Competition policy and contestable markets Flashcards
What are incumbents?
The existing firms in the industry
What are contestable markets?
Where there is free entry and free exit of other firms
What is competition policy?
Methods that the UK government and the EU authorities use in order to make markets more efficient
What are the strands of CC? (4)
Monopolies
Mergers
Restrictive trade practices
The promotion of new competition
What are restrictive trade practices?
Methods used by firms to reduce competition in a market
Who are the competition commission?
A government organisation responsible for implementing policy in relation to monopolies
What is a dominant market position?
Where a firm, or groups of firms, have a market share of 40%
What are the objections of a dominant market position? (3)
Productive and allocative inefficiency
X-inefficiency
Who are the office of fair trading?
A government organisation responsible for implementing aspects of competition policy
Who are the department of trade and industry?
The government department responsible for British industry
What is public interest?
A term used broadly to cover the public’s right not to be exploited by firms abusing monopoly power
What are the approaches available for the CC to deal with the problem of a monopoly? (6) (CPTNPD)
Compulsory breaking up Price controls Tax on excessive profits Nationalisation Privatisation Deregulation
What is nationalisation?
State control of firms
What is privatisation?
Sales of government owned assets the the private sector
What is deregulation?
The process of removing government controls from markets
Why is nationalisation supported? (2)
Economies of scale = lower costs
No profit motive
What is a natural monopoly?
A firms that can gain continuous economies of scale and where it i thus uneconomic for more than one firm to supply the market
What are the advantages for privatisation? (3)
Promotes efficiency
Raises revenue for government
Promotes competition
How does privatisation promote efficiency?
Profit motive = incentive to reduce costs = more dynamic efficiency
How does privatisation promote competition?
Breaks up monopolies
How does privatisation raise revenue for the government?
Selling former nationalised assets provides a short term source of revenue
What are the disadvantages of privatisation? (2)
Worse allocation of resources, produce at MC=MR
Externalities
What is a public-private partnership? (PPP)
Partnerships between the private and public sectors to provide public services
What is a private finance initiative? (PFI)
A form of public-private partnership in which private sector firms undertake the bulk of the work
What is an advantage of a PFI?
The private sector partners may have a greater expertise in project management
What is regulation?
Setting rules and controls that restrict market freedom
What is the aim regulation?
To try to achieve the social optimum level of production and consumption
How does deregulation promote competition and market contestability?
Through the removal of barriers to entry
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
What does free entry assume?
All firms have access to the same technology, thus have the same cost curves
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
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
What is a benefit of a contestable market?
Reduces the likelihood of government failure
What are the criticisms of a contestable market? (2)
The level of technical knowledge
Incumbents protect themselves by taking out patent
