Competition Policy - Monopoly (/Monopsony)

Question 1

What are the different ways competition authorities can regulate monopolies to promote more competitive outcomes and thus protect the public interest?

Answer 1

• price regulation
• quality control/performance targets
• profit control/regulation or windfall taxes on profit
• merger policy
• privatisation
• deregulation

Question 2

Price regulation

Answer 2

• RPI-X - reduce the extent to which firms can increase their prices (to improve efficiency)
• RPI+K - allows enough profit to be made to allow capital investment (dynamic eff + increase qual)

Question 3

Price regulation eval

Answer 3

• info issues (where to set level at)
• ^^ cost of regulator - tax payer burden (opp cost?)
• regulatory capture (gov faillure)
• not fair on firms with already low costs

Question 4

Quality control/performance targets eval

Answer 4

• unintended consequences (reduced quality)
• ‘gaming the system’ - e.g train companies increase journey time so no trains appear to be delayed

Question 5

Windfall taxes on profit eval

Answer 5

• worsened monop outcomes due to increase COP (higher prices, lower quan)
• promotes tax evasion/avoidance
• ^^ monopolist under-reporting level of profit
• risk of less innovation (cannot invest new profits) and laziness (no profit motive)

Question 6

Which of these promote competition (market-liberalising)?

Answer 6

• privatisation
• deregulation

Question 7

Profit regulation

Answer 7

when the government takes 100% of a firms’ profits via tax, after they’ve hit a certain profit limit