Competition Policy and Privatisation

Question 1

Main reasons why government may be concerened with competition, monopolies and mergers in industries

Answer 1

• Ant-competitive agreements, for example collusion, situations where firms dont actively compete with one another, resricting competitive measures
• Abuse of dominant market position, situations where firms have such a large degree of market power that it can ‘harm’ consumers.
• CMA investigates and regulates mergers in order to prevent them from reducing competition too much.

Question 2

Policies to increase competition

Answer 2

• CMA regulation
• Deregulation
• Government assistance

Question 3

Policies to increase competition - CMA and ACA

Answer 3

• Policies to correct collusive beahaviour such (MORE ON THIS IS OLIGOPOLY).
• Both UK and EU competition law prohibits agreements between firms which prevent or restrict competition in a market.
• The CMA, or the competition and markets authority, is a indpendant department that has the responsibility for carrying out investigations into Anti-competitive agreements. Enforcing competition law.

Question 4

What is important to consumers?

Answer 4

Price
Quality
Choice

Question 5

How can the CMA prevent ACA?

Answer 5

• Firms engaged in activities can face fines of up to 10% of global turnover.
• Anti-competitive restrictions become void and uneforcebale.
• They expose themselves to actions for damages from consumers, customers and other competitors.
• Individuals in the UK can face being disqualified from acting as company directors as well as risk from prosecution.

ESSAY E.G
The UK Competition and Markets Authority (CMA) has imposed fines of more than £260m against pharmaceutical companies for breaching competition law linked to the supply of hydrocortisone tablets to the National Health Service. It was founded that ACA allowed them to sell the drug at a 10,000% inflated price. The CMA discovered the pharma companies bought off potential rival firms to prevent them from competing with their versions.

Question 6

Evaluation of CMAs role of protecting ACA

Answer 6

• How much power does the CMA have and is the CMA effective at preventing Anti-competitive agreements from happening.
• For some firms, are anti competitive agreements worth the fine they will recieve, furthermore price leadership and tasset agreements are much harder to prove.
• If profits for the firms fall due to high fines and the CMA preventing them from increasing profits, then there will be lower dynamic efficiency, this will result in lower quality products. Productivity in the long run may also not improve, possibly preventing the oppurtunity to lower costs for consumers.

Question 7

Policies to increase competition - CMA and other regulatory bodies and Dominant market position

Answer 7

• Both EU and UK competition law prohibits firms with market power from unfairly exploiting their strong market positions, this is know as ‘abuse’ of dominance.
• To be in a position of dominance a firm must have the ability to act indpendantly from other competitors, customers and consumers, although this requires complex economic assesment it is widely accepted that 50% or greater would be regarded as dominant although some cases have found dominant firms with as low as 40%.
• This includes, predatory, limit or discriminatory pricing, refusal to suppy or provide access to essential facilities, imposing unfair trading terms such as exclusivitiy.

Question 8

How can the CMA and other regulators prevent absuse of dominant market position?

Answer 8

• Firms that abuse dominant market position can face fines of up to 10% of global turnover.
• Firms leave themself exposed to actions from third parties who can show they have suffered as a result form this anti competitive beahviour.
• Individuals can be disqualified from being a company director.

ESSAY E.G
Qualcomm were fined 242 million euros for selling its 3G baseband chipsets below cost to force a rival out of the market, this is called predatory pricing.

Question 9

OFWAT and prevention of dominant market position

Answer 9

• Regulates the water sector.
• OFWAT aims to promote competition and protect the interests of the consumers, ensure water companies carry out its functions. Thames water has a very influential monoply over the london area.
• They can do this via setting maximum prices so that consumers are not over charged for the product and firms dont abuse their dominant market position.
  DIAGRAM
• Reduce the welfare loss, lower prices for consumers, increase welfare and consumer surplus.

Question 10

CMA and Mergers

Answer 10

• The CMA investigates mergers in order to make sure they dont reduce competition and are negatively effecting consumers.
• The CMA found that UK shoppers would be worse off if Sainsburies and ASDA were to merge, they found that it would cause price rises, reduction in quality and range. This is because it would substantialy reduce competition on a local and national level. The CMA Blocked the merger.

Question 11

Evaluation of the CMA blocking mergers

Answer 11

• A merger would allow firms to share potential suppliers, possibly reducing costs, furthermore they will be able to take advatnage of economies of scale. This could result in lower prices for consumers as their costs have fallen.
• Merging will mean that they will have access to a greater number of consumers and possibly be able to lower their costs. Revenue and profits will likely increase. This could result in dynamic efficiency and therefore better quality products for consumers.

Question 12

Policy to increase competition - Deregulation

Answer 12

• Deregulation involves removing governmetn legilsation and laws in a particular market, in this case removing barriers to competition.
• More specifically this could mean that the government reduces regultations and legal frameworks that act as a barrier to entry for new firms, this will make the market more contestable.
• This could result in a greater number of firms in the market. This could lead to lower prices for consumers, greater invesment as there is greater incentive for dynamic efficiency and therefore better quality.
• Consumers also now have greater choice which means their prefferences are better met.

Question 13

Evaluation of deregulation as a policy to increase competition

Answer 13

• The inustry could have very high start up costs, particulary in a natural monoply, meaning barriers to entry are very high. Deregulation wont in this case reduce the barriers to entry, as the high start up costs remain.
• If there is already a very large and dominant firm that has monopoly power, brand loyalty and the economies of scale that they possess will act as a barrier to entry, even if there is deregulation.

Question 14

Policy to increase competition - Government assistance

Answer 14

• The government can directly subsidise companies to enter a market and reduce their costs. This incentivises more firms to enter the market.
• When they do enter the market they can compete with large incumbent firms and their economies of scale. Subsidies will help the new firms to also lower their costs.
• This will lead to a greater number of firms in the market, resulting in greater choice, more dynamic efficieny, more incentives to imrpove quality and a fall in the price level.

Question 15

Privatisation

Answer 15

Privatisation is the sale of state owned assets to the private sector. It may also involve the contracting out of services to the private sector.

Question 16

Benefits of privatisation

Answer 16

1. To improve efficiency
2. To improve the quality and range of services through dynamic efficiency
3. Lower prices, due to lower costs and competitive pressures.
4. Lack of potential state interference and pressure from shareholders
5. Raise short term revenue for the government.
6. Political motives, governments are more likely to be ‘short termist’ in their attitudes towards privatisation due to the nature of election cycles.

Question 17

Benefits of privatisation - To improve efficiency

Answer 17

• Private companies now have a incentive to be more efficient and cut costs, this is because they are profit motivated and are more likely to want lower costs in order to maximise their profits.
• There may be greater DYNAMIC EFFICIENCY in the pursuit of longer-term profits.
• Reduced X-INEFFICIENCY, as there is more emphasisi on cutting costs and reduce wasteful spending or ‘organisational slack’.
• Improved ALLOCATIVE EFFICIENCY, only if more competitive pressures emerge as a result.

Question 18

Benefits of privatisation - Increased competition

Answer 18

State-owned enterprises have a monopoly and are unaffected by market competition, privatisation therefore allows the private sector to participate more actively and encourage competition.

• This can be transeffered into lower prices for consumers, greater incentives to increase product quality and lower costs in the long run (further driving down prices).

Question 19

Benefits of privatisation - Lack of state interfference and pressure from shareholders

Answer 19

• It is arguable that governments make poor economic managers and are motivated by political pressures. For example a state enterprise may employ a surplus of workers, which is ineffient and the government may be reluctant to get rid of workers because of negative publciity.
• It can also be argued that privatefirms have pressure from shareholders to perform efficiently, if a firm is inneficient it could be subject to a takeover.

Question 20

Benefits of privatisation - Short term view

Answer 20

• A government may think towars the next election and therefore privatisation may raise short term funds for the government that can be reinvested.
• Privatisation can imrpove the governments image.

Question 21

Evaluation of privatisation - Depends on what kind of competitive measures the newly privatised sector will face.

Answer 21

• Are their low barriers to entry in this sector, and is it easy for new firms to enter the market and add pressures to the newly privatised firms.
• The privatisation could result in one entitiy in the market, this could mean that monoply issues arise, such as higher prices, less inovation and inefficiency.
• The government is better than a monopoly as they are not motivated by extracting maximum surplus from consumers. The state is more likely to act in the public interest.

Question 22

Evaluation of privatisation - Depends on how well regulated the sector is post privatisation?

Answer 22

• Is their a specific regulator that understands the industry such as OFWAT and OFGEM.
• Does the goverment have sufficient resources to ensure that the regulators are able to enforce the regulations effectively.

Question 23

Evaluation of privatisation - Long term loses

Answer 23

Although the government will gain a short term inflow of money they will lose out in the longer term as the income flows from the sector will be reduced. DEPENDS on how profitable the sector was for the government.

Question 24

Evaluation of privatisation - Depends on the industry

Answer 24

• British airways for example was a success story due to the new technolgies emerging from the sector and the huge amount of international and domestic competitive pressures that have arisen.
• Water companies such as Thams water has arguably been less succesful due to the natural monoply issues, issues with regulation and under investment by the firm as a result. Water companies have been able to create local monoplies with very low competitive measures.