Government Intervention

Question 1

Government intervention to control mergers

Answer 1

The CMA can stop the merger/takeover altogether, or allow it to go through on certain conditions. CMA Must regulate any that would take market share over 25%.

Sainsbury’s-Asda merger blocked in 2019

For example a merger of two supermarkets might be allowed provided that some stores are sold off to rivals to ensure that there is still sufficient competition.

Question 2

Government intervention to control monopolies

4

Answer 2

Price regulation

profit regulation

quality standards

performance targets

Question 3

Price Regulation U

Answer 3

Max Price can be used
Insert Diagram
This is one of the ways the gov. has regulated the privatised monopolies, such as gas, electricity. Max price can be set at the point where it is equal to the firms MC, this will result in lower prices for the consumer

Question 4

Profit Regulation

Answer 4

Limit amount of profit they are allowed to make.
Issue is that firms could over-invest in capital in order to increase amount of profit they are allowed to make (its a percentage of capital employed)
Also little incentive to increase efficiency as profits cannot increase –> X-Inefficiency
Regulatory Capture –> regulator have little knowledge of the business, thus overgenerous in profit allowance as firm has incentive to overstate level of risk and costs

Question 5

Quality Standards & Performance Targets

Answer 5

Performance & quality targets e.g. train companies are set targets for punctuality, electric providers have time limits for restoring power when supply is interrupted

Not always easy to monitor and enforce - Train companies may blame delays on network rail

Question 6

Intervention to promote competition & contestability

4

Answer 6

• promotion of small business
• deregulation
• competitive tendering for government contracts
• privatisation

Question 7

Help for small businesses

Answer 7

Small businesses can be helped in a number of ways, such as: exemptions from paying VAT; lower rates of corporation tax; grants for training or investment; government guarantees of bank loans

Question 8

competitive tendering

Answer 8

Contracting out e.g. G4S
Aims to create a competitive market instead of a public sector monopoly, leading to more efficiency

Scandals such as Carillion bankruptcy in 2018, leaving hospitals unfinished

Question 9

Government intervention to protect suppliers

3

Answer 9

making some practices illegal – For example, preventing buyers from imposing unfair contracts on suppliers.

giving suppliers the right to charge interest on firms that delay payment – This is often a major problem for small businesses that depend on large customers.

appointing an independent regulator - The regulator can set up a code of practice for how big businesses treat their suppliers, and fine firms that don’t stick to it

Question 10

Government intervention to protect employees

Answer 10

minimum wage laws;

obligation on firms to provide a pension;

regulation of maximum working hours and paid holiday entitlement;
minimum redundancy pay;

the right to join a trade union;

legally binding employment contracts

Question 11

Big CMA Cases

Answer 11

JD & Footasylum merger - ‘lessening on competition nationally’

Sainsbury’s & Asda - Would have given them over 30% market share, ‘feared it was raise prices’

Question 12

Regulatory Capture

3

Answer 12

• Regulators become friendly with the firms they are dealing with
• Asymmetric information
• Possibility of corruption