Essays

Question 1

Factors suggesting lower contestability

Answer 1

• increased barriers to entry/exit
• limit pricing being used
• economies of scale
• an increase in concentration ratio
• price fixing or collusion increasing
• dynamic efficiency

Question 2

Evaluation of factors lowering contestability

Answer 2

• collusion is illegal and regulators can stop this
• lack of profitability can suggest an industry is contestable
• budget, cost-efficient firms may be emerging
• diseconomies of scale may be occuring

Question 3

Points for how regulation can increase economic efficiency

Answer 3

• price capping e.g. RPI-X can incentivise productive efficiency as they may need to cut costs
• likely to improve allocative efficiency as prices become lower
• economies of scale

Question 4

Why regulation may not improve efficiency

Answer 4

• regulatory capture e.g. bribery, revolving door, familiarity
• difficult to know where P=MC (imperfect information)
• DoS
• firms may lose best managers if pay is capped