8.7 Competition Policy

Question 1

What are two important points to remember about perfect competition (in relation to competition policy)?

Answer 1

-in the absence of economies of scale, perfect competition would be more productively and allocatively efficient than a monopoly

-in perfect competition the consumer ‘is king’ and consumer sovereignty rules whereas in a monopoly this consumer sovereignty can be exploited (through raising prices and restricting output-net welfare loss and transfer of consumer surplus to producer surplus )

Question 2

What is competition policy?

Answer 2

Part of the government’s microeconomic policy and industrial aims to make goods in the market more competitive

(Comprises policy towards monopoly, mergers and restrictive trading practices)

Question 3

What is the aims of competition policy?
(6 aims)

Answer 3

-preventing the exploitation of monopoly power

-reducing costs of production

-improving efficiency

-getting rid of excess profit so prices reflect the cost of production

-removing barriers to extent and exit in a market

Question 4

What are the two circumstances in which competition policy recognises a monopoly may be most beneficial?

Answer 4

-when their is a limited size of the market but economies of scale is possible (produce at a lower average cost than competitive firms)

-monopoles may be more innovative and have more dynamic efficiency

Question 5

What are the three key areas competition policy is for?

Answer 5

-monopolies
-mergers
-restrictive trading practices

Question 6

Who are the Competition and markets authority(CMA)?

Answer 6

Government agency responsible for advising on and implementing UK competition policy

Question 7

What is monopoly policy based towards?

Answer 7

Oligopolies and highly concentrated markets dominated by a few firms(there are very few pure monopolies in the UK)

Question 8

What is the history of the CMA?

Answer 8

Monopolies commission in 1948- rebranded as the CMA in 2013 and began operations in 2014-not just restricted to monopolies

Question 9

Why is UK policy that monodies should be based on its merit?

Answer 9

Because it can be good or bad depending on the circumstances thus each one is looked on individually

Question 10

When should a monopoly be prevented?

Answer 10

When the costs resulting from the reduction of competition exceed the benefits

Question 11

When should a monopoly be permitted?

Answer 11

When the likely benefits exceed the costs resulting from the reduction in competition

Question 12

Why is ongoing regulation needed?

Answer 12

To ensure that firms, particularly large firms, continue to act in the public interest

Question 13

How does the CMA find evidence of monopoly abuse?

Answer 13

Uses market structure, conduct and performance indicators to scan the UK economy on a systematic basis

Question 14

What provides evidence to the CMA of monopolistic market structures?

Answer 14

Concentration ratios

Question 15

What are two market conduct indicators that the CMA use to monitor anti-competitive business behaviour?

Answer 15

-consumer complaints
-trade compaints

Question 16

What will the CMA do if it suspects a monopoly to be acting against the public interest?

Answer 16

Investigate it further

Question 17

What was the issue with the public interest up until recently

Answer 17

It was vaguely defined

2002 enterprise act changed this introducing competition bases tests to replace public interest tests

Question 18

What do the competition based tests centre on?

Answer 18

Wether any features or the market (includes structural features and conduct by firms and consumers in the market) prevent, restrict or distort competition

Question 19

The CMA has adopted a ‘watchdog regulatory role’ with the problem of monopoly.

What are the methods they could deal with it?(7 methods)

Answer 19

-compulsory breaking up of all monopolies(monopoly busting)

-use of price controls to restrict monopoly abuse

-taxing monopoly profits

-rate of return regulation

-state ownership of monopolies

-privatising monopolies

-deregulation and removal of barriers to entry

Question 20

Why might the CMA use ‘compulsory breaking up of all monopolies (monopoly busting)’ in their approach to the problem of monopoly?

Answer 20

Many free market economists believe that economic efficiency and consumer sovereignty can only be achieved when an economy is as close to perfect competition as possible

-gov should adopt automatic policy rule to break up monopolies (this has never happened but the Gov does have the power to do so)

Question 21

Why might the CMA use price controls to restrict monopoly abuse in their approach to the problem of monopoly?

Answer 21

This policy has been used by the UK Gov to restrict the freedoms of UK firms to set their own prices although it has only been used in a limited way in recent years

Question 22

Why might the CMA tax monopoly profits in their approach to the problem of monopoly?

Answer 22

Punish firms for exploiting their monopoly power and making excessive profit. Monopoly tax has been used a few times in the past

Question 23

Why might the CMA use the rate of return regulation in their approach to the problem of monopoly?

Answer 23

Maximum rates of return on the capital the companies employ they act as a price cap if the prices are too high and there are excessive rates of return

(Has unintended consequences of rising costs for firms so that raising prices does not lead to higher profit

Question 24

Why might the CMA use the state ownership of monopoly in their approach to the problem of monopoly?

Answer 24

Monopoly is result of private ownership and the pursuit of private profit
-once there is state ownership the monopoly can only act in the interest of the public(labour argue this)

Question 25

Why might the CMA privatise monopolies in their approach to the problem of monopoly?

Answer 25

-conservatives argue that state ownership produces similar forms of abuse (protected from any market disciple)that would not exist if it was privately owned (inefficiencies and resistance to change)

Question 26

Why might the CMA use deregulation and the removal of barriers to entry in their approach to the problem of monopoly?

Answer 26

(Most economists believe that privatisation cannot alone solve the problem on monopoly)

-regulatory bodies are used to make sure their don’t abuse their power and deregulatory policies remove artificial barriers to entry

Question 27

What is merger policy concerned with?

Answer 27

Takeovers and mergers that may form a new monopoly

Question 28

What will the CMA not allow in the market?

Answer 28

Mergers that combine to 25% of the market (working monopoly)

Question 29

What can restrictive trading practises undertaken by firms in imperfect product markets be split into?

Answer 29

-those undertaken independently by a single firm

-collective restrictive practises that involve a written or implied agreement amongst two or more firms

Question 30

What are 3 independently undertaken restrictive practises?

Answer 30

-decisions to charge discriminatory prices

-refusal to supply a particular resale outlet

-full-line forcing, whereby a supplier forces a distributor that wishes to sell one of its products to stock its full range of products

Question 31

What are restrictive trading practises?

Answer 31

Agreements between traders that are not considered to be in the public interest.

Question 32

What is the most commonly known example of collective restrictive trading?

Answer 32

A cartel agreement-where firms come together to fix the price of a good

Question 33

Who deals with both independently undertaken and collective resistance trading practises ?

Answer 33

CMA

Question 34

What does the CMA do when it finds independently undertaken restrictive prices?

Answer 34

Asks the firms to voluntarily drop the practise on the grounds it is ani-competitive

Question 35

What does the CMA do when it finds collective restrictive practises?

Answer 35

Bans the cartel agreement unless they can be persuaded it is acting in the public interest

Question 36

What approach do the CMA to competition policy?

Answer 36

A cost-benefit approach