3.6 Flashcards
1
Q
What are the aims of competition policy?
A
- Technological innovation which promoted dynamic efficiency in different markets
- Effective price competition between suppliers
- Safeguard and promote the interests of consumers through more choice and lower prices.
2
Q
What are the main pillars of UK competition policy?
A
- Anti-trust and cartels; eliminating agreements that restrict competition including price-fixing by firms with a dominant market position.
- Market liberalisation; introducing competition in previously monopolistic sectors such as energy supply, retail banking and mobile telecoms.
- Merger control; investigation of mergers and take-overs which could result in firms dominating the market.
3
Q
What can the CMA do?
A
- Examine mergers if the merger entity ahs a turnover of £70m or more or controls over 25% of the market.
- They can block acquisitions if they find that the integration of 2 businesses will lead to significant lessening of competition in one or more markets at local, regional or national level.
- They aim to ensure that all mergers don’t lead to worse outcomes for consumers, e.g. through higher prices, lower quality or reduced choice.
- they can allow mergers to go ahead, providing certain conditions are met e.g. selling off other parts of their company.
4
Q
What are the different types of gov. intervention to control monopolies?
A
- Tax on monopoly profits; one off windfall tax on SNPs for firms with significant market power. Can lead to tax avoidance/ loss of capital investment spending.
- Liberalisation of markets; Breaks up monopolies- allow smaller businesses to enter and increased contestability. Can lead to smaller businesses struggling to scale up and compete
- Introducing price capping policies; encourages cost efficiency and increases consumer surplus. Monopolists may find revs in other ways
- Nationalisation; some monopoly utilities are taken back into public ownership. Possible loss of productivity and investment into those utilities.
5
Q
What are industry regulators?
A
- the rule enforcers
- they are a surrogate for competition
- they are appointed by the gov. to oversee how a market works and the outcomes in efficiency and welfare that results for producers and consumers
- The main competition regulator in the UK is the CMA.
- It has a responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law.
e.g. OFWAT- water monopolies, OFSTED-education, OFGEM- energy markets
6
Q
What is the chain of reasoning for capping the price of a monopoly?
A
- To be effective, the capped price must be set by the regulator below the normal profit max price.
- A price cap lowers the monopoly profits made by the dominant firms in the market.
- May stimulate attempts to improve cost efficiency.
- In theory- should lead to an improvement in allocative efficiency and consumer welfare.
- May also lead to the exit of some businesses from the industry which might actually reduce competition.
7
Q
What are the arguments for price capping with a monopoly?
A
- Capping is an appropriate way to curtail the monopoly power of natural monopolies or dominant firms preventing them from excessive profits at the expense of customers.
- Cuts in real price levels are good for household and industrial consumers, leading to an increase in the consumer surplus and higher real living standards in the LR.
- Helps to stimulate improvements in productive efficiency because lower costs are needed to increase a producers profits.
- The price capping system can be a tool for controlling consumer price inflation.
8
Q
What are the arguments against price capping?
A
- Price caps have led to a large number of job losses especially in the utility industries
- Setting different price capping regimes for each industry distorts the working of the price mechanism.
- The industry regulator may not have enough accurate information when setting the price caps for future years.
- Price capping means lower profits which in turn can lead to reduced capital investment by the utility businesses- ultimately consumers suffer when there is underinvestment in utility infrastructure such as water and energy.
9
Q
What is cost-plus pricing?
A
- It requires competition authorities to assess the production costs of firms and then allow a certain price to be charged above that, thus limiting profits.
- The main advantages are that it is simple to understand for both regulator and firms.
-However, it doesn’t give the monopoly firm any incentive to try and reduce production costs and become more efficient. There is also a risk of not enough profit being earned to provide finance for innovation or investment.
10
Q
Why is true profit-capping not yet a policy that is followed by any major competition authorities?
A
- Disincentivation of business activity
- reduction in corporation tax rev.
- ease of which firms could bypass the regulation e.g. setting up subsidiaries or offshoring ect.
- Difficulties in monitoring.
11
Q
What are other ways that monopolies can be regulated other than by price/profit capping?
A
- Quality standards and performance targets.
- They are easier to regulate, because it is unlikely to involve examining a businesses’ accounts.
- Many industries face quality standards not just monopolies. They can be produced for healthcare, aviation and food and drink.
12
Q
What are some ways that the gov can intervene to promote competition and contestability?
A
- Deregulation of markets; attempts to liberalise a market to encourage new entrants act as challengers to established firms (the incumbent firm) .
- It usually involves lowering some of the statutory barriers to entry to reduce the hurdles for new firms to enter and make at least normal profit.
- A good example is UK parcels/ letter market ending the legal monopoly of royal mail.
13
Q
What are the characteristics of a natural monopoly?
A
- Large economies of scale; industry demand is insufficient to exploit all of the economies of scale. Only one business will reach the maximum efficient scale.
- Allocative efficiency and losses; LRAC is falling over all ranges of output. If price is set = MC, economic losses will be made. It makes sense for the core aspect of the industry to be served by one business.
14
Q
What are the different types of competition? Use the UK mail industry.
A
- Access competition; where the operator collects mail from the consumer, sorts it and transports to the Royal Mail’s inward mail centres, where it is handed over to royal mail who are paid to deliver it.
- End to end competition; where an operator other than Royal mail undertakes the entire process of collecting, sorting and delivering mail to the intended recipients.
15
Q
What are the potential advantages of deregulation of markets?
A
- Where deregulation and market liberalisation breaks down barriers to entry, market supply should expand, bringing down prices for consumers.
- Increased competition and heightened contestability is strongly associated with improved productive efficiency, allocative efficiency and dynamic efficiency.
- Competition limits firms’ ability to restrict output and raise prices. By forcing firms to charge a price closer to marginal cost, allocative efficiency is improved.
- If firms have less pricing power, they are more likely to seek profitability through cost reduction, boosting productive efficiency and reducing x-inefficiency.
- Greater capital investment and productivity could lead to improved dynamic efficiency.
16
Q
What are the arguments for privatisation?
A
- Private companies have a profit incentive to cut costs and be more efficient and raise productivity.
- Gov. gains rev. from the scale of assets
- If state monopoly is replaced by a number of firms, this will lead to lower prices. The competitiveness of the macro economy may also improve.
- Privatisation can create a shareholder democracy i.e. greater share ownership.
17
Q
What are the arguments against privatisation?
A
- Social objectives are given less importance
- Some activities are best run by the state because they are strategic parts of the economy e.g. water supply and railways.
- Gov. loses out on dividends from any future profits. Public sector assets often sold too cheaply.
- Shares are often bought/ held by large institutions such as pension funds, insurance funds ect.
18
Q
What are the cases for contracting out?
A
- Opening public services up to competition can save the taxpayer money and reduce a country’s fiscal deficit.
- Private sector businesses may be more likely to achieve productive efficiency improvements and cost savings- leading to improved value for money.
- Businesses in the private sector might be more innovative, less hierarchical and less prone to suffering from diseconomies of scale.
19
Q
What are the arguments against contracting out?
A
- Businesses bidding to win contracts might sacrifice quality of service as a way of lowering their costs.
- Doubts about some employment practices of service companies e.g. low wages, poor conditions.
- Contracting out/ outsourcing requires proper monitoring which itself involves extra spending.
20
Q
How can the government increase the ability of smaller businesses to enter the market?
A
- Encourage the rate of business start-ups.
- Incentivise businesses to invest, particularly through innovation, R+D.
- Improve the flow of finance to new and growing businesses
- Facilitate business growth strategies, particularly those focused on growth in export markets.
- Help businesses deal with red tape- the regulatory and other legal details that are often identified as barriers to business growth.
- Make it easier for small businesses to access public sector contracts.
21
Q
What are the cases for state ownership?
A
- Nationalised firms can target social objectives
- Firms might charge lower prices, not focused on pure profit max/ extracting consumer surplus.
- Natural monopolies in the state sector can achieve EoS= gains from productive efficiency.
- Can be used to hit macroeconomic aims such as keeping inflation under control.
22
Q
What are the arguments against state ownership?
A
- Absence of shareholder pressure might lead to disEoS and therefore higher prices.
- Lack of market competition can lead to x-inefficiency.
- Firms might lack an incentive to innovate, leading to a loss of dynamic efficiency.
- losses of state- owned firms are absorbed by tax payers and can lead to higher budget deficits.
23
Q
What are the arguments for rail nationalisation?
A
- Rail network is a natural monopoly suited to state control to achieve economies of scale
- Rail fares can be controlled to improve affordability for rail passengers
- Profits flow direct to the taxpayer rather than to shareholders of private train companies.
- state can direct single investment into the network and borrow more cheaply to fund it.
24
Q
What are the arguments against rail nationalisation?
A
- Competition on lines is more important than who owns the railways, therefore allow more operators.
- Private sector firms are more likely to improve dynamic efficiency and avoid x-inefficiencies.
- Possible to regulate more fares on services run by private train operating train companies.
- History of state-run railways wasn’t always positive.
25
Q
What are some key pieces of legislation to protect workers?
A
- National living wage
-Working time directive - Agency workers directive
- Equal pay act
- Pensions act.
26
Q
What are the arguments for an energy price cap?
A
- Cap protects consumers from over-charging due to the power of dominant suppliers who make high profits.
- High fuel bills hurt lower income families who are at greater risk of fuel poverty- relatively poorer families spend a higher proportion of their disposable income on energy bills.
- The cap can be temporary and lifted if competition improves.
- It will encourage energy suppliers to increase productive efficiency to improve profits.
27
Q
What are the arguments against imposing an energy price cap?
A
- Price cap might hurt competition by reducing profits and therefore lowering the incentive for new challenger firms to enter industry.
- Price tend to gravitate towards the cap so average prices for consumers might increase rather than fall.
- Fall in profits will mean less investment in renewables- operating profit of energy suppliers is only 5%
- Better LR strategy is to focus on nationwide housing insulation program to improve energy efficiency.
28
Q
Evaluate the effectiveness of industry regulation.
A
- Real prices for consumers; are prices falling in real terms so that the consumers find a product more affordable. Reduction on IRs of payday loans
- Size of industry profits- how high are the monopoly profits earned by leading firms and how much of their post-tax profits are re-invested into the industry through capital investment?
- Jobs; to what extent is regulatory intervention leading to gains in employment?
- Performance targets; e.g. success/ failure in meeting targets for service reliability in the rail industry.
- Research and spending- to what extent is the regulatory environment helping to sustain a high level of research and development spending to speed up the rate of product and process innovation.
- productivity improvements; is extra competition driving higher level of output per worker?
- Environmental indicators; is regulation effective in improving aspects such as clean beach standards and safety of supply in the water and sewage industry.
- Investment in new capacity to meet future demand; is the regulatory environment providing sufficiently strong incentives for the investment needed to cope with growing populations and rising real incomes?
29
Q
What are the limits to gov intervention?
A
- Regulators may actually limit innovation in fast-growing markets
- Capping prices might prevent new firms from entering a market
- Regulation becomes bureaucratic and highly costly
- They lack the powers to be truly effective in protecting consumers
- Regulator might be behind with new technologies
- Frequent rule changes can stifle business capital investment.
30
Q
What is regulatory failure?
A
- Occurs when intervention in markets is either ineffective in meeting the stated aims or- worse still- it leads to a deeper and more persistent market failure than existed previously.
31
Q
Why might gov failure occur when regulating?
A
- Creates distorted price signals e.g. price capping
- Unintended consequences e.g. preventing BBC/ITV and channel 4 from working together in 2008/9 as a rival to firms such as netflix who were in their infancy has led to concentrated market power by new entrants.
- Excessive administration costs, opportunity cost of this spending.
- Information gaps/ information asymmetry e.g. one reason why the financial sector failed to prevent the financial crisis was poor awareness of the changes in the financial sector.
31
Q
What is regulatory capture?
A
- The regulators are dependent on the utilities for the information on costs, and end up being overly sympathetic to those utilities.
- They often used to work in those sectors so are more likely to be lenient as they have had experience in those sectors.
