3.6 - Government intervention in product markets

Question 1

State the aims of competition law

Answer 1

To ensure consumers benefit from:

• price competition
• greater product development
• improved product specifications
• better quality of service between competitors.

[useful for intro in essay]

Question 2

State the types of behaviour UK competition law seeks to prevent

Answer 2

Competition law is concerned with agreements or practices which actually or potentially distort competition within a market in a way which is ultimately detrimental to the consumer. This includes:

-THE CARTEL OFFENCE: Agreement between competitors to rig bids, fix prices, share markets or customers or limit production or supply.

Question 3

State the role of the regulator

Answer 3

The UK utility regulators are industry specialists (Ofcom, Ofwat, Ofgem, etc..) with concurrent power within the CMA to enforce UK competition law:

• They can investigate suspected competition abuses by companies in their industry.
• Some have the power to fix prices in that industry, e.g. Ofwat and Ofgem.

Question 4

State the penalties for infringement of UK competition law

Answer 4

• Conviction for the cartel offence carries with it a maximum penalty of 5 years’ imprisonment and/or an unlimited fine.
• Imposition of very significant fines of up to 10% of worldwide turnover.
• Directors of UK companies that have infringed UK competition law may be disqualified from acting as a director for up to 15 years.
• Third parties may be able to sue for damages where they’ve suffered a loss.

Question 5

State the actions the CMA can take for infringement of UK competition law

Answer 5

• The CMA is vested with the power to conduct investigations at business premises and to take copies of evidence (e.g. documentations, e-mails etc..)
• They can interview individuals who are connected to the businesses under investigation.

Question 6

When does the CMA intervene in a merger

Answer 6

If the merger is deemed to cause a ‘significant lessening of competition’ in one or more markets, it will not be allowed to proceed: the CMA blocks it.

Question 7

State the 4 ways the government intervenes to control monopolies

Answer 7

1) Price regulation
2) Profit regulation
3) Quality standards
4) Performance targets

Question 8

Explain how the government uses price regulation to control monopolies

Answer 8

This is a form of price control in which a monopolist is forced to charge a maximum price equal to the marginal cost of production. Rather than the profit maximising level of output price, the firm is producing at the allocatively efficient point.

Question 9

State the advantages on price due to price regulation

Answer 9

CONSUMERS:
- Lower prices, increasing consumer surplus​- Greater choice and quantity from allocative efficiency

PRODUCERS:
- Firms can increase their output and benefit from economies of scale. Therefore, lower LRAC.

Question 10

State the disadvantages on price due to price regulation

Answer 10

A significant rise in price maximisation means that consumer welfare won’t be maximised.

Question 11

Define profit regulation how the government enforces it

Answer 11

= When the gov can fix the maximum level of profit that can be earnt by monopolists.

This is by introducing a profit cap in
industries where supernormal profits are regarded as excessive or in industries where little competition exists/where collusion is possible.

Question 12

Define deregulation

Answer 12

Refers to the removal of statutory/gvt controls from markets. The purpose is to increase PE & AE through greater competition in markets. Costs will be lowered (PE), prices will be lowered and output increased (AE).

Question 13

State examples of deregulation

Answer 13

• Gvt allows private firms to compete in a market currently supplied by a state monopoly. ​
• Gvt lifts regulations on an industry once privatised so that firms are not restricted​.
• Gvt abolishes laws with anti-competitive effects, such as licensing of certain firms to sell pharmaceuticals in a particular area.​

Question 14

Explain the benefits of deregulation to firms

Answer 14

• EOS firms as markets are opened up and output can rise.​
• Incentive to be PE as barriers to entry are reduced as competition is introduced into the market, so costs fall.
• FC fall as excessive gvt bureaucracy is removed.

Question 15

Explain the benefits of deregulation to consumers

Answer 15

Firms increased incentive to be AE as barriers to entry are reduced and competition is introduced into the market.

• Therefore, lower prices, more choice and higher quality of goods/services.

Question 16

Define privatisation

Answer 16

(Opposite of nationalisation) The transfer of assets from the public (govt) sector to the private sector.​

Question 17

Explain the purposes of privatisation

Answer 17

INCREASE COMEPITION, CONTESTABILITY, EFFICIENCY:
- This reduces prices, increases choice and quality.

WIDENING SHARE OWNERSHIP
- As firms are accountable to shareholders so there’s is a threat of shareholders withdrawing their investment if the firm does not perform.​

INCREASING INVESTMENT
- As privatised businesses can raise finance through the stock market.

LESS TRADE UNION POWER:
- As there’s not a monopsony employer.

Question 18

State the effects of privatisation

Answer 18

-In the UK the process has led to a sizeable reduction in the size of the public sector. State-owned enterprises now contribute less than 2% of GDP and less than 1.5% of total employment.​

• Over the last few years, privatisation in the UK economy has given way to a new wave of nationalisation including high profile banks, building societies and transport services.​

[Intro to essay on effects of privatisation]

Question 19

Define nationalisation

Answer 19

(Opposite of privatisation) The process of a govt buying up private assets and taking them under state control.

Question 20

Explain the role of the GCA

Answer 20

The Groceries Code Adjudicator is a statutory code responsible for regulating the relationship between the UK’s largest grocery retailers and their direct suppliers by encouraging, monitoring and enforcing compliance with the Groceries Supply Code of Practice.

Question 21

State the methods of govt intervention to reduce monopsony power

Answer 21

1. Govt can appoint an independent regulator, the GCA who can enforce the Groceries Supply Code of Practice.
2. Block mergers
3. Price regulation - min prices

Question 22

State the evaluation points of the methods of govt intervention to reduce monopsony

Answer 22

1. Through cost-benefit analysis, the size of the fine may not act as a deterrent
2. Benefits of merger aren’t received (EOS, DE, revenue etc..)
3. Possible shortage and lack of incentive for new firms to enter the industry as there’s a fall in snp.

Question 23

Define the two limits to govt intervention

Answer 23

• Regulatory capture = When a regulatory body operators in favour of the producers that it governs rather than the consumers, employers and suppliers that its meant to represent.
• Info gaps/asymmetry = When, in imperfect markets, one party has more info than the other and can therefore exploit that info gap to the detriment of the other party.​