3.6 government intervention Flashcards
what is the role of the competition and markets authority?
The Competition and Markets Authority (CMA) work to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law, enforce consumer protection law and bring criminal cases against individuals who participate
in cartels.
what power does the CMA have?
They are able impose financial penalties, prevent mergers taking place and force businesses to reverse actions already taken.
when is a merger investigated by the CMA?
A merger is investigated if it will result in market share greater than 25% or if it meets the turnover test of a combined turnover of £70 million or more.
what does the CMA try to prevent when a stop a merger?
The aim of preventing two large companies merging is so they do not exploit their customers by raising price, offering poorer quality service and reducing choice. It
can prevent firms from gaining monopoly power.
what is the issue with the CMA and mergers?
the problem is that very few mergers are investigated each year. The CMA can suffer from regulatory capture and may not have all the information necessary to make a decision.
what is regulatory capture?
regulatory agencies may come to be dominated by the interests they regulate and not by the public interest. Regulated industries devote large budgets to influencing regulators at federal, state, and local levels. By contrast, individual citizens spend only limited resources to advocate for their own rights.
when is a monopoly anti-competitive?
if the firm exploits its dominant power to stifle competition
where does most the regulation occur for monopolies?
the utilities which are natural monopolies
how do the CMA regulate the prices of monopolies?
they can set price controls to force a monopsonist to operate under the profit maximization price. they usually use the RPI - X formula to do so.
what is the RPI - X price cap?
the amount they can raise their prices by each year is denoted by the formula RPI - X
what is the X in RPI - X?
the expected efficiency gains of the firm
what is the RPI in RPI - X?
the retail price index is a measure of inflation
what is the significance of RPI - X price cap?
it encourages the monopolies to be more efficient as if they can be more efficient then X they will be able to increase their profits. it also prevents excessive prices to the consumer
what would be a better formula for RPI - X price cap?
RPI - X + K where K is the level of investment, this is important as if they need to construct new pipes for example they will be able to finance this through the increased prices so encourages the monopoly to be dynamically efficient
what is an example of the RPI - X + K being used in the uk?
This is used in the water industry and has allowed investment of £130bn.
what is the issue with the RPI - X price cap?
it is difficult to know where to set X due to rapid improvement in technology and because any information on what the efficiency gains will be have
to come from the firm, who could easily lie as there is asymmetric information. As a result, there may be sudden price falls or rebates for customers
what is the benefits of the price cap on the monopolies?
maximum prices could be set where the price is equal to the MSC, ensuring monopolies are allocative efficient.
what is “rate of return” regulation
In the USA, ‘rate of return’ regulation is used where prices are set to allow coverage of operating costs and to earn a ‘fair’ rate of return on capital invested, based on typical rates of return in a competitive market.
what are the issues with rate of returns regulation?
it gives firms an incentive to employ too much capital in order to increase their profits. It is also criticized since a reduction in costs will not improve the firm’s situation and so there is little incentive to be efficient. regulators need sufficient knowledge of the industry and so will suffer from asymmetric information.
how can the CMA ensure quality goods from monopolists and why would it work?
Monopolists will only produce high quality goods if this is the best way to maximise profits. The government can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality.
what is an example of quality standards?
the Post Office has to deliver letters on a daily basis to all areas and electricity generators are forced to have enough capacity to prevent blackouts.
how can the CMA introduce performance standards?
Regulators can introduce yardstick competition, such as setting punctuality targets for train operating companies based on the best-performing European train operators. It is also possible to split up a service into regional sectors to compare the performance of one region against another; this is used in the water industry. They could set targets over price, quality, consumer choice and costs of production. It will help firms to improve their service and lead to gains for customers.
what are the issues with performance standards?
The problem is that firms will resist the introduction of targets, so again it requires political will and understanding. They will also attempt to find ways to meet targets without actually improving , for example changing train timetables to prevent trains officially arriving late. Other firms will fail to meet their performance targets and so there will be no
improvements.
what needs to occur for performance standards to be successful?
The government need to ensure that fines and other
deterrents are strong enough that firms at least work to ensure targets are met.
