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
What are the advantages of quality standards/performance targets
- Can affect market share by allowing the public to know the cost-cutting methods of the business
- Allow better rights for employees
- Consumers benefit from higher quality goods/services
- Allows efficiency/productivity to increase for business
- Positive externalities of business behaving better
What are the 4 ways the Government would intervene to promote competition and contestability
- Enhancing competition between firms through promotion of small businesses
- Deregulation
- Competitive tendering for Government contracts
- Privisation
What are the disadvantages of quality standards/performance targets
- Criticised for being too weak + lack of sanctions
- Alters company’s behaviour in a way that may not be beneficial to consumers
- Regulatory capture - rely on misleading information
- May cause companies cost to rocket up so they cost cut in more dangerous way
- Wouldn’t you have to impose these sanctions across the whole industry
How can deregulation promote competition and contestability
- Removal of legal barriers to entry allowing increase competiton and increase efficiency
- Privatise industries encouraging competition
Deregulation increases competition by lowering legal barriers to entry
How would this affect prices and quantity of goods produced in the market
Where Qc/Pc is the allocatively efficient production point
What are the advantages of deregulation
Increased consumer choice - incentive for allocative efficiency
Increased chance of productive + x-efficiency - reducing waste and cost, increasing consumer surplus
Increased incentives for dynamic efficiency
(shifting away from profit maximising point on a diagram)
What are the disadvantages of deregualtion
- Loss of a natural monopoly if there previously was one = increased cost/productive and allocative efficiency loss
- This is because duplication using scarce resources is seen as wasteful
- Wasteful duplication of resources - allocative inefficiency
- Formation of local oligopolies, which could collude and reduce competition
What does the success of deregulation depend on
Short run vs Long run (contestability may decrease in long run)
Height of barriers to entry without legal barriers (information gaps about true barriers)
Levels of Government regulation can lead to excessive admin costs (due to anti-competitve behaviour occurring from Oligopoly/Monopoly exploitation)
Recent examples of Deregulation
The ‘Big Bang’ here refers to the deregulation of the London Stock Exchange (LSE).
Deregulation allowed for free-market competition in the financial markets and caused London to become a major European centre of finance.
How can the promotion of small businesses promote competition and contestability
- Training and grants to new eutrepreneurs - increase competition
- Encourage small businesses through tax incentives/subsides - increase competition
- Improved finance flows allowing growth/innovation and investment
- Tax allowances + grants - new business centre
What is the problem with promotion of small businesses
How much entrepreneural activity would take place after intervention
Can have crowding out effects (commercial provision maybe more effective)
What will the success of the promotion of small businesses depend on
- What type of other barriers
- Contestability of market - i.e entry/exit barriers/sunken costs
- Brand loyalty
- Lack of economies of scale for smaller businesses - higher costs
- Unintended consequences - i.e lack of efficiency from financial support
Examples of recent schemes which aid in the promotion of small businesses
- Exporting is Great – a programme designed to facilitate more exporting
- Growth Hubs – run by local enterprise partnerships
- British Business Bank and Start-up Loans – providing business finance
- Innovate UK – encouraging and financing innovation and the commercialisation of research and development
What is privatisation
State owned organisation is sold to the private sector with the hope of gaining more competitive outcomes
What are the advantages of pritatisation
- allocative efficiency will increase - supply = demand, lower costs and higher consumer surplus
- Reduction in waste - X-efficiency
- Incentive for dynamic efficiency to gain advantage against competitors
- Government revenue from sale of asset
Disadvantages of Privatisation
- Limited competition - less incentive for productive/allocative efficiency
- Loss of making services cut even if it was socially desirable - profit motive (unintended consequences)
- Loss of economies of scale from closing an natural monopoly (productive efficiency too)
What does the success of privatisation depend on
- Levels of competition post privatisation - effecting drive of business
- Levels of Gov regulation = to prevent non-competitve behaviour from monopolies/oligopolies - excessive admin costs
What is competitve tendering
When local council/Gov bids for the rights to provide a certain service
Firm with the best bid wins the right to the contract
Increase competition
Advantages of competitive tendering
- Businesses bidding creating competition can save taxpayers money + reduce fiscal deficit
- Private sector businesses may be more likely to achieve productive efficiency - costs saving
- Businesses in private sector maybe more innovative, less likely to suffer from diseconomies of scale
Disadvantages of Competitive tendering
- Risk of a provider decreasing quality of service once contract is gained
- Businesses bidding to win contracts may sacrifice quality of services to lower costs
- Contracting out requires thorough monitoring - extra spending/admin costs
- Doubts about some employment practices to keep prices low e.g. low wages, poor conditions
- Short-term contacts may discourage long term investment
- Information gaps - quality of service being hired
What are the two ways the Governments intervene to protect suppliers and employees
- Restriction on monopsony power of firms
- Nationalisation
Cases for state ownership (nationalisation)
- Nationalised firms can target social objectives, target welfare issues
- Firms might charge a lower price - not focused on profit motive, long-run decisions
- Natural monopolies in the state sector can achieve high economies of scale = gains in productive efficiency
- Maximise positive externalities/ minimise negative externalities
Cases against state ownership (Nationalisation)
- Absence of shareholder pressure might lead to diseconomies of scale and hence higher prices
- Lack of market competition can reduce drive and bring about X-inefficiencies
- Greater risk of moral hazard - as employees wages aren’t tied to business revenues
- Firms may lack an incentive to innovate - leading to a dynamic loss
- Losses of state-owned firms are absorbed by taxpayers and lead to higher budget deficits
- Can be rigid/bureaucratic
Why may the Government regulate monopsonies
How may they do this
Monoponists are able to exploit suppliers by reducing prices
Gov can use Anti-monopsony laws and independent regulator
Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount
How may the Government tackle Monoposony power
- Fines from the regulator - up to 1% of revenues
- Laws - payment within appropriate timing
- Price regulation: minimum wage/price
- Block mergers that may lead to increased monopsony power
- Encourage greater competition/promote new entry/reduce barriers to entry
Why is if difficult for the Government to intervene with Monopsonies
Bulk-buying can lead to purchasing economies of scale - allowing prices to be lower for consumers - Gov doesn’t really want to cause high prices - especially in essential market (UK milk industry)
Many firms of global MNC and exercise monopoly power abroad
Evaluate the different forms of regulation for monopsony’s
Regulation/laws, price regulation, encouraging contestability
- Gov regulation is seen to have a soft touch, asymmetric information about levels of regulation
- What levels to put minimum price/wage at - what is the optimal level, what about excess demand
- Other reasons why firms might not enter the market, and new firms could still collude together
