3.6 Flashcards
What is CMA and what do they do
CMA- competition and markets authority- main competition regulator in the UK
Ability to:
- impose fines
-prevent mergers
-force businesses to reverse actions taken
Key aim:
- promote competition to ensure efficient markets
- protect consumer interests by keeping prices low and widening choice
Gov intervention to control mergers, what is the aim of this?
- CMA considers whether a firm is slc (substation lessening of competition)
- CMA looks at the competition situation if merger goes ahead and if it doesnt ,
- If benefits greater than costs then merger takes place and is approved
Aim:
- No exploitation of customers by increasing prices, offering poor quality
- Prevent firm gaining monopoly power
When is a merger investigated and what is the problem of CMA?
- Merger is investigated when market share results in more than 25% or if it meets the labour turnover test of a combined turnover of £70 million or more
EVAL/problems
- Very few mergers investigates each year
- CMA can suffer from regulatory capture and may not have all the information to make a decision
What is regulatory capture
Regulatory capture is a form of corruption where a policy maker is co-opted to serve the firms interest over public interest
4 ways governemts intervene to control monopolies
- Price regulation
- Profit regulation
- Quality standards
- Performance targets
Price regulation definition adv and dis
- Prevent from charging expensive prices which could lead to a loss of allocative efficiency
- This can be done using the RPI-X formula, where X is the expected efficiency of firm = forces efficiency to improve in order to increase profits
- Also RPI-X+K , where K is the level of investment needed = increased quality and decreased prices, and X is the amount in real terms prices are cut by,
ADV
- Increases profits by cutting costs more than X, = encourages efficiency due to incentive to lower costs
- Encourages competition in market = prevents monopolies abusing power
DIS
- Hard to determine value of X
- Limits how much profit is made= may reduce investment
- Risk of regulatory capture
Profit regulation
Profit regulation- control profits made by firms ensuring its not excessive
> Profit regulation forces reinvestment = increases quality and helps to increase efficency to lower price
ADV
- Aims to encourage investment, prevent high prices
DIS
- Gives incentive to employ to much capital to increase profits
Quality standards
Quality standards
- Regulators can observe the quality of goods/services to prevent customer explotation and ensure minimum standard is met
Eg post offices are forces to deliver letters on daily basis
EVAL: requires political will and understanding to introduce
Performance targets
Performance targets
- Set targets by regulators to ensure a minimum standard is met, aim to regulate quality
- These can be set on price, quality, consumer choice and cost of production = improved service and increased welfare
Eg NHS target to reduce wait times
EVAL
- firms may resist targets, needs political understanding
- find ways to meet targets without improving eg train timetbale change to prevent trains arriving late
- firms fail to meet targets= no improvements = gov has to ensure deterants are strong eg fines to ensure target is met
4 ways the gov intervenes to promote competition and contestability
- Promotion of small businesses
- Deregulation
- Competitive tendering
- Privatisation
Promotion of small businesses
- Giving training and grants to new entrepreneurs = increase competition as more firms join
- Also encourages new business through tax incentives or subsidies
- This also increases innovation and efficiency due to firms providing new products
- Also increased efficiency due to comp rise incentivising firm to not be x-inefficient
Deregulation
- Removal of legal barriers to entry = increased efficiency as more firms enter = reduced x-inefficiency
- Deregulation increases gov power
EVAL
- Could lead to poor business behaviour which can cause LR issues
Competitive tendering
- Good produced by the private sector and then bought by public sector eg roads
- They can also contract out the provision of a good/service to private companies eg private firms run hospitals
- Competition is introduced as gov invited private firms to bid for a contract.The firm with the lowest price wins contract. This decreases costs for gov and ensures efficiency as private firm has to reduce costs due to competitive market
EVAL
- private firms may not meet contract requirements
- process of biding is time consuming and costly
- reduce quality due to cutting costs = decreases social welfare
Privatisation
- Sales of government equity in nationalised industry or other firms to private investors
ADV
- Increased competition= decreased x-inefficeicy = lower prices and higher quality
- Managers more accountable = poor performance= decreased share price/ market share
- In SR/LR it can reduce PSNCR public sector net cash requirements as initial sale increases revenue and gov doesnt need to cover firms loss
- Gov doesnt need to intervene = can focus on other variables
DIS
- Some argue PSNCR is worse as firms are under priced and gov doesnt receive firms revenue
- Increased price and decreased quality to cut costs= inequality as firms are pmax
- Better to be a natural monopoly run by gov as privatisation of firms can abuse their power
3 ways govs intervene to protect suppliers and employees
- Restriction on monopsony power on firms
- Nationalisation
- Restriction on monopsony power (workers rights)
Restriction on monpsony power of firms
> done by passing anti-monopsony laws = makes some practises illegal
can introduce independent regulators who force monopsonists to buy fairly
can put fines in place for those exploiting customers eg 1% charge of annual revenue
introduce minimum price to ensure suppliers are paid a fair amount
Nationalisation also ADV and DIS
Nationalisation- private sector company is brought under state control to be managed by the government
ADV
- private firms may only invest in SR as shareholders see no benefit from LR investment = poor quality of service
- Natural monopoly= better for monopoly to be ran by state so social welfare is maximised
DIS=
- Nationalised industries suffer from principle agent problem and morazl hazard as if loss is made the gov will cover it
- x-inefficny due to no comp= higher prices in LR
- Not enough capital to invest = poor quality
Restriction of monopsony power ( workers rights)
Protect employees through:
- Health and safety laws
- employment contracts
- redundancy process
- maximum hours at work
EVAL- if workers rights are too strong= disincentivises employers to take on new workers due to extra cost
Other types of regulation for monopolies
- Windfall tax- taxes imposed after an event has occurred eg energy companies make excessive profits
- breaking up the monopoly - split into smaller parts = lower prices, lower profit and more choice
- self regulation- but tends to be weak
- reducing barriers to entry- prevent monopolies being formed
NATIONALISM DIGRAM
The impact of government intervention on prices
- Gov prevents monopolies charging high prices and limits profit = equality , maximised welfare, benefit people with low incomes
- Consumers get fair price = receives good quality and increased choice
EVAL
- high regulation = force frims out= reduce choice
