3.6.1 Government Intervention

Question 1

What kind of government intervention is used to control mergers?

Answer 1

The Competition and Markets Authority (CMA) is the body given the power to investigate mergers and takeovers in the UK and consider whether they should go ahead.
1. The CMA has authority to examine mergers if the merged entity has a turnover of £70m or more, or controls 25% or more of its market.
2. They can block an acquisition if they find that the integration of two businesses will lead to a “significant lessening of competition” in one or more markets at local, regional or national level.
3. The aim of the CMA is to ensure that mergers do not lead to worse outcomes for consumers, for example, through higher prices, lower quality or reduced choice.
4. They have the power to give a merger the go-ahead providing certain conditions are met – for example, the CMA may require the acquiring company to sell off part of its operations to reduce its market power. E.g. the Cineworld / Picture House Merger (2013) was eventually cleared by the CMA after Cineworld sold
three cinemas to the Light cinema chain.

Question 2

What kind of government intervention is used to control monopolies?

Answer 2

1. price capping: setting a maximum price linked to inflation in an industry e.g.
   - RPI - X: Prices must rise by no more than the Retail Price Index (RPI) minus an efficiency factor (X), encouraging cost reductions.
   - RPI + K: Prices can rise by RPI plus an additional factor (K), often used in utilities to allow investment.
2. profit regulation: setting a maximum profit level for a company/industry ensuring they do not earn excessive returns while allowing fair investment
3. quality standards: To ensure monopolies provide acceptable service levels and meet consumer needs e.g. Ofgem setting standards for electricity companies to reduce power outages.
4. performance targets: To ensure monopolies provide acceptable service levels and meet consumer needs

Question 3

What kind of government intervention is used to promote competition and contestability?

Answer 3

• enhancing competition between firms through promotion of small business: through grants, tax incentives, reducing entry barriers, and offering subsidised loans
• deregulation: The removal of government restrictions to allow more firms to enter the market and increase competition
• competitive tendering for government contracts: The process where private firms bid for government contracts, ensuring the best value for taxpayers. Firms must compete by offering the best service at the lowest cost.
• privatisation: Selling state-owned businesses to the private sector to improve efficiency. E.g. the privatisation of British Telecom (BT) in the 1980s

Question 4

What kind of government intervention is used to protect suppliers and employees?

Answer 4

• restrictions on monopsony power of firms: Monopsony power is when a single buyer (e.g., a large supermarket) dominates the market, pressuring suppliers with low prices. The government restricts monopsony power through minimum prices, supplier protection laws, and industry regulation
• nationalisation: nationalisation is when the government takes ownership of key industries to protect workers and ensure fair prices. E.g. the UK rail industry was partially nationalised under Network Rail.

Question 5

Evaluate price capping as a form of government intervention to regulate monopolies.

Answer 5

Arguments FOR:
1. Capping is an appropriate way to curtail the monopoly power of natural monopolies or dominant firms preventing them from making excessive profits at the expense of consumers.
2. Cuts in the real price levels are good for household and industrial consumers (leading to an increase in consumer surplus and higher real living standards in the long run).
3. Price capping helps to stimulate improvements in productive efficiency because lower costs are needed to increase a producer’s profits.
4. The price capping system can be a tool for controlling consumer price inflation.

Arguments AGAINST:
1. Price caps have led to large numbers of job losses especially in the utility industries.
2. Setting different price capping regimes for each industry distorts the working of the price mechanism.
3. The industry regulator may not have enough/accurate information when setting the price caps for future years.
4. Capping prices means lower profits which in turn can lead to reduced capital investment by the utility businesses – ultimately consumer suffer if there is under-investment in utility infrastructure such as water and energy.