Competiton Policy

Question 1

contestable market d

Answer 1

where there is free entry and exit of other firms

Question 2

competition policy d

Answer 2

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

Question 3

restrictive trade practices d

Answer 3

methods used by firms to reduce competition in a market

Question 4

competitive commission d

Answer 4

a government organisation responsible for implementing policy in relation to monopolies

Question 5

what are the four main strands of current competition policy

Answer 5

monopolies
mergers
restrictive trade practices
the promotion of new competition

Question 6

dominant market position d

Answer 6

where a firm, or group of firms working together, have a market share of 40%

Question 7

when and in what act was the abuse of a dominant market position outlawed

Answer 7

the competition act 1998

Question 8

what are the two government agencies responsible for implementing policy concerning monopolies

Answer 8

office of fair trading (OFT) and the Competition Commission (CC)

Question 9

what is the office of fair trade

Answer 9

a government organisation responsible for implementing aspects of competition policy

Question 10

what indicators does the OFT use to monitor the UK economy for evidence of monopoly abuse

Answer 10

concentration ratios
evidence of price discrimination and leadership
merger activity
profit margins

Question 11

what happens if the OGT discovers evidence of exploitation of a dominant market

Answer 11

refers the firm(s) to the CC who have legal powers to order firms to cease particular trading practices

Question 12

what are the things the CC can do to deal with the problem of monopoly

Answer 12

compulsory breaking up
price controls
taxes on 'excess' profits (windfall tax)
nationalisation
privatisation
deregulation

Question 13

what does contestable market theory say

Answer 13

monopolies are defined by how easy or difficult it is for new firms to enter (not vital to have actual competition, the threat of entry is enough)

Question 14

who surveys merger activity

Answer 14

the OFT

Question 15

what happens if the OFT finds a suspicious merger

Answer 15

it is passed on to the CC for investigation

Question 16

what are examples of restrictive trade practices

Answer 16

charging discriminatory prices
resale price maintenance (manufacturers fix the price that retailers sell at)
refusal to supply particular outlets
‘full-line forcing’

Question 17

examples of privatisation

Answer 17

British gas, British telecom

Question 18

what are the other types of privatisation

Answer 18

deregulation (bus services)
state of local authority assets
competitive tendering of services (introducing competition, franchising and licensing (regional rail services))

Question 19

what are the advantages of privatisation

Answer 19

promoting efficiency
raises revenue for government
promoting competition
reduce size of public sector

Question 20

what are the disadvantages of privatisation

Answer 20

worse allocation of resources
externalities may be ignored
closure of loss-making services (suburban bus routes)
short-termism

Question 21

public-private partnerships (PPPs) d

Answer 21

partnerships between the private and public sectors to provide public services

Question 22

regulation d

Answer 22

setting rules and controls that restrict market freedom

Question 23

examples of public-private partnerships

Answer 23

street cleaning, prisons, schools

Question 24

example of self-regulation

Answer 24

British Medical Association

Question 25

regulatory capture d

Answer 25

where agencies set up to regulate industries or firms can be ‘captured’, or influenced by the firms they are intended to oversee

Question 26

example of deregulation

Answer 26

access to BT’s distribution infrastructure given to competitors, mail services

Question 27

what does free exit assume

Answer 27

there are no sunk costs and that when the firm leaves the industry it can fully recover all of its previous investment

Question 28

the lower the ______ _______ of entry, the more contestable the market

Answer 28

sunk costs

Question 29

what is a good example of a contestable market

Answer 29

the bus industry

Question 30

what is the point of productive efficiency

Answer 30

lowest point on ATC where AC = MC

Question 31

for contestable markets when can potential entry be as effective as actual entry

Answer 31

if entry can be easily accomplished, if existing firms take potential entry into account when making price and output decisions

Question 32

what are the assumptions of contestable market theory

Answer 32

low barriers to entry
no-one has significant share of marketplace
no collusion
firms are short run profit maximisers
perfect knowledge
homogeneous

Question 33

how had the bus industry become less contestable

Answer 33

the industry has now become a six-firm oligopoly which has created entry barriers

Question 34

what are the criticisms of contestable market theory

Answer 34

limited application
level of technical knowledge required to enter industry high
incumbents protect themselves with patents
ignores potential aggressive actions of incumbents who may make it known