10.1 Monopoly Regulation Flashcards
Monopoly Regulation Diagram
What are 4 reasons that a competition authority may choose to intervene?
A competition authority may choose to intervene when there is antitrust behavior and cartel agreements, when markets are highly concentrated with dominance from one or a few firms, when there is merger activity that could result in outcomes against the public interest, and to ensure that state aid control in the form of subsidies to domestic firms in a given industry does not restrict competition or provide an unfair advantage over another industry.
When do competition authorities have rationale to intervene in an industry?
Competition authorities have rationale to intervene in an industry when the public interest is being harmed due to monopoly or oligopoly market abuses.
What is antitrust behavior?
Antitrust behavior refers to firms in highly concentrated oligopolistic markets agreeing to fix prices or quantities acting clearly against the public interest.
How can regulators intervene to liberalize the market?
Regulators can intervene to liberalize the market using policies such as privatisation, deregulation, and trade liberalisation when markets are highly concentrated with dominance from one or a few firms leading to outcomes against the public interest.
What can regulators do when there is merger activity that could result in outcomes against the public interest?
When there is merger activity that could result in outcomes against the public interest, regulators can step in and investigate, potentially breaking up the merger if that merger leads to market share in excess of 25% and market domination.
What is state aid control?
State aid control refers to ensuring that subsidies to domestic firms in a given industry do not restrict competition in an economic area like the EU or provide one industry an unfair advantage over another.
What do regulators investigate if subsidies are only going to a state-owned provider of services?
If subsidies are only going to a state-owned provider of services, regulators can investigate to ensure no artificial advantage is at play.
What is excess pricing?
Excess pricing is where monopolies exploit consumers by charging prices in excess of marginal cost, reducing consumer surplus and burdening those on low incomes in particular.
What is the aim of ensuring the quantity and quality of provision is high?
The aim of ensuring the quantity and quality of provision is high is to prevent monopolies from producing at an output below socially desirable levels, which restricts consumer choice. Without a competitive drive, the quality of the good or service produced might not meet the demands of the consumer. Regulation can enforce minimum standards for the monopolist.
How can regulators promote competition in concentrated markets?
Regulators can promote competition in concentrated markets by liberalising markets, which could take the form of privatisation, deregulation, or trade liberalisation, all of which encourage more competition and contestability in the market, breaking up market dominance.
What are natural monopolies?
Natural monopolies are industries with very high fixed costs and huge economies of scale. It makes sense for one firm to exploit full economies of scale and supply the entire market. Competition would be wasteful both in economies of scale lost but also in terms of resources used as the incumbent will price out new entry.
Why is it dangerous to allow one firm to dominate a natural monopoly market freely?
Allowing one firm to dominate an industry freely is dangerous because the monopoly pricing and provision can be against the interest of consumers, hence there is rationale for regulation to promote socially desirable outcomes in a natural monopoly market.
What is the aim of promoting technological advancement?
The aim of promoting technological advancement is to prevent monopolies from making large supernormal profits but not re-investing them back into the company. Regulators can intervene and force the re-investment of profits if it is in society’s best interest.
What is the intention of price regulation?
The intention of price regulation is to cap prices of monopolists at allocatively efficient levels in the market, acting as a price ceiling. This can increase social welfare in the market and recover the deadweight losses of both consumer and producer surplus that existed due to monopoly abuses.
What is RPI price regulation?
RPI price regulation caps price increases by the RPI inflation rate. Allowing firms to increase prices by the rate of RPI inflation will allow firms to cover their costs and still make a profit if they find efficiency savings (cost savings).