government intervention 3.6.1 Flashcards
Gov intervention to control mergers
-CMA considers whether a merger will create a substantial lessening of competition (SLC)
-Potential benefits must be greater than the cost
-Will be investigated if total market share greater than 25%
-Combined turover is greater than £70 million
-Prevent exploitation of customers by:
-raising price
-offering poorer quality
-reducing choice
-Tescos takeover oof booker approved by CMA - impact of competition not too high - hypercompetitive industry
-European commission blocked merger of ryanair and aerlingus in 2010 - would control more than 80% of flights from ireland
CMA
-Promote competition for consumer benefit
-investigate breaches of competiton law
-bring cases agaisnt cartels
-enforce consumer protection law
-financial penalties
-force actions to be reversed
-prevent mergers taking place
-CMA suffers from regulatory capture
-assymetric/imperfect info
Controlling monopolies
-firms often exploit dominant market position to stifle competition
-anti-competitive
-allocatively and productively inefficient
Gov intervention to control monopolies:
price regulation
-Regulators set price controls - below profit maximising price
-used to regulate several privatised utilities in the UK
-take into account rate of inflation (RPI)
RPI-X
-X represents expected efficiency gains of firm
-aim is to ensure firms pass on these efficiency gains to consumers
-force firms to look for productivity gains to eliminate built up inefficiency as if they achieve cost savings beyond the assumed X%, they can retain the profits
-used in airport industry
RPI+K
-takes inflation rate and allows addition of factor K
-K accounts for additonal capital spending a firm has agreed with regulator is necessary
-K is different for each firm as dependent on how much is required to maintain and improve quality of service
-If firm raises prices by RPI, not enough SNP will be generated to sustain capital investment
-used by OFWAT
Advantages of price regulation
-Allows firms to keep any profits (deemed reasonable) it makes through improving efficiency
-X and K factors usually in place for reasonable periods - firms can plan ahead - know they won’t be punished for making efficiency gains
-If policies are successful they will reverse price and quantity issues with monopolies
Disadvantages of price regulation
-Difficult to calculate X - information of efficiency gains given by firm - asymmetric info
-Productivity gains may be achieved by a reduction in quality, neglecting long-term investment, allowing maintenace standards to drop
-Regulatory capture - regulator works in favourof producers
-likely to have relations with managers thus be less strict
-best regulators have once worked in the industry - reduces imperfect info
-taxpayers money - costly - opportunity cost or not?
Gov intervention to control monopolies:
profit regulation
-firms can make certain level of profit based on capital stock before remainder of profit is taxed at 100%
AD:
-aims to encourage investment and prevent firms charging a high price
DISAD:
-no incentive to make efficiency gains that increase profits like with price reg - incentive to limit profit if anything
-excess profit is not declared - spent on capital stock - increase amount of profit that can be made
-firms encouraged to overstate pr embark on wasteful spending of captial - asymmetric info
-Being replaced by price/rev caps in US
Gov intervention to control monopolies:
Quality standards
-Monopolies often only produce high quality goods if it is the best way to maximise profits
-CMA can implement quality standards to prevent consumer exploitation - then be monitored
-Political will and understanding necessary to implement
Performance targets
-Introduce yardstick competition
-e.g. punctuality targets for train operating companies
-can compare performance in one region vs another - water
-service can improve and increase gains for consumer
-can cheat system - e.g. extending train journey times, times on the timetable
-Fines and other deterrents must be strong enough to ensure targets are met
-2013-14 - network rail failed to meet targets on long distance sector
promoting competition and contestability: promotion of small businesses
-Give training and grants to new entrepreneurs or firms with high growth potential
-Tax incentives, subsidies, access to finance
-Works as there are now more firms in the market
-Increased innovation and efficiency since new firms are likely to produce new products and incubent firms can no longer be x inefficient
-The red tape challenge aims to decrease regulation particularly for small businesses
promoting competition and contestability: deregulation
-Removal of legal barriers to entry to allow private enterprises to compete
-Reduces costs of production
-Increased efficiency from greater competition as more firms can enter and conduct activities they couldn’t before
-Increased product market flexibility, adaptability
promoting competition and contestability: competitive tendering
-Contract out the provision of a good or service to private companies
-Government will request competitive tenders by drawing up a specification for the g/s then inviting private firms to bid for the contract to deliver it
-The firm offering the lowest price and highest productivity wins the contract subject to quality guarantees
-Minimises costs for gov and ensures efficiency
-Costly and time-consuming method - private sector may not aim to maximise societal welfare in the same way as the government - may cost cut which reduces quality
promoting competition and contestability: privatisation
-Sale of public assets to private investors
-Aim to revitalise inefficient industires but can sometimes lead to higher prices and poorer services
Advantages:
-Better incentives for firms to run efficiently thus achieve improvements in economic welfare
-Firms can invest with greater certainty - no worry of changes after government elections
-Raised gov revenue
Disadvantages:
-Public sector monopoly may be replaced with private sector monopoly which then requires regulation
-Poorer services as there is a profit maximising incentive
Government intervention to protect suppliers and employees: Restrictions on monopsony power
-Monopsonists are able to exploit suppliers by reducing prices
-Gov can pass anti-monopsony laws to make certain practices illegal
-Introduce an independent regulator
-Fines can be put in place for those who exploit their power
-Minimum prices may be introduced for fairness
Government intervention to protect suppliers and employees: Nationalisation
-private sector company is brought under state control
Advantages:
-Natural monopolies are better run by the state as they aim to maximise societal welfare rather than profits
-Gov considers externalities
Disadvantages:
-Principal-agent problem and moral hazard - gov covers losses
-Experience x-inefficiency causing higher prices for consumers - especially if industry becomes a monopoly
Impact of gov intervention on: prices
-Prevent monopolies charging excessive prices which would have resulted in the loss of allocative efficiency
-Make utilities more affordable
-Limiting prices increases efficiency so that they can lower costs and increase profit margins
Impact of gov intervention on: profits
-Impose strict price caps
-Investment is limited
Impact of gov intervention on: efficiency
-Objectives change from profit maximisation to maximising social efficiency
-Competition and contestability promote efficiency which is most common in the free market
-Prevent x-inefficiency by keeping costs low
Impact of gov intervention on: quality
-Ensure firms meet minimum targets which ensures firms focus on increasing societal welfare
-Prevent exploitation of vulnerable groups
-Prevent profit max firms compromising on quality - however private firms may have more knowledge and expertise thus produce products of higher quality
Impact of gov intervention on: choice
-Consumer choice widens since there are more firms competing
-Stringent price ceiling may force some suppliers out of the market reducing quantity supplied and narrowing choice
-Reduced price increases choice for consumers on lower incomes
Limits to gov intervention: regulatory capture
-When regulator acts in interest of the company
-Often meet with firm employees - more empathetic
-Removes impartiality and weakens their ability to regulate
-Large corporations can invest huge amounts into learning how to play the system and gaining support of their regulator
-Regulator likely to have worked in the sector - have personal connections - bias
-Example of gov failure
Impact of gov intervention on: asymmetric info
-Regulators must use info provided by the industries
-May provide inaccurate or limited info to maximise profits - regulators cannot set correct targets/ prices
