Government Intervention in Business Flashcards
what do the CMA (competition and markets authority) investigate
-formal cartels
-price fixing
-monopoly power
what can the results of a CMA investigation be
-fines
-prosecution of individuals
-blocking a merger
what are the objectives of the CMA
- increase competition
-penalise anti competitive behaviour
-appoint regulators for natural lacks of competition
examples of mergers blocked by the CMA
-Asda and Sainsbury’s –> to stop price rises and consumer experience falling –> consumer welfare
-Microsoft and Activision –> to stop a lack of innovation
what is a benefit of blocking mergers
protected consumer welfare via keeping prices low and choices high
what are the disadvantages of blocking mergers
-a merger could increase consumer welfare as lower LRAC via economies of scale could mean higher profits and therefore innovation
-investigations can take a long time and create an opportunity cost or the time and money spent
example of when the CMA imposed a fine
£10 million for owners and manufacturers of thyroid tablet
what are the 3 ways governments intervene to control monopolies
- price regulation (RPI - X)
-profit regulation
-quality standards and performance targets
how does price regulation work to control monopolies
-limits the price rises of an industry
-RPI is the annual increase in inflation
-X is the regulators view of potential efficiency savings the firm can make
how does profit regulation work as a way to control monopolies
if overall profits are deemed to high the regulator can force the firm to cut its prices or recommend the gov imposes a windfall tax
how do quality standards and performance targets control monopolies
firms can be fined if the standard falls below a certain level
what are the problems of government intervention to control monopolies
-regulatory capture –> regulator becomes sympathetic to firms
-asymmetric info –> no incentive for firms to be truthful when they know more than the regulator
-fines may not be large enough to disincentivise poor standards or performance
what are the 5 ways governments can intervene to promote competition and contestability
-promotion of small businesses
-reducing barriers to entry
-deregulation
-competitive tendering for gov contracts
-privatisation
how can the promotion of small businesses promote competition and contestability
-subsidies and easier access to finance makes it easier to enter an industry
-increased supply –> lower prices –> increased choice –> increased consumer welfare
how do reducing barriers to entry promote competition and contestability
-reducing the length of patents encourages new firms to enter
how does deregulation promote competition and contestability
-easier for new firms to enter –> more competition –> lower prices –> more choice –> increased consumer welfare
how does competitive tendering for gov contracts promote competition and contestability
-bidding for the right to provide a service (e.g a school canteen) means that the contract is given to the firm offering best value for consumers
how does privatisation promote competition and contestability
firms will profit maximise leading to greater efficiencies and increased consumer welfare
what are the problems with
-the promotion of small businesses
-reducing barriers to entry
-competitive tendering
-privatisation
as a way to promote competition and contestability
-subsidies could be wasted if given to inefficient start ups
-reducing patent lengths may reduce incentive for innovation
-competitive tendering may mean firms only bid for profitable services e.g a bus route in city vs in rural area
-privatisation often occurs for natural monopolies so the lack of competition and inelastic demand means they can charge high prices
what are the 2 ways government intervene to protect suppliers and employees
-restrictions on monopsony power of firms
-nationalisation
how do restrictions on monopsony power of firms help to protect suppliers and employees
-CMA investigations mean they can fine guilty firms e.g ASDA, Tesco and Sainsbury’s for exploiting dairy farmers
how does nationalisation help to protect suppliers and employees
-protects jobs
-could increase consumer behaviour
e.g Northern Rock (2007)
why is government intervention to protect suppliers and employees not always effective
-fines don’t compensate the suppliers effected
-fines may not be large enough
-nationalised firms have less incentive to be efficient with costs and to innovate so could lead to decreased consumer welfare
-nationalisation is very expensive so creates an opportunity cost
