3.6 - Government intervention

Question 1

What are the aims of competition policy?

Answer 1

1. technological innovation (promotes dynamic efficiency)
2. effective price competition between suppliers
3. safeguard and promote interests of consumers through more choices and lower prices

Question 2

Pillars of competition policy?

Answer 2

1. Anti trust and cartels - eliminating agreements that restrict competition including collusion (price fixing by firms with a dominant market position)
2. Market liberalisation (promote competition in previously monopoly sectors such as retail banking, energy supply and air transport)
3. Merger control (investigation of mergers and takeovers which could result in firms dominating the market)

Question 3

What is the UK competition body that looks after competition within the market?

Answer 3

The Competition and Markets Authority (CMA) - given the power to investigate mergers and takeovers in the UK

Question 4

Example of CMA blocking mergers

Answer 4

Sainsbury and Asda merge was blocked by the CMA in April 2019 due to concerns over reduced competition and increase in price for consumers

They found that it would reduce the amount of strong grocery retailers causing reduced ability for suppliers to get more favourable terms and conditions

Question 5

What does the CMA do?

Answer 5

1. Authority to examine mergers if the merged entity has a turnover of over £70 million or more or controls 25% of the total market
2. They can block an acquisition if they find that the integration of two businesses will lead to “a significant lessening of competition” in one or more markets at local, regional and national level
3. Ensure that mergers do not lead to worse outcomes for consumers (e.g.) through reduced choice, lower quality and higher prices
4. The power to give mergers the green lights provided they meet certain requirements (acquiring company must sell parts of its operations to reduce its market share)

Question 6

Example of merger meeting requirements by the CMA which is then approved?

Answer 6

Cineworld and Picturehouse merge in 2013 - eventually cleared after Cineworld sold off three of its cinemas to Light cinema chain)

Question 7

Government intervention in monopolies

Answer 7

1. Taxes on profits (windfall taxes) - e.g. in 1997 Gordon Brown announced that private utilities had to pay around £5 billion to New Labour’s “welfare to work programme”
2. Liberalisation of markets
3. Introduce price cap policies
4. Nationalisation

Question 8

Diagram for price regulation

Question 9

Chains of reasoning for capping the price of a monopoly

Answer 9

• to be effective, capped price must be set by the regulator below the normal profit maximising price
• a price cap lowers the abnormal profit made by dominant firms in the market
• this may stimulate attempts to improve cost efficiency
• in theory, this leads to an improvement in allocative efficiency and consumer welfare

Question 10

Evaluation for capping the price of a monopoly?

Answer 10

This may lead to the exit of some businesses from the industry which might actually reduce competition and increase the market share of existing firms

Question 11

Arguments in favour of price capping

Answer 11

1. Stimulates the improvement of productive efficiency as firms need to lower their costs in order to earn higher profits
2. Cuts in price for industrial consumers is beneficial as this would lead to gain in consumer surplus and higher material standards of living
3. Appropriate way to curtail the monopoly power of natural monopolies or dominant firms preventing them from making excessive profits at the expense of consumers