall in customer surplus. In this case, with less competition the companies will have fewer motivations to extend better quality services; so, because of the fact that companies will not respond to the preferences of consumers, it will lead to the increase of inefficiency. Moreover, the companies will have less motivation to cut prices; consequently, it may lead to the fact that the average costs of the company are higher than in competitive markets. It will lead to the raise of productive inefficiency. When the supplier is dealing with a monopoly company, the difficulties with selling products for high process are inevitable. As a result, a monopoly company will be able to increase its profits at the expense of the suppliers. Consequently, a merger between Tesco’s and Sainsburys can lead to lower prices and profits for British suppliers and consumers. One of the positive results of this merger is that the new company will get more profits and will be able to make the investments in the research and development for improvement the quality of its goods and delivery system (Galpin and Herndon, 2008: 45). On the other hand, the reduction of competitiveness will lead to the increased prices for the consumers and decrease of demand consequently. In this very case, this merger is likely to have more disadvantages than advantages for both, companies and consumers, despite of the aim of economic theory to reduce the competitiveness. This particular merger does not reflect the probable results of the merger, represented in the report of the Competition Commission. It is presupposed by numerous reasons that are mentioned above.