3.6 Government Intervention Flashcards
When is a merger investigated
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.
How are mergers assessed by the CMA
whether there will be a substantial lessening of competition (SLC).
The CMA will consider the likely competitive situation if the merger goes ahead compared to if it does not, and the merger will be approved if its potential benefits are greater than its cost.
What is an example of a merger recently blocked by the CMA
The merger between Activision Blizzard and Microsoft due to it’s potential monopoly in the cloud-gaming market
What are the potential disadvantages of mergers that lead to a significant increase in market share
- Higher prices –> fall in allocative efficiency and consumer surplus
- X-Inefficiency
- Less competition –> less dynamic efficiency
- Less choice for consumers
- May suffer from DEoS
- Impetus may come from high-achieving employees e.g. ABN Amro
What are the potential advantages of mergers
- Economies of scale (esp. for natural monopolies)
- Help compete internationally
- Greater dynamic efficiency through more R+D
Evaluate mergers
- Is there a scope for economies of scale? Are fixed costs high enough?
- Will there be a significant reduction in competition (magnitude)
- Is the market still contestable (force limit pricing)
- Other factors: need for financial sector e.g. First Republic and JP Morgan
What are 8 potential methods for governments to control monopolies
- Price Regulation
- Profit Regulation
- Quality Standards
- Performance Targets
- Windfall Taxes
- Breaking them up
- Subsidies
- Self-Regulation
What is RPI-X price controls
Regulators set price controls to force monopolists to charge below MC=MR
X Reprents the expected efficiency gains of the firms and the aim is ot ensurte firms pass on those gains to consumers since if firms can reduce costs more than X than they enjoy increased profits
What is RPI-X+K price controls
Same as RPI-X but K represents the level of investment
In which industry was RPI-X+K used successfully for investment
Water industry, it allowed ro investment of £130bn
What are the advantages of RPI-X regulation
- Incentive for efficiency gains through profit
- Stability can help for some forward planning; esp if regulated for long time
- System is flexible
- Independent and Specialist Regulator –> more likely to set prices closer to MC
What has been the effect of RPI-X regulation on real prices of telephones and electricity since the system started in 1984
Significant cuts in real prices of telephones and electricity
What are the disadvantages of RPI-X regulation
- Assymetric information leading to too weak or too strong regulation
- Regulatory Capture
- If too strict –> Hampers investment (‘UK is closed for Business’)
- may be fewer incentives to cut costs because, if they do increase efficiency, the regulator may just increase the value of x. e.g. Five Year Plan targets
- Performance/Quality more important than price
What is profit regulation
Prices set to allow covering of operating costs and to earn a ‘fair’ rate of return on invested capital, based on returns in a competiitiive market
Thus encouraging investment and prevents firms setting high prices
What are the advantages of profit regulation
- There is substantial incentives to invest in R and D and capital as this could allow for greater future return. This can lead to greater long run dynamic efficiency.
- Consumers are protected from price hikes above inflation etc as there is very little incentive to raise prices. This effectives waters down price making power and creates a more allocative efficient environment.
What are the disadvantages of profit regulation
- There are incentives to over investas the more capital employed can mean the industry/firm can attain more profit. This is inefficient spending and is not useful for consumers or industry in the long run
- Assymetric information - firms overreport capital employed and costs for greater profit
- There is very little incentive to cut costs as greater profitability is not allowed. This can lead to a lack of productive efficiency and more x inefficiency (diagram)
How do quality standards control monopolies
Introduce quality standards to ensure sufficieny investment of profits to benefit the consumer
e.g. Post Office has to deliver letters on a daily basis to all areas despite the loss incurred
How do performance targets control monopolies
‘Yardstick Competition’ by setting puntuality targets for companies based on the best-performing
Can be targets on price,quality, consumer choice or cost
e.g. Train companies subject to close scrutiny on punctuality, safety records and win franchieses based on level of service
Evaluate the use of performance targets to control monopolies
- Targets may be too weak and have little deterrence for failure e.g. Ambulances have 8 minute target but often don’t make it
- Unintended Consequences e.g. GPs may not do proper diagnoses
- May cheat to meet targets e.g. train comppanies change timetables to give themselves more time to arrive
- Regulatory Capture
How can windfall taxes control monopolies
Discourage monopolists from making excessive profits and/or encourage htem to reinvest them
e.g. UK Windfall tax had a tax break through investment
what are the disadvantages of a windfall tax
- Disincentive for investment e.g. TotalEnergies leaving
- High profit may be due to an efficient firm
- Short-term solution and firms may start to underreport profits
What are the costs and benefits of breaking up a monopolyfor controlling monopolies
- Split Monopoly into competing units to lead to lower profits and prices as well as greaterr consumer choice
but
- May also have loss of EoS leading to higher prices
- Lobby groups may make it unfeasible1
How do subsidies control monopolies and what are the issues with this
- Beneficial for producing at allocatively efficient point when unprofitable otherwise (natural monopoly)
BUT
- Assymetric information
- Dynamic Market means MC can change a lot
- Politically unpopular –> large opportunity cost
How does self regulation control monopolies and what are the issues with it
- Monopolies may have a profit motive to self-regulate properly to avoid worse side effects ( financial crises ) or greater regulation
But
- There always exists a profit motive and they will take actions that minimisse change and to maximise profit
e.g. (SVB)
How can the government intervene to promote competition and contestability
- Promotion of small businesses
- Deregulation
- Competitive Tendering
- Privatisation
How does the promotion of small business promote competition and contestability
- Training and grants to new entrepreneurs
- Increases incumbents fear of creative destruction
What is the Seed Enterpise Investment Scheme
provide tax relief for people who buy shares in small companies to help them grow.
Evaluate the effects of promoting small business on competition and contestability
- Small firms will lack EoS
- Depends also on quality and success of business
- Assymetric information of gov. grant size
What is outsourcing of public sector
Private sector businesses used to provide public sector work
What are arguments for out-sourcing
- competition can save the tax payer money
- Private sector businesses more likely to achieve efficiency improvemments and costs savings
- Also might be more innovative, less heirarchical and less prone to suffering from DEoS
What are arguments against out sourcing
- Business bidding to win contracts may sacrifice quality of service as a way of loweing their costs
- Doubts about some employmeny practices of service companies
- Contracting-out/outsourcing requires proper monitoring which itself invovles extra spending
What are arguments against out-sourcing/competitive tendering
- It gives firms a private monopoly; danger that the private firm will increase prices, or cut back on service.
- It requires the government to monitor the quality of service provided and
to make sure they don’t take shortcuts to boost profit. - Because the contract is short-term, it may discourage long-term
investment e.g. Railway firms not taking 7 year contracts - Costs involved in the bidding process.
- Private Firms may collude in cover pricing e.g. construction £200m
How does deregulation help promote competition and contestability
- Allows greater competition by reducing legal barriers to entry and thus more efficiency e.g. Royal Mail
- Reduce regulation costs e.g. Red Tape Challenge
effective in increasing competition in the retail of electricitty and gas
Evaluate the effects of deregulation on promoting competition and contestability
- More competition may mean less profit and less DE
- Unable to benefit from EoS therefore never reach MES
- Some industries require regulation e.g. Gas, Financial
- Doesn’t work in Natural Monopolies
What are the advantages of deregulation in general
· Increased choice
· Increased competition mean firms will cut costs and a decrease in x inefficiency as firms look to offer lower prices through productivity gains
· Regulation often involves costs of bureaucracy and therefore deregulation should help relieve the burden to the taxpayer.
Lesser regulation can help reduce the effects of regulatory capture
Evaluate the idea of deregulation
· Alternatives to deregulation
· Ideal in theory but how good is deregulation in practice.
· is there an optimal level of regulation?
· S/R vs. L/R effects
· Greater allocative and productive efficiency (greater static efficiency) but may be less long run efficiency in terms of dynamic efficiency
What are the benefits of privatisation
- Reduced government short-terminism
- Remove borrowing limits
- Private Companies are more efficient from profit motive
- Improved public finances
- Increased comeptition –> AE, better quality
What are the potential problems of privatisation
- Barriers to Entry make it hard to increase competition
- Public Services should be run in the public interest
- Positive Externalities of industries like rail
- Revenue is one off
- Privatised businesses close off essential unprofitable parts and so services worsen
- Lack of investment or improvement e.g. Water Companies £18.2 billion in dividends
How can government intervention protect suppliers and employees
- Restrictions on monopsony power of firms
- Nationalisation
- Workers Rights
How can restrictions on monopsony power of firms protect suppliers and employees
- Monopolists exploit suppliers/employees by reducing prices/wages
- Governments can introduce an independent regulator and make such practices illegal
- Minimum prices can also be introduced
But
* Regulatory Capture
* Assymetric information
How can workers rights protect employees
- Health and safety laws, employment contracts, redundancy processes, maximum hours at work and the right to be in a trade union
BUT
* If workers rights are too strong than employers will be unwillling to take on new workers due to the extra cost of employiing these workers
What are the advantages of nationalisation
- Providing essential services to the consumer (equity) - Natural Monopoly
- Need for strategic control e.g. Arms, Finance
- Private companies only do short-term investment
- Positive Externalities
- Profit shared with tax revenue
- Better protection of employees
What are the disadvantages of nationalisation
- Principle Agent Problem - loss covered by gov.
- No profit motive/ competition –> X-Inefficiency
- Influenced by government short-terminist as based on budget
- Worsening public finances –> higher debt
e.g. NHS lack of funcing/compeititon leads to ppoor quality as well as uncertainity with each government.
Why was the Just Eat acquisition of Hungryhouse allowed in 2017 despite giving Just eat 70% market share
As Hungryhouse was less dynamic and loss making
How is government intervention in market structures limited
- Regulatory Capture
- Assymetric Information
How does regulatory capture limit government intervention
- Regulators see things from the firms perspective rather than the consumers which damages the ability to regulate
- Regulators often have personal links with the coporation
e.g. HMRC alledged capture by vodafone who negotiated their tax of £7bn to be reduced to £1bn
