4) Competition policy - MB

Question 1

define merger…

Answer 1

two or more firms joining to form a new firm

Question 2

define a cartel…

Answer 2

an agreement between firms on price and/or output with the intention of maximizing their joint profits (this is illegal)

Question 3

what is competition policy?

Answer 3

a form of regulation used to protect consumers and firms from being exploited by firms with market power

Question 4

in the UK, who investigates merges and anticompetitive behaviour?

Answer 4

Competition and Markets Authority (CMA)

Question 5

what are the CMA’s main functions? (6 things)

Answer 5

1) Investigate mergers that could lead to a ‘substantial lessening of competition’ - if above £70m revenue and 25% UK market share
2) assess markets in which there may be competition problems
3) investigate abuse of dominant position
4) protect consumers
5) enforce the above with fines of up to 5% of worldwide revenue
6) bring prosecutions against cartels

Question 6

when could the CMA launch a consumer awareness campaign?

Answer 6

if problems in the market are found, but no wrongdoing by firms

Question 7

UK competition policy… the CMA to intervene in markets where…

Answer 7

1) empowers
2) the behaviour of a firm exploits its market power to act against the interests of consumers of the firm

Question 8

if a firm abuses it’s… position to… consumers their consumer rights under law, then the CMA can…

Answer 8

1) dominant
2) deny
3) intervene with fines of up to 5% of global revenue

Question 9

what incentivises firms to improve their behaviour? (2 things)

Answer 9

• this fine (the fines of up to 5% of global revenue) is legally enforced by UK courts
• the threat of fines incentivises other firms to respect consumers’ rights

Question 10

what an the CMA do to firms that substantially lessen competition in a market?

Answer 10

they can act to block, or unwind, mergers between firms if the market share of the new firm is above 25% in the UK

Question 11

why can the CMA block mergers, what are the benefits of this?

Answer 11

this maintains a higher level of competition in markets which helps to keep prices lower for consumers

Question 12

what do the actions of the CMA help prevent?

Answer 12

their actions help prevent market failure by ensuring that the market mechanism can function correctly to allocate scarce resources

Question 13

what are two advantages of competition policy?

Answer 13

1) cheap
2) threat of enforcement

Question 14

how is competition policy cheap?

Answer 14

the CMA does not need a large budget, and the fines levied could cover the costs of operation

Question 15

how does competition policy cause a ‘threat of enforcement’?

Answer 15

the threat of fines or prosecution by the CMA incentivises third parties to behave in a way that does not lead to these outcomes, increasing the effectiveness of CMA in correcting potential market failure

Question 16

what are two disadvantages of competition policy?

Answer 16

1) regulatory capture
2) size

Question 17

why is regulatory capture a disadvantage of competition policy?

Answer 17

if the CMA becomes too ‘close’ to the firms that it is supposed to investigate, it can come to represent their interests instead of regulating the market

Question 18

how can the size of competition policy be a disadvantage?

Answer 18

the correct size of fine may not be clear, and the imposition of fines too small can still incentivise market failure if it’s more profitable for firms to engage in anticompetitive behaviour and pay the fine

Question 19

what does anticompetitive mean?

Answer 19

tending to reduce or discourage competition