CMA Flashcards
what is the CMA
Competition and Markets Authority
- works to ensure that the actions of firms are within the law, and are beneficial/not exploiting consumers
- they are an independent non-ministerial department, part of the govt
how does it regulate markets
- investigate mergers to ensure that they aren’t reducing competition - any merger which would create a combined market share of >25% or combined turnover greater tha £70m gets investigated automatically
- investigate entire markets if there are competition or consumer problems
- take action against businesses that take part in cartels (collusion) or anti-competitive behaviour
why and how does the govt regulate mergers
- want to stop firms from exploiting customers, offering poor service quality, less choice etc
- they consider whether there will be a substantial lessening of competition (SLC) if the merger is carried out
why are govts concerned with competition and mergers
- competition drives innovation, as firms fight between each other for consumers. Innovation requires investment in R and D, which is a component of aggregate demand, shifting AD out, thus boosting economic growth. Innovation also i
- competition creates lower prices for consumers
- innovation creates better quality products for consumers
how might govts intervene to control monopolies
Price regulation
- can set price controls so that monopolies produce at a socially optimum quantity, reducing the welfare loss to society
- might get monopolies to produce where P=MC
Profit regulation
- cap on profits
Quality standards
- minimum quality standards so that consumers aren’t being exploited
Performance targets
- performance targets ensures that firms are working at a minimum level of productivity, which will benefit consumers
windfall taxes, subsidies,
- taking money away from firms that have been lucky enough to land massive profits
- providing subsidies for firms which are struggling
how might govt intervene to promote competition and contestability
promotion of small business
- providing shelter to smaller businesses to help them grow, by giving them training, grants, more favourable taxes
- smaller businesses with profits under £50k are still paying 19% corporation tax, whereas larger businesses are paying much more
deregulation
- removal of legal barriers to entry to allow firms to join
privatisation
- selling state owned businesses to the private sector to promote competition and efficiency
what is the impact of govt intervention, is it effective or ineffective
Effective:
- monopolies are prevented from charging excessive prices
- consumers benefit from lower prices, better quality and choice
- efficiency is increased through competition and contestability
Ineffective
- large firms may be very powerful politically - e.g., Vodafone managed to get HMRC to lower it tax bill from £7bn to £1bn in 2009-2010
- information asymmetry - govt rarely has all the information, as it is in the firm’s interest to conceal information so that they can continue maximising profits
to what extent are competition and contestability desirable
- lower prices, more choice, better quality products for consumers
- more efficient
- leads to innovation
what are the difficulties inherent with regulation
- informal collusion very difficult to spot
- asymmetric information
- administrative costs of regulation
- may be corruption within regulatory body
examples of intervention
- the European Commission blocked Rynair and Aer Lingus from merging, as they argued that it would have given the two companies monopoly power over some routes, could have exploited consumers
- Qualcomm predatory pricing on their 3D baseband chip set, fined 242 million euros - European Commission
- pharmaceutical companies fined 260 million for collusion, selling their hydrocortisone tablets to the NHS at 10000% inflated price
20 marker: markets dominated by large firms, such as Google, Facebook, Apple and Amazon can deliver huge benefits to consumers. TWE should economists be concerned by highly concentrated markets such as these?
