3.6 government intervention Flashcards
Horizontal integration
Is one of firm merges with another firm in the same industry at the same stage in production
Ad/dis of horizontal integration
AD-
economies of scale
lower LRAC
higher market share (more market influence)
reduction in comp
reduction as costs may be duplicated
DIS-
costs
increased workload
increased responsibility
anti-trust
legal issues/creating monopoly
Conglomerate integration
Has a large number of diversified businesses
AD/DIS of conglomerate
AD-
spread risk
spreads ides
cross substation
the company may have excess cash but not enough opportunity’s ti grow in existing market
DIS-
Company is taking over another company without having experience about that industry and hence chance of mismangment or overpricing the target company increase substantially
The company is shifting its focus from its core bus to other bus which in turn may result in the company performing poorly in both areas
Its difficult to merge cultural value, employees etc
Vertical backwards integration
Is Winnefeld with another firm in the same industry, but further back in the chain of production
AD/DIS of Vertical backwards integration
AD-
increased control
guarantee source of raw materials
can’t be help to ransom by supplier demanding higher prices
reduces comp access
increased profits due to improved cost control
removal of the middle markup
DIS-
the process leads to lack of supplier comp that will leads to low efficiency resulting in potentially higher costs
Vertical forwards integration
Is one affair merges with another firm in industry, but further forward in the chain of production
AD/DIS of Vertical forward integration
AD-
guarantee outlet for products
the firm can exercise greater control over sales and prices of products
the firm own retail stores serve as better source of customer feedback
the firm can improv e its port by reducing the costs of distribution and coats of middle man
integration can ensure that handling and transportation costs are reduced
DIS-
Since its prices are interdependent a slight interruption in one process may dislocate the entire production system
It is very difficult to efficiency manage an integrated firm because every bus has its own structure, tech and problems
Factors the regulator is concerned about
Prices
Profit
Efficiency
Quality
Choice
Benefits of merger and takeover
-economies of scale. Important for firms with high fixed costs
-the reduction in average cost per unit will help the firm compete on an international level
-managers can allow great investment in R&D because the firm will have more economic profit. This can need to be a good for the customer.
Dis of merger and takeover
-If the merger leaders to a significant increase in market share, either in local or national markets, the new firm could exercise monopoly power:
-Higher prices leading to allocative inefficiency and a reduction in consumer surplus.
-Monopolies are more likely to be productively inefficient
-Less competition can lead to complacency amongst firms. This can lead to lower quality products and less investment in new products
-Fewer firms means less choice for consumers
-With increased economic profit the firm can engage in cross subsidisation or predatory pricing, increasing the barriers to entry to the industry.
-The larger firm can pay lower prices to suppliers (monopsony power)
-The large firm may be able to drive down wages (monopsony power)
-mergers can lead to job losses
-if the firm is too big D of scale will occur. Might increase prices for consumer
What factors make the CMA look at mergers and takeovers
-when mergers and takeover may result In monopoly or high market share
-The business being taken over, has a UK annual turnover of at least £70 million
-specific situations which the public impress might be threatened
-To support/waive through a turnover that is public interest
CMA
To ensure that merger don’t sig effect comp which would lead to worse outcomes for consumer
Ad of gov intervention to control monopoly’s
-economies of scale
-Dynamic efficiencies
-May choose to be efficient
-more internationally competitive
-so big so regulators can see them
-counter monopsony
Dis of gov intervention to control monopoly’s
-Can raise prices however they want
-may disincentivise other firms to joint and R+D
-less choice as fewer firms are supplying the product
- likely to be productivity inefficient, x-inefficient, allocatively inefficient
Regulate prices
-Prevent excessive price increases-regulators have the power to limit price increase or order firms to cut prices by a certain amount
-can set min and max price levels
-CPI-X+K (firms have to cut prices by an amount X, after taking inflation into account)
K is investment
CPI is inflation
X level prices will be cut by
Ad of price regulation
-the system provides an incentive for firms to increase efficiency
-different prices can be set, depending on the circumstance of the industry and the system is therefore flexible
-the regulator should be independent of the gov and the firm, and can therefore act in the interest of consumers
-if the info the regulator has is good then they can increase allocative efficient by setting price close to marginal costs
-since the system started back I. 1984, there have been sig cuts in the real prices of telephones and electric, suggesting it has been successful
Dis of price regulation
-regulators have often underestimates the potential cots saving of firms, therefore X has been too low and regulated too soft. Thus has allowed firms to increase their profits at the expense of consumers
-regulators have been accused of regulatory capture. This occurs when a firm persuades the regulator to look favourably
-If regulators become too strict with a firm, its may hamper investment. firms may be reluctant to invest, if they fear the regulator will make them cut prices
-it is possible that there may be fewer incentives to cut costs because if they do not increase efficiency, the regulator may just increase the value of X
-regulators need to look at more than just prices e.g. they should consider performance targets and quality of service
Profit regulation
Look at the profitability of firms. If it is excessive compared to similar firms. It is an sign the firm is abusing monopoly power
Ad of profit regulation
Dis of profit regulation
-critics argue regulation is rather arbitrary and as a consequence, it is difficult to know how much to tax firms
-windfall taxes and profits regulation may create a disincentive for a firm to cut costs and become more profitable, because they will lose out to the gov in the future
-it is difficult to know either high profits us due to successful and efficient firm, or the abuse of monopoly power
-water companies have argued that they need substantial profits to finance expensive, long tern investment. Windfall taxes could reduce one term investment and encourage a short terms
Quality of service regulation/performance targets
-Monitor performance targets and investment level
-firms may wish to cut costs, by lowering safety standards
Ad of quality of service regulation
-can tax if targets are not met
-improves quality
Dis of quality of service regulation
-difficult to regulate
-expensive to regulate
-targets may be too weak or too strong
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