Banning unfair trading practices

Overview

Unfair trading practices, governments ban misleading advertising and false price claims and refusal to supply.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is meant by unfair trading practices?

   Model answer

   Unfair trading practices are business methods that harm customers or competitors by deception, coercion or the exploitation of a stronger position, rather than by offering a better product at a better price. Examples include misleading advertising, hidden charges, pressure selling, false claims about savings, unfair contract terms, refusing to supply a competitor with something it needs, and tying the sale of one product to another.

2. 2

   Why do governments ban misleading advertising and false price claims?

   Model answer

   Because a market allocates resources well only if buyers can compare what is on offer. Deception causes buyers to choose the worse product, which rewards the firm that misled them rather than the one that offered better value, so resources flow to the wrong producer. It also undermines trust generally, since buyers who cannot rely on claims discount all of them, which harms honest firms and reduces the return to genuine quality.

3. 3

   What is tying, and why can it be prohibited?

   Model answer

   Tying is making the sale of one product conditional on buying another, such as supplying a machine only to customers who also buy its consumables from the same firm. It can be prohibited because a firm with a strong position in the first product can use that strength to capture a second market in which it would not otherwise be able to compete, foreclosing rivals that offer a better consumable. It is not always harmful, since bundling can genuinely reduce cost or guarantee compatibility, so the question is whether it excludes efficient competitors.

4. 4

   What is a refusal to supply, and when does it become an unfair practice?

   Model answer

   It is a dominant firm declining to sell an input, or to grant access to a facility, to a firm that needs it in order to compete. Firms are generally free to choose their customers, so refusal becomes unfair only where the firm controls something rivals genuinely cannot obtain or duplicate elsewhere, and where the refusal would eliminate competition in the market that depends on it.

5. 5

   Why are exclusive dealing agreements scrutinised?

   Model answer

   An agreement requiring a retailer or distributor to stock only one supplier's products removes shelf space and routes to market from competitors. Where the supplier is dominant and the agreements cover most of the available distribution, a rival cannot reach customers however good its product, so the practice raises a barrier to entry without offering anything better to the buyer. The same arrangement between small firms is usually harmless, so the effect depends on how much of the market is covered.

6. 6

   What are unfair contract terms, and why are they regulated?

   Model answer

   They are conditions buried in a contract that heavily favour the seller, such as automatic renewal at a much higher price, penalties for early exit, or clauses removing the buyer's normal remedies. They are regulated because a consumer facing a long standard-form contract cannot practically read and price every clause, so competition operates on the headline price while the terms escape scrutiny. Firms then compete on the visible price and recover the difference through the terms, which makes the market work worse rather than better.

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