competition policy
The set of statutory measures of a country, or of the european community, which attempt to control dominant monopolies, RESTRICTIVE PRACTICES and ANTI-COMPETITIVE practices, to monitor mergers and to protect consumers.
In the UK, this policy was gradually developed from 1948. The Monopolies and Restrictive practices (inquiry and Control) Act 1948 permitted the Board of Trade to refer to the newly constituted Monopolies and Restrictive practices Commission ‘monopoly situations’ where one-third of the supply of goods was supplied by one firm, or two or more interconnected firms, in order to ascertain whether that situation was against the ‘public interest’, which was regarded as the promotion of efficiency, the suitable pricing of goods for domestic and foreign markets and technical progress. The commission’s report on ‘Collective discrimination’ recommended the separate and judicial investigation of restrictive practices. The Restrictive Trade Practices Act 1956 set up a register of permitted restrictive agreements and a Restrictive practices Court to ascertain whether it was right to regard an agreement as against the public interest. The legislation was also extended in 1964 by the Resale Prices Act to cover individual enforcement of resale price maintenance. References to the renamed Monopolies and Mergers Commission were possible under the Monopolies and Mergers Act 1965 where a monopoly situation was strengthened or the value of assets taken over was in excess of £5 million. The investigation of firms supplying services was another concern of the 1965 Act. Further legislation on restrictive practices in the 1968 Restrictive Trade Practices Act brought information agreements within the ambit of the Restrictive Practices Court. The Fair Trading Act 1973 set up the office of Director-General of Fair Trading with wide powers to investigate and refer to the Monopolies and Mergers Commission. The monopoly situations which could be investigated included those with only a quarter of the market, not only nationally, but also in local areas; the concept of ‘public interest’ was clarified by relating it to ‘competition’. The Competition Act 1980 transferred the investigation of prices to the Director-General of Fair Trading and gave the latter the task of investigating anticompetitive practices; under the Act, various public bodies, e.g. bus and water authorities, could be referred to the Monopolies and Mergers commission for a consideration of their efficiency and costs, the service provided and possible abuse of a monopoly situation. The 1984 Act consolidated the legislation. The Competition Act 1998 introduced new rules to prohibit agreements, business practices and conduct that would damage competition with fines up to 10 per cent of a business’s turnover.
The EUROPEAN ECONOMIC COMMUNITY from its inception regarded the promotion of competition as a major policy goal. The treaty of rome in Articles 3, 7, 37 and 8594 deals with many aspects of the promotion of competition. state monopolies, restrictive agreements, abuses of dominant positions in markets, the control of public enterprises by national governments and state aid to industries by national governments are all covered by the policy.
In the USA, since 1890 the federal government has pursued an active competition policy, known as antitrust.
Competitive Equality Banking Act 1987
US federal statute which establishes that transactions between member banks of the federal reserve and their subsidiaries and holding company affiliates be on the same terms as those offered to unaffiliated companies. A bank was broadly defined to include institutions receiving deposits, having deposit insurance and being engaged in commercial lending.
competitive fringe
The smaller firms coexisting with a few large firms in an oligopolistic industry: these firms have no influence over the market, especially in the setting of prices.
competitiveness index
An index to determine average annual increase in GDP per capita based on seven types of variable: openness, government policies, finance, infrastructure, technology, management, labour and civil institutions. it is compiled by the World Economic Forum of Geneva, switzerland.
competitive process
A process consisting of two opposing tendencies: the transfer mechanism which reallocates the market shares of the less efficient firms to the more efficient and the innovation mechanism which enables firms lagging behind their competitors to introduce new products or processes to reassert their position in a market.
competitive trading
The traditional method of exchange in a market consisting of buyers and sellers using their relative market strengths to reach an agreed single market price.
complement
A good consumed in conjunction with another, e.g. petroleum with a car. Whether two goods are complements of each other can be discovered by measuring the CROSS PRICE ELASTICITY OF DEMAND between them. if the cross-elasticity is negative, then the good is a complement.
complexity theory
A study of agents interacting simultaneously in a multiple cause and effect feedback. It looks at the emergence of a new phase of a system and a large range of potentials instead of forecasting on the basis of a simple cause and effect chain. The Santa Fe Institute of New Mexico, founded in 1984, pioneered this form of analysis.
compliance cost
The cost of complying with a government regulation, including taxation. Such costs are incurred by the private sector and by governmental organizations below the level of central/federal government. The costs of compliance include accountants’ fees and the opportunity cost of the time spent filling in forms.
composite commodity
A collection of goods representing purchasing power in general, or money as it is a medium of exchange. This composite is only possible if the prices of other goods remain constant. hicks introduced the concept.
composite insurance company
An insurance company transacting a wide range of life and non-life insurance business.
compound interest
Cumulative interest paid on both the original amount lent and subsequent interest which is added to the principal. If the total accumulation period is long, the total sum becomes immense compared with the original sum. Not surprisingly, Keynes asserted that ‘there is no more powerful force than compound interest’.
Comprehensive Employment and Training Act 1973 (J2) US federal statute consolidating previous, mainly youth, training programmes which hoped to give every youth and adult an opportunity to work. It decentralized planning procedures and its implementation, including on-the-job training. The Job Corps set up under Title IV was a residential programme to provide remedial work and skills training for severely dis-advantaged youths.
Comptroller of the Currency (G2, H1) US office set up under the national banking act 1863 originally to deal with currency and monetary matters, but the task of chartering and monitoring national banks also given to it has become its principal concern.
compulsory competitive tendering
The rule that UK local authorities put out major services, e.g. street cleaning, to tender instead of providing them by their own departments. In many cases, the contract is awarded to the original local authority service.
Computer-assisted Trading System
Toronto-based securities trading system, the first of its type to receive orders from abroad electronically and to direct them immediately to its trading floor.
concentration
The extent to which an industry is dominated by a few firms. This can be measured by examining the proportion of production, sales, value added or employment attributable to the largest firm or firms. monopoly, duopoly and oligopoly are the most concentrated of market forms; perfect competition is the least. UK industry is more concentrated than that of the USA or other West European countries, partly because of its smaller domestic market, which necessitates few firms per industry if economies of scale are to be achieved, and partly because of the weakness of the UK policy on mergers.
concentration economy
An economy of scale arising from the concentration of industry in a particular area.
concentration ratio
1 An absolute ratio (sometimes called a leading firms ratio) which shows the percentage of sales, output, assets, value added or employment which can be ascribed to the largest firms of the industry, usually the top four or five. These ratios are more accurate if they are adjusted for imports and exports.
2 A relative ratio based on a size distribution of firms showing, for example, what proportion of firms has what proportion of output; lorenz curves and gini coefficients are used for this purpose.
concrete labour
The labour required to produce a particular product, e.g. a piece of furniture. Labour in this qualitative sense creates use values.
conditionality
Lending to a debtor on condition that the loan is used for a specific purpose so that there is less risk of default in servicing the loan. It is argued that the international monetary fund and world bank in making this stipulation make ‘conditionality’ a PUBLIC GOOD.
Condorcet criterion
A voting procedure by which the candidate is chosen on the basis of defeating all the others by obtaining the majority of the votes in pairwise elections.
Confederation of British Industry
The major representative body for private and public sector firms of UK industry. The CBI was created in 1965 as a result of the merging together of the Federation of British Industries (founded in 1916), the British Employers’ Federation and the National Association of British Manufacturers.
confidence interval
The range within which, to a certain percentage, one is confident that a sample statistic lies. Thus, with a 95 per cent confidence interval, if we sample 1,000 voters to ascertain their current opinion of the government we can be confident that only fifty are unrepresentative of the population as a whole. Confidence intervals are stated for means, standard deviations, proportions and differences.
confidence level
A confidence limit, or critical value, expressed as a percentage.
conflicting claims approach to inflation
Attributing inflation to the total wage claims of workers exceeding the total income available.
confluence analysis
A general statistical method used in econometrics created by frisch and others from the 1930s onwards. It attempts to discover the different linear relationships between several observable variables, taking into account measurement errors.
conglomerate
A large firm, particularly in the USA, with many subsidiary firms producing unrelated goods and services so as to reduce risk. Famous US conglomerates include ITT, LTV, Litton, Textro and Gulf and Western. Their past growth was based on a simple mathematical truth that if a company with a high price-earnings ratio takes over one with a lower price-earnings ratio, the acquiring company’s earnings per share will automatically rise, helping to finance further acquisitions. Their recent growth has been hampered by the opposition of the US Department of Justice and periods of falling stock market prices.
conglomerate merger
A merger between two firms with different products or activities. These mergers are motivated by the desire to use underutilized resources, particularly management and marketing. Although it is hoped that the merger will create a financially strong firm, rather than a firm with an increased market share, experience has shown that many mergers of this kind have not been financially successful.
Congressional Budget and Impoundment Control Act 1974
Major US federal statute which reformed the US budget process by changing the fiscal year from 1 July to 1 October to give Congress more time to consider the budget, created new budget committees, introduced a first budget resolution to establish ceilings on expenditure, revenue and debt and made anti-impoundment provisions to stop the president from seizing money voted to particular programmes: previously the president could refuse to spend moneys for purposes which had been the subject of appropriation bills despite Congressional approval.
consideration
1 The value of a stock exchange transaction expressed in a particular currency.
2 The advantage or detriment which establishes a particular contract under common law jurisdictions such as England and Wales, the USA and some Commonwealth countries.
consol
A consolidated fund stock (‘Consolidated Annuity’) of the UK government issued as an unredeemable fixed interest security. They were introduced in 1751 as a means of replacing a variety of government bonds of different maturities and interest rates with a single government stock. The yield on consols has often been used as a measure of the long-term rate of interest. The consols currently traded in the UK have nominal interest rates of 2% per cent and 4 per cent.
Consolidated Fund
The fund of the UK central government into which all direct and indirect tax revenues and other receipts are paid. Prior to its establishment in 1787, separate funds existed for each type of government revenue.
Consolidated Fund standing services
An item of the UK budget covering expenditures which do not require annual approval by parliament, e.g. interest on the national debt and the salaries of judges.
Consolidated Metropolitan Statistical Area
A large metropolitan complex of the USA including primary metropolitan statistical AREAS.
consolidation loan
A loan offered by a financial institution to replace several outstanding loans of a debtor. The replacement loan will be less costly to service each month and will be over a longer period. Persons with burdensome credit card debts can use loans of this kind, often secured on residential property.
consortium bank
A bank jointly owned by a number of other banks for the purposes of giving small banks representation in a financial centre. These consortia deal with specific types of financing, especially massive loans for infrastructure investment.
conspicuous consumption
Expenditure on expensive goods to impress others with one’s wealth and status rather than to satisfy basic needs. veblen was the first to analyse ostentation of this nature.
constant capital
The Marxian term for raw materials and machinery. This form of capital transfers only its own value, originally created by labour, to the finished product.
constant elasticity of substitution production function
A production function in which the elasticity of input substitution is constant at 1 or some other value. This production function succeeded the cobb-douglas production FUNCTION.
constant prices
A measure of an economic variable deflated to allow for price changes; for example, the national income at constant prices would show national income for a number of years at the prices of one year.
constrained market pricing
Prices in little need of regulation because they are constrained by competition. This concept is used by US regulatory agencies, such as the interstate commerce commission, in its pricing policies. Prices not constrained by competition have to be between a floor price equal to marginal cost and a ceiling price equal to the standalone COST.
Consumer Advisory Council
A subordinate organization of the US federal reserve Board of Governors established in 1976 to advise the board on the discharge of its duties under the consumer Credit Protection Act. It has thirty members.
consumer credit
credit granted by banks, finance houses and other financial institutions usually to purchase consumer durables. The volume of this credit can be controlled by altering its price, i.e. by changing interest rates or the minimum size of initial deposits.
Consumer Credit Act 1974
UK statute which set up a system of consumer protection administered by the Director-General of Fair Trading. Agreements for credit under £5,000 were regulated, businesses conducting consumer credit or consumer hire were licensed, credit advertisements were controlled and consumers were allowed a cooling-off period in which agreements could be cancelled.
consumer durable
A consumer good not immediately consumed but the producer of a stream of services over a period of years. vehicles, electrical goods and other durable household articles are major examples. Unlike the services of houses, there is no inclusion of the benefits of consumer durable ownership and allowance for their depreciation in national income accounts. Despite consumer durables resembling the fixed capital used by firms, they are classified as part of consumption. However, as their purchase often requires consumer credit, like fixed capital, they are subject to a fluctuating demand sensitive to monetary policy.
consumer equilibrium
That choice of expenditures, using a given income, which will maximize a consumer’s utility. Formally it is expressed in the statement that each ratio of marginal utility from a particular good relative to its price is equal to every other such ratio throughout the consumer’s purchases (if it is not, it will be possible to redistribute one’s expenditures to increase total utility). This equilibrium is based on the law of diminishing marginal utility:
Consumer Expenditure Survey
US survey of the current expenditure of US residents which began in 1979. It is used to revise the consumer price index and is conducted by the Bureau of the Census for the Bureau of Labor Statistics. Information is collected from a panel which is interviewed five times every three months, and from records kept by participating households over a specified fortnight.
consumerism
1 Concerted action to make firms pursue the interests of consumers, even at the cost of shareholders’ incomes. Action can take the form of lobbying parliaments for legislation, protest marches and legal suits. In response to these campaigns, many Western countries since the 1960s have introduced elaborate consumer protection legislation to ensure that consumers get a fair deal before, during and after buying a good or service. In the USA, for example, the federal trade commission supervises advertising, the Fair Packaging and Labeling Act 1965 prevents inadequate product information on packages and labels, the Consumer Credit Protecting Act 1968 requires a simple statement of the details of loans, the Fair Credit Reporting Act 1970 allows consumers access to their credit reports, and a variety of safety acts protect the users of cars, toys and other products. In the UK, the consumer credit act 1974 provides protection for consumers. However, there are still opponents of consumer protection who argue that regulation is an expensive and bureaucratic procedure unduly restricting the behaviour of firms. Also, some consumers may be prepared to endure lower quality to make some purchases fall within their budgets.
2 Advocacy of materialism, of purchasing more and more goods and services rather than being frugal.
consumer price index
US price index which shows the average change in the prices of a representative basket of goods and services purchased for daily living by US households. Data are collected on the prices of food, clothing, housing, fuels and services, etc., from eighty-five areas. Market prices, including indirect taxes, are used and each item is weighted according to its importance in consumers’ budgets. The US Bureau of Labor Statistics began the compilation of this index in 1919. Two versions of it are published: the cpi-u and the cpi-w.
consumer protection legislation
Measures to enforce minimum standards in the provision of goods and services, to provide advisory services for consumers and, in the case of public corporations (UK), to establish users’ councils to handle complaints. The principal measures protecting the UK consumer are the Sale of Goods Act 1979, the Trade Descriptions Acts 1968 and 1972 and the Consumer Credit Act 1974. In the USA, the Food and Drug Administration and the Consumer Product Safety Council energetically protect the consumer.
consumer society
A society which devotes a high proportion of its income to luxury goods and undertakes little saving. Only market economies have been prosperous enough to choose this lifestyle.
consumer sovereignty
The decisive power of consumers to determine the amount and pattern of production by freely choosing goods and services in accordance with their preferences. Adam smith in his rejection of mercantilism turned the goal of economic activity to satisfying the consumer rather than producers. neoclassical economics built many of its theories on the notion of consumer equilibrium. Given the growth of large corporations with huge advertising budgets, galbraith and others have challenged this view of the influence of consumers. Also, the increase in the role of government and the importance of merit goods have reduced the power of individual consumers in modern economies.
consumer’s surplus
The area, shaded in the figure, under an individual consumer’s demand curve which shows the difference between what a consumer is willing to pay and what actually is paid. It will be greater for richer consumers as they have a higher demand; hence, when the price structure is designed to reflect consumer incomes, higher income groups pay more for a good service, e.g. employed persons are charged more than unemployed. This major concept, introduced into economics by dupuit and refined by Marshall and hicks, has become a major tool of cost-benefit analysis.
consumption externality
The effect of one person’s consumption on the production and consumption of others. A modern example is the effect of cigarette smoking on the health of non-smokers who are forced to be ‘passive smokers’ and are compelled to pay for the consequences of smoking on the health of smokers through higher medical insurance premiums or higher taxes.
consumption function
The relationship which shows aggregate consumption as a function of income (measured absolutely, relatively or permanently at current or constant prices) and possibly wealth or the rate of interest. As consumption is the major part of national expenditure, the consumption function is central to models of income determination. keynes in his General Theory inspired much of later work, which has included the absolute income, relative income, PERMANENT INCOME and LIFE-CYCLE approaches.
consumption tax
A tax levied on actual expenditures with the hope that it will encourage saving. In wartime when it has been necessary to curb consumption, taxes of this kind have been levied as an alternative to rationing.
contango
1 A charge a stockbroker used to make for carrying over a sale or purchase of a security to the next accounting period.
2 In commodity markets it refers to spot prices being lower than futures prices.
contemporaneous externality
An economic activity affecting another type of production in the same time period, e.g. bee-keeping helps fruit farming.
contestable markets thesis
Bbaumol’s view that competition can be maintained by the state ensuring that an industry’s barriers to entry are kept low. Under such circumstances, free entry and exit will maintain the market in a competitive state. This thesis is compatible with recent UK competition policy.
contingency table
A table whose columns and rows are observed frequencies so that the expected frequency of a particular hypothesis can be investigated. These tables can be extended to more than two dimensions.
contingent commodity
A new commodity resulting from the occurrence of a particular event.
contingent fee
A fee paid only on the successful outcome of an activity, e.g. a fee for a lawyer’s services which is a percentage of the damages awarded to a plaintiff. In the USA this fee system is alleged to encourage vexatious litigation.
contingent market
A market, particularly an insurance market, which transfers risk from those facing it to those who are prepared to undertake it. An example of this is when a ship owner faced with the risk of the loss of a ship can transfer the risk to lloyd’s insurers. If the insurance market is in equilibrium, the insurance premium should settle at the rate which equates the marginal cost of insurance to the marginal benefit of losing an undesired risk.
contingent valuation
valuation of commodities not traded in markets, e.g. clean air, landscapes and wildlife. The valuation is based upon the responses of individuals to questions about what their actions would be if a particular hypothetical situation were to occur. When the average of responses has been calculated with weighting if necessary, people’s valuation of a public good is ascertained. A proxy measure already used is the travel cost a person will incur to benefit from that environment.
continuity thesis
The view that there is a continuum between the allocation theory of classical and neoclassical economists with the consequence that there was no marginal revolution in the 1870s. Thus it is asserted that Marshall was not overturning classical economics but using the sharper tools of mathematics to clarify Ricardian economics as stated by John Stuart mill.
