3.6.1 Government intervention

Question 1

what does CMA stand for?

Answer 1

competition and market authority

Question 2

what is the role of CMA?

Answer 2

• they work to promote competition for the benefit of consumers because of low prices.
• they enforce consumer protection law and bring criminal cases against individuals who participate in cartels
• They have the power to impose financial penalties,prevent merges and force businesses to reverse actions already taken

Question 3

why would CMA control mergers?

Answer 3

The CMA will consider the competition situation if the merger goes ahead compared to, if it does not the merger will be approved if the potential benefits are greater than costs.
-it also depends if the market share is greater than 25%

Question 4

why wouldn’t the CMA want large companies to merge?

Answer 4

This is because the companies will have the incentive to exploit consumers by rising the prices- this causes poorer quality of services-reduce choice and prevent firms from gaining monopoly power.

Question 5

what is the evaluation point if companies don’t merge?

Answer 5

firstly even if CMA wants to impose this, few mergers are investigated each year

• CMA lacks relevant information to make decisions
• they may suffer from regulatory capture-which means they operate in the favour of producers rather than consumers.

Question 6

what is the problem with controlling monopolies?

Answer 6

Holding a dominant position in an industry is wrong itself but if the firm exploits this advantage they are deemed anti-competitive.
-monopolies are allocative and productive inefficient so they need to be controlled because price is greater than marginal cost of production

Question 7

what is the point of price regulation?

Answer 7

regulators can set price controls to force monopolists to charge a price below the profit-maximizing price- using the RPI-X formula
the X represents the expected efficiency gains of the firms and the aim is to ensure that firm pass their efficiency gains from consumers.

Question 8

what is the better version of RPI-X formula

Answer 8

RPI-X+K where k represents the level of investment

Question 9

how is this an incentive for firms?

Answer 9

they have to be efficient as possible where they have lower costs more than x anf enjoy the increased profit, this prevents excessive prices and ensures that gains are passed onto the consumer