3.6.1 Government intervention in the product markets Flashcards
What are the aims of competition policy in the UK
to promote competition
make markets work better
contribute toward improved efficiency
enhance competitiveness of business in overseas market
What do the aims of the competition policy to ensure
- Technological innovation which promotes dynamic efficiency in different markets
- Effective price competition between suppliers
- Safeguard and promote the interests of consumers through more choice and lower prices
What are the main pillars of the UK’s Competition policy
- Anti-trust & cartels: Eliminating agreements that restrict competition including price-fixing by firms with a dominant market position
- Market liberalisation: Introducing competition in previously monopolistic sectors such as energy supply, retail banking, postal services, mobile telecoms and air transport
- Merger control: Investigation of mergers and take-overs which could result in firms dominating the market
What is the Competition and Market Authority (CMA)
the body is given the power to investigate mergers and takeovers in the UK and consider whether they should go ahead.
How and why may the CMA intervene in a merger
- merged entity has a turnover of £70m or more, or controls 25% or more of its market
- if they find that the integration of two businesses will lead to a “significant lessening of competition” this can be from a local to a national level
- mergers do not lead to worse outcomes for consumers, for example, through higher prices, lower quality or reduced choice
- have the power to give a merger the go-ahead providing certain conditions are met e.g. selling off assets or part of the business
- They also have the power to reverse mergers
Potential benefits of mergers
- Economies of scale - important for firms with high fixed costs
- Reduction in average cost per unit will help firm be able to compete on an international level too
- Can allow greater investment in R&D due to higher economic profit - better goods for the consumer
What are the drawbacks of mergers
- A significant increase in market share (>25%) firm could exercise monopoly power
- Static inefficiency from being a monopoly
- Less completion could lead to complacency among firms - leading to lower investment
- Mergers can lead to job losses
- Monopsony power for supplier
- Diseconomies of scale could occur
Evaluation of mergers - desirability depends on
- Scope of economies of scale
- Benefits passed onto the consumers?
- What will the competition look like/contestability
What is the problem with monopolies
They are profit maximisers - meaning they produce at a lower output, at a higher price
leading to a loss of consumer surplus, limited choice
What are the 4 ways monopolies can be regulated
- Price regulation
- Profit regulation
- Quality standards
- Performance targets
What is price regulation
Prevents excessive price increases
CPI-X or RPI-X
Where business must cut prices by x, once inflation has been taken into account
What are the advantages of price regulation
- Gives incentives to increase efficiency
- Flexible from firm to firm
- Independent regulator acting in the consumer’s interest
- Increased consumer surplus, social wellbeing if monopoly sells essential goods
How would price regulation be shown on a graph for a monopoly
What are the disadvantages of price regulation
- X value is often too low
- Regulatory capture - firms persuade regulators to be more favourable by controlling information
- If regulation is too strict can hamper investment
- Price isn’t everything (performance/quality)
- Costs-cutting in dodgy places within the business
What is profit regulation
Prevents excessive profitability of firms e.g. a windfall tax
One method could be cost-plus pricing: this approach requires competition authorities to assess the production costs of firms, and then allow a certain price to be charged above that, thus limiting profits
An alternative might be a combination of revenue-capping and cost-monitoring,
What are the advantages of profit regulation
- Can lead to fairer prices for consumers, if business moves away from the profit maximising point
- Prevent exploitation of monopoly power
- Not all profits are reinvested
- Moves focus towards longevity of business rather than short-term profit-driven decisions
- Could allow increased contestability
What are the disadvantages of profit regulation
- value judgement in the amount taxed, asymmetric information
- Disincentives to become more efficient
- High profits can come from a successful, efficient firm
- Not advantageous to companies which heavily rely on dynamic efficiency
What are quality standards/performance targets
monitor performance + investment levels + contestability
Quality standards may be easier for competition authorities to regulate due to quality of products being measured in all sorts of different industries for health and safety of consumers