4.2.2 Promoting Competition

Question 1

ways of promoting competition

Answer 1

1. Laws and regulations prohibit cartels and collusion, entail anticompetitive agreements between businesses that want to reduce the forces of competition → avoid abuse from dominant firms in the market
2. Restrictive practices prevented eg market sharing and price fixing
3. Mergers and takeovers giving businesses more than 25% of market are investigated and may be blocked
   - Allowed if investigators think it will not be threat to consumers
   - Business has grown by own efficiency and competitiveness → market remains contestable and competitive
4. 25% of market share - legal monopoly as business gains substantial market power
5. Businesses may need to sell off part of their organisation
6. Some public companies have been privatised to ensure markets are more competitive eg royal mail
   - Organisations with market power have to become efficient by competition
   - They have an incentive to improve efficiency → profit

Question 2

regulating natural monopolies

Answer 2

• Natural monopoly: most efficient scale of production is a monopoly as more than one producer or supplier involves a waste of resources
• Regulators of natural monopolies → responsible for making sure natural monopolies do not exploit consumers by overcharging and do not make strenuous efforts to keep their production costs down
• Ensure good service is provided at a reasonable price → share information and may be susceptible to regulatory capture
• Regulator is influenced by industries point of view → because they are working closely

Question 3

protecting consumers

Answer 3

consumers have little market power where the availability of close substitutes, firms can
- Inappropriate labellinng
- Pricing strategies can obscure the true cost of the product
- Price fixing of collusive businesses → consumers cannot buy from a competitor with a lower price
- poor quality products that can endanger consumers → electrical components

Regulators aim to ensure companies do not exploit their monopoly power by charging excessive prices
- Evidence of pricing behaviour, rates of return on capital employed

Question 4

Uk monopolies

Answer 4

• Uk definition of a monopoly = when a firm has more than 25% of market share
• Organic growth to more than 25% is allowed
• Grounds to investigate firm for anticompetitive behaviour
• Inorganic growth: usually not allowed
• Can be permitted If seen as in the public interest

Question 5

role of the CMA

Answer 5

• Ensures that consumers, firms and economy have choice and fair deals
• Principle competition regulator → makes sure markets are open so businesses can compete and thrive
• Free advice to businesses so they adhere to competition law and spots illegal business
• Can give fines of up to 5% of turnover and business managers can be sent to prison for restrictive practices
• Firms have incentive to become whisteblowers for anticompetitive behaviour → cooperation means leniency

Question 6

Key actions of the CMA

Answer 6

1. Investigate mergers that can lessen competition
2. Action against cartels/anti-competitive behaviour
   - Firms make abnormal profits
   - Give them profit cushion while they complete predatory pricing (eg lower it) to drive out other competitors who cant afford low prices
   - Less choice in market
   - Indicative of market failure
3. Investigate unfair markets
4. Guidance and technical advice → rights of consumer and laws for firms
   - Can promote consumer protection with sites like go compare etc
   - Reduces information failure in a market, and therefore market failure as consumers are aware of the best deals
   - Reduces market failure
5. Work with other regulatory bodies like OFCOM

Question 7

sainsburys and Asda merger 2019

Answer 7

• Blocked due to concerns about reduced competition and increased prices for consumers
• Decrease competition at a national level for groceries
• Decrease number of strong grocery retailers → their monoposony power increases and fair conditions for suppliers/farmers are not allowed

Question 8

limits of the CMA

Answer 8

• Evidence of anticompetitive behaviour hard to find as not explicit
• Can only regulate according to how they were established
• Dynamic efficiency → cannot actin response to changes, immediately in tech world
• Ability to act and legislate is limited
• Regulatory capture → due to operation close to the market, becomes sympathetic to them and regulates less harshly, not effective

Question 9

natural monopolies

Answer 9

• Economically efficient where FC dominates cost structure eg national infrastructure
• Having one firm means that you will be further along fixed cost graph
• Lower costs passed onto consumers with lower prices
• However a firm may gain the incentive to raise prices with inelastic demand (lack of competition to incentivise them to decrease prices)
• Market failure observed
• Choice decreases, competition decreases
• Ped = inelastic
• Incentive to increase P and R
• Regulation needed

Question 10

nationalisation and privatisation

Answer 10

• 1945: nationalisation of key industries → government owned social objectives (benefit of consumers) rather than profit maximisation
• Surplus given to treasury to reinvest in economy
• Clause 4: bringing services into government ownership but stopped by Tony Blair
• Lack of profit incentive made no incentive for firms to become efficient and increase quality of service
• Enterprise increases efficiency
• 1980s: thatchrism
• Privatisation driven to improve efficiency
• To ensure comp is fair, break up market and regulation

Question 11

employee protection

Answer 11

• Equal pay and opportunities for protected groups
• Fairer labour markets as individuals employed based on skills
• Minimum wages: Reduce poverty and exploitation → increase incentive to work
• Health and saftey act 1974: improves working conditions and provides for compensation where negligence has led to accidents
• Unfair dismissal prevented

Question 12

arguments for regulation

Answer 12

1. Regulation keeps the market efficient and reduces the risk of market failure
2. Competition creates more innovative and robust economy, fostering economic growth by increasing efficiency
3. Regulation protects consumers and employees
4. Businesses hurt by unfair competition can complain to the CMA
5. Can benefit suppliers where monopsony buyers have market power and can force prices down
   Better working conditions to improve productivity
6. Strict rules for all business levels the playing field → socially responsible businesses do not lose CA to firms that cut labour costs and have poor working conditions
7. Legislation is key guidelines → mayor paris and diesel cars banned from 2025 onwards

Question 13

against regulation

Answer 13

• Government spending for regulatory bodies
• Government may be too quick to accept public opinion leading to government failure → diesel cars implementation
• Legislation is expensive
• Legislation can be changed by future governments (Brown and 0.7% of GDP towards foreign aid, while 0.3% proposed as new figures)
• May reduce firm profitability as they must reduce prices/abandon mergers
• Reduce ability to invest and grow in the future → wider economy impact
• Consumer protection legislation may incur production costs, increasing prices for consumer
• Discentive for firms to establish production in country with high regulation → high cost and reduce profitability, government loses FDI/domestic production