3.6 Government intervention Flashcards
What is competition policy?
Set of rules and powers that are used to increase competition within markets.
Provide two examples of competition authorities:
Competition and Markets Authority (CMA) - in the UK it has the power fine firms up to 10% of its annual worldwide turnover and ban it from holding directorship for 15 years.
The Federal Trade Commission in the USA.
What does the government do in order to control mergers?
CMA will investigate proposed mergers if the business being taken over has a UK annual turnover of £70 million or the businesses have combined market share of at least 25%.
The CMA can also force firms to demerge.
Why may the CMA block a proposed merger?
If the merger is detrimental to the competitiveness of the market, the CMA may block it to protect consumers.
Provide an example of a merger that was blocked:
Between Sainsbury’s (~16%) and Asda (~12.5%) in 2019.
Provide an example of a firm that was forced to split into two firms:
Lloyds TSB in 2013.
How does the government use price regulation in order to control monopolies?
OFGEM - the energy regulator, has set a price cap since 2019.
OFWAT - sets price controls for water companies.
ORR - regulates half of all rail fares.
How does the government use profit regulation in order to control monopolies?
The government can set a maximum percentage profit to a firm’s assets.
Despite this, firms often become inefficient in their capital spending rather than reduce prices.
How does the government use quality standards in order to control monopolies?
The government can control the quality of provision of goods and services by setting quality standards. For example, the Care Quality Commission sets standards for hospitals and care homes.
How does the government use performance targets in order to control monopolies?
Businesses may be set specific measurable target. For example, the proportion of first class post arriving the next day.
How does the government use promotion of small businesses in order to promote competition and contestability?
Providing start-up loans of up to £25000 and tax relief for small businesses.
How does the government use deregulation in order to promote competition and contestability?
Deregulation reduces or removes direct controls on industries with the aim of making the more competitive. Examples in the UK include postal services and busses.
How does the government use competitive tendering in order to promote competition and contestability?
This is where the government invites private firms to bid to undertake a large project. It is designed to get the lowest price possible in order to maximise the taxpayers money. Usually the lowest bid wins, however, other factors such as timeline and quality are also considered. An example is the construction of roads in the UK.
How does the government use privatisation in order to promote competition and contestability?
This involves selling public sector businesses to the private sector. The idea is the company is run more efficiently due to the threat of competition.
How does the government use restrictions on the monopsony power of firms to protect suppliers and employees?
Firms in a strong buying position may face regulation to ensure that their suppliers are not exploited. For example, the Groceries Code Adjudicator (GCA) ensures that large supermarkets treat their suppliers lawfully and fairly
How does the government use nationalisation to protect suppliers and employees?
A government can bring firms into the public sector to protect workers and other firms that rely on the failing firm. For example, in recent years, some rail franchises have bee renationalised.
What is the benefit of government intervention on prices and choice?
If measures in improving competition succeed then consumer surplus should increase along with choice.
What is the benefit of government intervention on profit?
Companies may face a fall in supernormal profits if caps are effective.
What is the benefit of government intervention on efficiency?
Increased competition will provide incentive for firms to operate efficiently and limit waste.
What is the benefit of government intervention on quality?
If measures to increase competition are successful then increased competition should act as an incentive to improve design and quality of products.
What is the limit of government intervention with regard to regulatory capture?
This is where the regulated industries are able to gain influence over their regulator. This results in the regulator acting in the interest of the incumbent firms rather than consumers. This is a type of government failure.
What is the limit of government intervention with regard to asymmetric information?
This makes it difficult for regulator to investigate and discover anticompetitive practices. For example, when when private sector firms rig bids when competitive tendering.
