Competition policy - government intervention (micro)

Question 1

What is UK competition policy?

Answer 1

• The UK’s competition policy aims to reduce the amount of anti-competitive behaviour in markets and protect consumers

Question 2

Who undertakes UK competition policy?

Answer 2

Undertaken by the Competition and Market Authority (CMA)

Question 3

Give an example of an anti-competitive strategy that governments want to avoid?

Answer 3

• Monopolies formed through mergers or agreements can often be inefficient.
• This is because they restrict quantity and agree to raise price to a level that isn’t allocatively efficient

Question 4

How can the government prevent monopolies forming?

Answer 4

• by blocking mergers.
• The UK government investigates all mergers which will result in a firm having greater than 25% market share (a legal monopoly)

Question 5

Give examples of anti-competitive sources UK competition policy looks for?

Answer 5

• Monopolies
• Mergers
• Cartels
• Financial support

Question 6

What is the regulatory body of the communications industry?

Answer 6

OFCOM - ensuring fair play within it

Question 7

What is the CMA responsible for monitoring?

Answer 7

Merger and acquisition activity in the UK

Question 8

What gov policies could increase competition.

Answer 8

• price ceiling - restricts the amount of firms that can raise their prices- reducing the potential losses in efficiency
• or could tax excessive profits or set performance targets for monopolies.

Question 9

What can CMA do to mergers if they think it will have excessive monopoly power?

Answer 9

They can block the deal.

Question 10

What 3 things can the CMA do with their power?

Answer 10

• They can force the break up of firms who are too powerful
• They can force a monopoly to split or sell assets to increase competition
• They rarely break up firms who have gained power through organic growth (internal growth).

Question 11

Why do governments encourage competition?

Answer 11

• Leads to lower price
• Higher quality of goods and services
• all that leads to increase in welfare

Question 12

How does more competition lead to technological advancements?

Answer 12

• To stand out firms develop and use more advanced technology.
• Investment in technology leads to positive spill over effects as the technology is shared through an economy.
• Each technological breakthrough pushes society further forward and leads to improved welfare.

Question 13

How do lower prices lead to increased welfare?

Answer 13

lower prices results in households being able to afford to consume more leading to improved welfare.

Question 14

Give an example of how competition has lead to increase in quality?

Answer 14

Video game industry

• competition has created high quality games to be successful.
• The technology in gaming has improved rapidly.

Question 15

Give 2 examples of deregulation laws to reduce monopoly power.

Answer 15

• Preventing mergers/acquisitions that create monopoly
• Forced sales of assets e.g. BAA and airports in the UK

Question 16

Give 2 examples of how competition policy has caused businesses to go private? (privatisation)

Answer 16

• Stock market floatation of the Royal mail
• Part-privatisation of Network Rail similar to the sell-off of HS1 - the high-speed link that connects London’s St Pancras to the Channel tunnel, on a long-term concession

Question 17

What tough anti-competitive behaviour laws have been implemented?

Answer 17

• Strong laws and penalties against proven cases of price fixing or collusion that involves market sharing.
• Companies breaching EU and UK competition rules risk hefty fines of up to 10 percent of global turnover - senior executives can be jailed.

Question 18

How can countries improve competition - competition policy (increase competition).

Answer 18

• A reduction in import tariffs encourages cheaper products from over seas.
• Increasing or eliminating import quotas.
• Allowing new countries into the European Union Single market increase contestability.

Question 19

Give an example in the UK where a merger was blocked by the CMA?

Answer 19

Microsoft £55 million takeover of activision was blocked

Question 20

What is the CMA as it isn’t part of the government? (it works for the government)

Answer 20

Quango (semi -public) - Quasi-autonomous

Question 21

What are the potential benefits of successful takeovers?

Answer 21

• Higher market share
• Economies of scale
• Revenue synergies (creating more revenue than if businesses ran seperately)

Question 22

Give an advantage of competitive markets

Answer 22

• competition acts as an incentive for improvements in quality of products
• Competition drives down consumer prices

Question 23

Give an advantage of a non-competitive market

Answer 23

• Larger firms may be able to locate in less profitable regions - improving regional inequality
• Large profits can lead to increased spending on R and D