3.6 - Government Intervention Flashcards
What are the main roles of the CMA (and other regulators)?
- Monitor & regulate prices - aim to ensure that companies don’t exploit their monopoly power by charging excessive prices
- Set standards of customer service - Companies that fail to meet specified service standards can be fined
- Open up markets -encourage competition by lowering barriers to entry - e.g. forcing the dominant firm in the industry to allow others to use its infrastructure network.
- Act as the ‘Surrogate Competitor’ - regulation can act as a form of surrogate competition – attempting to ensure that prices, profits & service quality are similar to what could be achieved in competitive markets
Give examples of other regulators?
- OFWAT: Water monopolies
- FCA: Financial Conduct Authority
- OFGEM: General energy markets
- OFCOM: Telecoms & broadcasting
- ORR: Rail regulator
How is government intervention used to control mergers?
- CMA can monitor merger activity by preventing any firm gaining more thane 25% market share
- If CMA has concerns they have the authority to stop it, or they can allow it to go ahead & force them to sell some of its assets
Include a real world example of a merger blocked by the CMA?
- In 2019, the CMA blocked the proposed merger between Sainsbury’s & Asda
- CMA concluded that the merger would lead to increased prices and & reduced quality for consumers
- The decision was based on an extensive investigation that included surveys, economic analysis, & consultations with stakeholders
What are the arguments for the government to intervene to control mergers?
- Protect jobs: potential restructuring, moving abroad, outsourcing, closing UK plants
- Protect consumers: exploitation (monopoly power), greater choice
- Economic environment: protect jobs, GDP, support UK owned industries
What are the arguments against the government controlling mergers
- Competitiveness - survival of the fittest
- FDI - creates jobs
- Strategic industries e.g. defense, US banning tiktok
- Can other countries do a better job
What are the types of regulation the CMA uses to regulate firms?
- Merger policy: blocking mergers that may give firms too much market power
- Price regulation: capping prices firms can charge consumers
- Profit regulation: taxing firms 100% on SNP above a certain limit
- Performance targets & quality standards: imposing targets & standards so firms don’t provide dodgy G&S
How and when does the CMA use merger policy to regulate firms?
- CMA investigates merger if:
1. Combined market share is over 25%
2. Combined annual turnover over £70million - Only block mergers if they will negatively affect consumers
Give 3 real-world examples of when the CMA used merger policy?
- When Three tried to acquire O2 - if they merged they would have had a combined market share of 31% -> blocked
- The speculated Virgin active & David Lloyd’s merger - they would have had a combined annual turnover of £1011million (2016) -> placed under investigation
- Orange & T-mobile merged -> EE despite having 33% marker share - merger was allowed as increased size of firm -> EoS -> improve quality of network coverage
What are the two types of profit regulation?
- RPI-X
- RPI+K
What are the limitations of price regulation?
- It’s difficult to know where to set X or K
- Due to asymmetric info, they don’t know the allocative efficient output
- Efficiency gains may come from somewhere else -> quality falls
- Different markets have different rates of inflation so using it for the whole economy -> misallocation of resources
What is RPI-X?
- RPI-X: a tool by the government to control/regulate the price that monopolies charge
- ‘X’ represents expected efficiency gains
- Firms must make efficiency gains in the SR to reduce costs & keep making SNP
What is RPI+K?
- RPI+K: alternative to RPI-X
- Can increase price with inflation + k% -> extra SNP can be invested into better capital
- K represents investment & factors in the potential for dynamic efficiency in the industry
- Ensures gains are passed to consumers
What is regulatory capture?
Regulatory capture is when a regulator begins to favour the company they’re regulating
Give examples of regulatory capture in the UK?
- Setting K too high in RPI+K: increases firms price cap -> increase prices more than needed -> more profits
- Setting X too low in RPI-X: allows firms to increase prices by more than they should
- Setting extremely low quality standards: firms can get away with selling cheaper quality products -> more profits - negatively affects consumers
Give a real world example of regulatory capture?
- BP ended up with free permits to drill for oil in the Mexican Gulf after American regulators were charmed by staff -> oil spill (2010)
How do regulators use profit regulation?
- Firms are taxed by the government 100% above a certain limit
- Firms must re-invest extra profits to avoid tax on profits above profit cap -> encourages investment & discourages raising of prices
Give a real world example of profit regulation?
- Windfall tax: one-off tax payment to the government on a firms’ profits
- Eval: managers may hide profits
What are the problems of using profit regulation?
- Ineffective: reduces profit incentive -> lazy -> inefficient -> costs spiral
- Requires sufficient knowledge to set an appropriate benchmark
What are performance targets?
Targets for firms to meet to ensure they’re providing a top quality service
Give 2 real world examples of performance targets?
- Scotrail has the performance target of 91.3% of its trains on time (fined if it falls below)
- NHS has target of responding to A&E patients in 4 hours
