Competition policy and contestable markets Flashcards

1
Q

What are incumbents?

A

The existing firms in the industry

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2
Q

What are contestable markets?

A

Where there is free entry and free exit of other firms

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3
Q

What is competition policy?

A

Methods that the UK government and the EU authorities use in order to make markets more efficient

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4
Q

What are the strands of CC? (4)

A

Monopolies
Mergers
Restrictive trade practices
The promotion of new competition

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5
Q

What are restrictive trade practices?

A

Methods used by firms to reduce competition in a market

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6
Q

Who are the competition commission?

A

A government organisation responsible for implementing policy in relation to monopolies

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7
Q

What is a dominant market position?

A

Where a firm, or groups of firms, have a market share of 40%

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8
Q

What are the objections of a dominant market position? (3)

A

Productive and allocative inefficiency

X-inefficiency

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9
Q

Who are the office of fair trading?

A

A government organisation responsible for implementing aspects of competition policy

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10
Q

Who are the department of trade and industry?

A

The government department responsible for British industry

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11
Q

What is public interest?

A

A term used broadly to cover the public’s right not to be exploited by firms abusing monopoly power

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12
Q

What are the approaches available for the CC to deal with the problem of a monopoly? (6) (CPTNPD)

A
Compulsory breaking up
Price controls
Tax on excessive profits
Nationalisation 
Privatisation 
Deregulation
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13
Q

What is nationalisation?

A

State control of firms

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14
Q

What is privatisation?

A

Sales of government owned assets the the private sector

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15
Q

What is deregulation?

A

The process of removing government controls from markets

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16
Q

Why is nationalisation supported? (2)

A

Economies of scale = lower costs

No profit motive

17
Q

What is a natural monopoly?

A

A firms that can gain continuous economies of scale and where it i thus uneconomic for more than one firm to supply the market

18
Q

What are the advantages for privatisation? (3)

A

Promotes efficiency
Raises revenue for government
Promotes competition

19
Q

How does privatisation promote efficiency?

A

Profit motive = incentive to reduce costs = more dynamic efficiency

20
Q

How does privatisation promote competition?

A

Breaks up monopolies

21
Q

How does privatisation raise revenue for the government?

A

Selling former nationalised assets provides a short term source of revenue

22
Q

What are the disadvantages of privatisation? (2)

A

Worse allocation of resources, produce at MC=MR

Externalities

23
Q

What is a public-private partnership? (PPP)

A

Partnerships between the private and public sectors to provide public services

24
Q

What is a private finance initiative? (PFI)

A

A form of public-private partnership in which private sector firms undertake the bulk of the work

25
What is an advantage of a PFI?
The private sector partners may have a greater expertise in project management
26
What is regulation?
Setting rules and controls that restrict market freedom
27
What is the aim regulation?
To try to achieve the social optimum level of production and consumption
28
How does deregulation promote competition and market contestability?
Through the removal of barriers to entry
29
What is regulatory capture?
Where agencies set up to regulate industries or firms, can be captured or influenced by the firms they are intended to oversee
30
What does free entry assume?
All firms have access to the same technology, thus have the same cost curves
31
What is hit and run entry?
Where new firms enter the industry, cream off some of the supernormal profits of the incumbents and then exit
32
What are the assumptions of a contestable market? (6) (FNFSPH)
``` Freedom of entry and exit No one firm has a high market share Firms compete Short run profit maximisation MC=MR Perfect knowledge Homogeneous products ```
33
What is a benefit of a contestable market?
Reduces the likelihood of government failure
34
What are the criticisms of a contestable market? (2)
The level of technical knowledge | Incumbents protect themselves by taking out patent