3.6 Government intervention Flashcards
what is competition policy?
applying rules to make sure businesses and companies compete fairly with each other.
-Technological innovation
- Effective price competition
- Safeguard and promote the interests of consumers
Main pillars of UK competition policy
Antitrust and cartels
- Eliminating agreements that restrict competition
Market liberalisation
- Introducing competition in previously monopolistic markets such as energy supply, retail banking
Merger control
- Investigation of mergers and take over which could result in firms dominating
Context of CMA
- CMA is the body given power to investigate mergers and takeovers in the UK
- Can examine any merges that have a turnover of over £70m or control more than 25% of the market
Block acquisition if it will lead to a ‘significant lessening of competition’ - Ensure mergers don’t lead to worse outcomes for consumers, through higher prices, low quality or reduced choice
- Can give mergers the go ahead if conditions are met
Eg cineworld and picturehouse merger in 2013
2018 CMA investigated and rejected a proposed merger of sainburies and ASDA
Government intervention to control monopolies ?
- Tax on monopoly profits
Risk of tax avoidance/lack of investments - Liberalisation of markets (break up monopolies, allowing smaller businesses to enter)
Smaller businesses may struggle to scale up and compete - Introduce price capping policies (encourages cost efficiency)
Monopolists may find revenues in other ways - Nationalisation (take some monopolies back to public ownership)
Possible loss of productive efficiency
Industry regulators?
- Rule enforcers
- Appointed by the govt to see how a market works
- Main one is CMA
price capping?
Maximise price of a product to reduce monopolies profits
argument for price capping?
- Prevent monopolies from making excessive profits at the expense of the consumer
- Cuts in real prices levels are good for consumers
- Helps improve productive efficiency as the only way to make more profits is reducing costs
- Controls consumer price inflation
argument against price capping?
- Large number of job losses
- Distress the working of the price mechanism
- Industry regulator may not have enough accurate information when setting price caps for future years
- Capping prices means lower profits which in turn lead to reduced capital investment
Profit capping
- Less common than price capping
- Cost-plus pricing can be used, authorities asses the production costs of firms and then allow a certain price to be charged above that, limiting profits
- Alternative revenue-capping (v similar to price capping as firms can only make so much revenue per product) and cost-monitoring which is easier for CMA and don’t regulate profits directly
arguments for profit capping?
Simple to understand for regulators and firms
argument against profit capping?
Might lead to dynamic inefficiency as firms don’t have enough profit for reinvesting
Quality standards and performance targets ?
- Easier for competition authorities to manage and regulate as it most likely doesn’t involve looking at a businesses accounts
- BSI produced many industries standards incl health, food and drink and construction
- Specific targets
ORR sets performance targets for train operating companies, checks how many trains are on time etc
Govt intervention to promote competition and contestability?
Increasing contestability is an important micro-economics supply-side economic policy
De regulation of markets?
- Liberalisation to encourage new firms to challenge established firms
- Usually involves lowering some of the statutory barriers to entry
- Deregulation of banking sector in 2022
Arguments for deregulation?
- Market supply should expand, bringing down prices for consumers
- Increased contestability (competition) will improve PE, AE and DE
- Limits firms’ ability to restrict output and raise prices
If firms have less pricing power they will be more likely to reduce costs to make profit (PE and reducing X inefficiency)
