3.6 government intervention

Question 1

Horizontal integration

Answer 1

Is one of firm merges with another firm in the same industry at the same stage in production

Question 2

Ad/dis of horizontal integration

Answer 2

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

Question 3

Conglomerate integration

Answer 3

Has a large number of diversified businesses

Question 4

AD/DIS of conglomerate

Answer 4

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

Question 5

Vertical backwards integration

Answer 5

Is Winnefeld with another firm in the same industry, but further back in the chain of production

Question 6

AD/DIS of Vertical backwards integration

Answer 6

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

Question 7

Vertical forwards integration

Answer 7

Is one affair merges with another firm in industry, but further forward in the chain of production

Question 8

AD/DIS of Vertical forward integration

Answer 8

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

Question 9

Factors the regulator is concerned about

Answer 9

Prices
Profit
Efficiency
Quality
Choice

Question 10

Benefits of merger and takeover

Answer 10

-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.

Question 11

Dis of merger and takeover

Answer 11

-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

Question 12

What factors make the CMA look at mergers and takeovers

Answer 12

-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

Question 13

CMA

Answer 13

To ensure that merger don’t sig effect comp which would lead to worse outcomes for consumer

Question 14

Ad of gov intervention to control monopoly’s

Answer 14

-economies of scale
-Dynamic efficiencies
-May choose to be efficient
-more internationally competitive
-so big so regulators can see them
-counter monopsony

Question 15

Dis of gov intervention to control monopoly’s

Answer 15

-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

Question 16

Regulate prices

Answer 16

-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

Question 17

Ad of price regulation

Answer 17

-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

Question 18

Dis of price regulation

Answer 18

-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

Question 19

Profit regulation

Answer 19

Look at the profitability of firms. If it is excessive compared to similar firms. It is an sign the firm is abusing monopoly power

Question 20

Ad of profit regulation

Question 21

Dis of profit regulation

Answer 21

-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

Question 22

Quality of service regulation/performance targets

Answer 22

-Monitor performance targets and investment level
-firms may wish to cut costs, by lowering safety standards

Question 23

Ad of quality of service regulation

Answer 23

-can tax if targets are not met
-improves quality

Question 24

Dis of quality of service regulation

Answer 24

-difficult to regulate
-expensive to regulate
-targets may be too weak or too strong
-

Question 25

Encourage comp regulation

Answer 25

-gov can encourage comp so they reduce monopoly power
-may lower barriers to entry or subsidies new firms

Question 26

Ad of Encourage competition regulation

Answer 26

-reduce monopoly power
-more choice for consumers
-better prices

Question 27

Dis of Encourage competition regulation

Question 28

Promiting small bus

(promoting contestability and competition)

Answer 28

-tax breaks
-subsidy
-guidance and advice

Question 29

deregulation

(promoting contestability and competition)

Answer 29

-this involves removing legal barriers to entry
-it has efficient for increasing competition in the retail of electricity and gas to consumers. With increased competition, there is no need for price regulation
-deregulation cannot create competition in a natural monopoly, such as electricity networks and train companies
-the regulation solved a problem and now it been removed
-firms have more freedom
-easier for new firms to enter market
-encourage contestability
-gov can offer tax breaks and subsidies to help small firms develop, creating more competition

Question 30

privatisation

(promoting contestability and competition)

Answer 30

-involves selling state owned assets to the private sector
-AD; reduces gov interference, removes borrowing limits, private companies more efficient, improved public finances, increased competition
-DIS; barriers to entry, public services should be run in the public interest, positive externalises

Question 31

competitive tendering

Answer 31

-this occurs when local councils/gov allow firms to bid for the right to run certain services

AD:
-best firm gets contract
-lots of comp for the contract

DIS:
-costs involved
-contract is usually short term so lack of long term investment
-requires gov to monitors quality if service
-it assumes loads of people want to do this service

Question 32

effect of monopsony on suppliers

Answer 32

-lower prices
-less revenue
-less economic/abnormal drifts
-less producer surplus
-less finance for re-investment
-might be forces out of bus or need to change markers
-might need to try and find another bus to sell goods to
-might need to make cutbacks or produce less quality due too less money

Question 33

effect of monopsony on customers

Answer 33

-cheaper products
-monopsony may not pas on benefits from lower prices
-less choice
-poorer quality due to suppliers needing to save mom
-but lower prices are better for consumers, increase consumer surplus, more money to spend elsewhere etc

Question 34

effect of monopsony on employees (employees of the monopolist)

Answer 34

-lower wages
-less workers employed=more work
-less choice of employer and alternative job opportunities

Question 35

effect of monosomy on employees of the suppliers

Answer 35

-potential wage cuts
-potential job losses
-potential poorer working conditions due to less money being received

Question 36

How can the gov intervene wit monopsony

Answer 36

-min price levels for suppliers
-reduce barriers to entry for new firms / promote competition
-give new firms grants/subsidies
-use trade unions are able to force monopsony for better prices/wages
-law/regulation

Question 37

problems with gov intervention with monopsony

Answer 37

-expensive
-bus could just put prices up by 1%
-tears to investigate
-gov is a monopsony
-law takes time to pass
-what specific laws
-opportunity cost for grant/ sub
-what level of min wage?