Government intervention to promote competition

Question 1

What is the aim of a government’s competition policy?

Answer 1

enhance efficiency by promoting competition and protecting consumers

Question 2

What is the key potentive negative from a merger?

Answer 2

reduced competition / potential monopoly, leading to welfare loss by restriction on output and increased price

Question 3

What is the key potential positive from a merger?

Answer 3

economies of scale

Question 4

In the UK, which organisation oversees competition policy?

Answer 4

Competition and Markets Authority (CMA)

Question 5

What are the five main functions of the CMA?

Answer 5

1. investigating mergers that could potentially lead to substantial lessening of competition (SLC)
2. investigating markets to assess suspected competition issues
3. antitrust enforcement by investigating possible breaches of UK or E~U competition law
4. taking action against criminal cartels
5. consumer protection

Question 6

When will the CMA investigate a potential merger?

Answer 6

• combined assets >£70m worldwide, or
• combined UK market share > 25%

Question 7

Which supermarket takeover was investigated in 2003 in UK and what was the outcome?

Answer 7

• Number of UK supermarkets attempted to take over Safeway.
• Only acceptable bid was from Morrisons, as it evened out the balance among larger supermarkets so likely to increase competition.

Question 8

Why was merger of Sainsburys and Asda in 2018 blocked by CMA?

Answer 8

competition expected to reduce as both already had high market share (31% between them, compared to 28% Tesco)

Question 9

What is deemed to be the relevant market in a competition investigation?

Answer 9

market defined so no major substitutes omitted but no non-substitutes included

Question 10

Why did the CMA block the merger of 21st Century Fox and Sky plc?

Answer 10

It would give Rupert Murdoch (owner of 21CF) too much control over UK media.

Question 11

Name four markets with natural monopolies.

Answer 11

railwas
gas supply
electricity generation
water supply

Question 12

What tends to make a market a natural monopoly?

Answer 12

high fixed costs

Question 13

What rule did Ofwat originally apply to water supply companies re price increases?

Answer 13

RPI+k increases allowed, with k set based on estimate of capital investment needed

Question 14

What rule do Ofwat (water) and Ofgem (gas & electric) apply?

Answer 14

RIIO (Revenue using Incentives to deliver Innovation and Outputs), ie incentives to improve quality rather than focus on costs; if don’t meet quality standards then they are fined

Question 15

Why might a government deregulate a market?

Answer 15

to encourage competition and therefore encourage innovation and efficiency

Question 16

Define contracting out.

Answer 16

public sector pays provide firm to provide good or service

Question 17

Define competitive tendering.

Answer 17

process by which public sctor calls for private firms to bid for a contract for provision of good or service

Question 18

What does PPP stand for?

Answer 18

public-private partnership, ie arrangement where a service or venture is funded and operated through partnership of government and private sector

Question 19

What is PFI or PF2?

Answer 19

Private Finance Initiative, ie arrangement by which private sector designs, builds, finances and operates an asset and associated services for public sector in return for annual payment linked to its performance. (PF2 is later version with different process.)

Question 20

What is privatisation?

Answer 20

transfer of publicly owned enterprise into private ownership

Question 21

What is nationalisation?

Answer 21

transfer of privately owned enterprise into public ownership

Question 22

What is regulatory capture?

Answer 22

when regulator comes to represent the industry’s intersts rather than regulating it