3.6 Government intervention to promote competition

Question 1

What are the aims of competition policy?

Answer 1

• Ensure technical innovation and dynamic efficiency
• Effective price competition
• Safeguard consumer interest
• Anti trust and cartels - price fixing
• Market liberalisation - introducing competition in monopolistic sectors
• Merger control - investigate mergers and takeovers

Question 2

What are anti-competitive agreements?

Answer 2

Against price fixing

• Market sharing
• Exchanges competitive information
• Bid rigging

Question 3

What is the CMA?

Answer 3

• Investigates mergers and takeovers in the UK and considers if they are in public interest and should go ahead. They can block mergers.
• Investigated if results in £70m+ turnover or 25% market share
• Blocks if leads to reduction in competition
• Ensures mergers do not lead to worse outcomes for consumers
• Can give go ahead if firms selll part of its operations to reduce power

Question 4

What are the consequences of infringement of the CMA?

Answer 4

-fined 10% of turnover
-Provisions that breach article 101 void and unenforceable
Firms in A101 exposed to actions for damagers from customers and competitors who can show been harmed
-Breach of C1 can caus disqualification from being company director and lead to criminal sanction.

Question 5

How may monopolies be controlled?

Answer 5

• Tax on profits
• Liberalise markets
• Price capping policies
• Nationalisation

Question 6

What is the impact of a price cap?

Answer 6

Maximum price means when monopolies supply at profit maximisation they do not benefit from the higher prices they are able to charge.

Question 7

What are the advantages/disadvantages of price capping?

Answer 7

Advantages:

• Curtails monopoly power
• Cuts real price levels for households and consumers
• Stimulates improvements in productive efficiency
• Controls inflation

Against:

• Job losses
• Distorts price mechanism
• Industry regulator lacks information for future years
• Lower profits lead to less capital so consumers suffer

Question 8

What is profit capping? What are the arguments against it?

Answer 8

Assessing production costs and only allowing a price to be charged above that limiting profits. Easy to understand but gives no incentive to reduce production costs and become more efficient.

• Dis incentivises business activity
• Reduces tax revenue
• Firms can bypass regulation
• Difficulties in monitoring

Question 9

How do governments use quality standards and performance targets?

Answer 9

-British Standards Institution produce many standards for industries - healthcare, aviation, food and drink, construction, utilities among others. Set my exports to ensure goods and services are safe to use and in line with expectations

Question 10

What is deregulation?

Answer 10

• Deregulation of markets stimulates growth and businesses by preventing regulations in markets - increases competition and rises interest rates, liberalises the market to encourage new entrants.
• Often involves lower barriers to entry for new entrants
• Good example is opening up UK parcel market and UK bus industries

Question 11

How do governments combat monopolies?

Answer 11

One supplier with large EofS, only one businesses reaches MES, allocative efficiency and losses - LRAC falling over all ranges of output and so if a firm joins and sets prices at MC economic losses will be made.

One approach may be to split an industry into core network and final mile service to the consumer - e.g. core is the rail network and the final mile is allowing competition in other aspects e.g. telecom companies can use BT infrastructure

Question 12

What are the advantages of deregulation?

Answer 12

• Market supply increases, lower prices
• Increased competition increases efficiency
• Limits firms ability to restrict output and raise prices
• Cost reduction, boosting productive efficiency and reducing x-inefficiency
• Greater capital investment and productivity

Question 13

What are public private partnerships?

Answer 13

Government services or private business ventures funded and operated through partnership of the private sector. Involves part privatisation, competitive tendering and PFI.

Question 14

What are the arguments for privatisation?

Answer 14

• Private companies profit incentive to cut costs and be more efficient and raise productivity
• Government gains revenue from sale
• lower prices if state monopoly becomes multiple firms
• Creates shareholder democracy i.e. greater share ownership

Question 15

What are the arguments against privatisation?

Answer 15

• Social objectives given less importance
• Some activities best run by state
• Government loses out on dividends and future profits
• Public sector assets often sold too cheaply
• Shares are often bought/held by large institutions such as pensions, insurance and others?

Question 16

What is competitive tendering and contracting out?

Answer 16

Competitive tendering is when private companies put in bids for the contract to produce the goods and services. The businesses offering the lower price, subject to a certain level of quality, wins the contract

Contracting out: situation in which public sector places activities in the hands of a private firm and pays for the provision.

Question 17

What is the case for and against contracting out?

Answer 17

• Saves taxpayer money and reduces fiscal deficit
• Private sector more likely to achieve productive efficiency and cost saving
• Businesses in private sector more innovative, less hierarchical and less prone to suffering from DofS

Against:

• Businesses bidding tow in contracts sacrifice quality of service to lower costs
• Doubts about employment practices of service companies
• Contracting out requires monitoring - more spending.

Question 18

How do governments encourage small businesses?

Answer 18

• Encourage start ups
• incentivise investment
• innovation R and D
• facilitate growth strategies
• Reduce red tape - regulations and details
• Easier to access public sector contracts
• Improve access to finance
• Provide tax breaks
• Provide business support, training and education

-Department of Business innovation and Skills noted SMEs provide nearly 60% of UK’s jobs and 50% of employment

Example is milk industry who received tax relief, financial assistance from the EU worth £500m, supporting faremrs with understanding and uses future markets.

Question 19

What is PFI?

Answer 19

Funding arrangement where the private sector designs, builds, finances and operates an asset and associated services for the public sector in return for an annual payment linked to the performance of the service. This is paid back over a period of time- typically 25 years.

The private sector produces the service and the government ultimately pays for it. Keeps public finances in the short term, but borrows from the private sector - it can reduce the PSNB and puts the risk on the private sector so can benefit politicians.

Question 20

What are the advantages and disadvantages of PFI schemes?

Answer 20

Advantage:

• Risk transferred to the private sector, an incentive to complete the project on time and prevent costs from getting out of control
• Reduces government borrowing figures

Disadvantages:

• High long term cost - £10bn spent in 2013 and £4bn on debt and interest
• Bromley hospital cost NHS £1.2bn - over 10x what it was worth
• Cost of borrowing higher for private company than government
• Private firms often don’t lose contract even if fail to deliver
• Trade unions argue private sector firms pay lower wages than public sector - efficiency savings are transfers of income from workers to the partners in a PFI projects and the shareholders of the company
• Quality of the service may be lower if focused on efficiency rather than consumer experience.

Question 21

What is the case for and against state ownership?

Answer 21

For:

• Nationalized firms target social objectives
• Firms may charge lower prices - not focused on profit maximisation
• Natural monopolies can achieve economies of scale
• Hit macroeconomic aims such as inflation

Against:

• Absence of shareholder pressure leads to DofS and higher prices
• Lack of competition reduces efficiency
• Firms lack incentive to innovate
• Losses of state owned firms absorbed by tax payers - higher budget deficits

Question 22

What are the arguments for and against rail nationalisation?

Answer 22

For:

• Natural monopoly suited to control to achieve EofS
• Rail fairs controlled to improve affordability
• Profit flow directly to taxpayer instead of shareholders
• State directs investment into network, borrows cheaper

Against:

• Competition may mean more trains
• Private sector firms improve dynamic efficiency
• Possible to regulate more fares on services run by private trains
• State run railways poor history

Question 23

What are the arguments for and against an energy price cap?

Answer 23

+

• Protects consumers from over charging due to power of dominant supplies
• High fuel bills hurt lowe income families
• Price cap encourages energy suppliers to increase productive efficiency - lower LRAC to increase profits
• Cap temporary and can be lifted if unneeded

Negative:

• Hurts competition by reducing profits and lowering incentive for new challenger firms to enter
• Prices gravitate towards cap so average prices may start to increase
• Fall in profits mean less investment in renewables
• Better long run strategy is to focus on insulation to improve efficiency

Question 24

What are the 9 indicators which can be used to judge the effectiveness of industry regulation?

Answer 24

• Real prices for consumers - after inflation so goods may be more affordable
• Size of industry profits - how high are monopoly profits and how much is reinvested
• Jobs - how does it affect employment
• Performance targets - meeting targets for service reliability
• Research and innovation - how much is it spend to sustain high levels of R&D to speed up rate of product and innovation
• Productivity improvements
• Environmental indicators
• Investment in new capacity to meet future demand
• Inequality

Question 25

What are limits to government intervention?

Answer 25

• Regulators may limit innovation in fast growth markets
• Capping prices might prevent new firms from entering a market
• Regulation becomes bureaucratic an costly
• Lack the powers to be truly effective in protecting consumers
• May be behind curve with technology
• Frequent rule changes stifle business capital investment

This leads to regulatory failure where it is either ineffective in meeting stated aims or leads to deeper and more persistent market failure. Regulators are dependent on the utilities for the information on costs, and end up being overly sympathetic to those utilities.

Question 26

Why may government failure occur?

Answer 26

• Distorted price signals e.g. price capping
• Unintended consequence
• Excessive administration costs and opportunity cost
• Information gaps and asymmetry