Governments Controlling Monopolies

Question 1

What do the CMA do

Answer 1

regulate the market by encouraging competition to ensure efficiency and keep prices low for consumers

Question 2

What are the four things the CMA will look out for in the market

Answer 2

• Stop mergers that form monopoly power as these aren’t beneficial to efficiency
• Stop cartels and collusive oligopolies
• Helping with privatisation to fully open up markets to competition
• Regulate unfair financial support to firms from European governments

Question 3

OFWAT

Answer 3

Water

Question 4

OFCOM

Answer 4

Communications

Question 5

OFGEM

Answer 5

Gas and Electricity

Question 6

What merger created the worlds third largest food company in 2015

Answer 6

Heinz and kraft

Question 7

When will mergers be investigated

Answer 7

resulting in 25% market share or 70million combined turnover

Question 8

Whats the problem with CMA

Answer 8

• Prone to regulatory capture
• Doesn’t investigate all mergers
• Is selective - allows Tescos and booker but blocks Ryanair and aerlingus

Question 9

Methods to control Monopolies

Answer 9

• Price regulation
• Profit regulation
• Quality Standards
• Performance Targets
• Subsidies
• Self regulation
• Breaking them up

Question 10

What is the price control used on monopolies

Answer 10

RPI - X in which X is the expected efficiency gains of the firm so this ensures they are passed onto consumer when increasing prices
–> forces firms to charge under profit maximising

Question 11

What is the aim of RPI - X price regulation

Answer 11

Encourages monopolies to be efficient as it means they can gain more profit, also ensures lower prices for consumers

Question 12

What is another price regulation that can be put on monopolies

Answer 12

A maximum price can be put at the allocative efficient point to maximise social welfare
–> Difficult to know where this is and sometimes it will be below cost

Question 13

What is the problem with RPI - X

Answer 13

Difficult to know where to set X because of rapid technology improvements efficiency is always changing, efficiency information is also imperfect as it comes from the firm

Question 14

RPI - X + K

Answer 14

Accounts for the level of investment needed for the efficiency improvements

Question 15

What is the primary form of profit regulation

Answer 15

Windfall Taxes

Question 16

Windfall tax

Answer 16

Tax put on to monopoly firms supernormal profits if the government believes these have been made unfairly or by chance

Question 17

Where is the windfall tax put on the graph

Answer 17

horizontal line put somewhere in normal profit, the top half is governments tax revenue then the bottom half is SNP kept by the firm

Question 18

Problems with windfall taxes

Answer 18

• Discourages investment as it reduces retained profit
• Fall in dividends to shareholders which reduces share price thus reducing firm capital
• Doesn’t benefit consumer if revenue isn’t distributed well by government
• Normally retrospective which is unfair

Question 19

Why are quality standards imposed on monopolies

Answer 19

Lack of competition means quality of monopolies goods will drop, so regulators can put in standards to stop customers getting exploited

Question 20

How are performance targets imposed on monopolies

Answer 20

• Certain standard of customer service
• targets for amount of customers
• Standards for efficiency (leakages in water companies)
• Environmental standards (ESG)
• Punctuality standards

—–> If these aren’t abided by then regulators can impose fines

Question 21

Why are performance targets imposed on monopolies

Answer 21

To help maintain competition and ensure customers aren’t exploited

Question 22

Problems with performance targets

Answer 22

• Requires political will
• greenwashing
• punishment for not meeting not harsh enough

Question 23

Why will governments break up monopolies

Answer 23

Split them up to increase competition leading to better quality goods and lower prices

Question 24

How do governments use subsidies to control monopolies

Answer 24

Subsidise monopolies so the they produce at p=mc whilst covering their costs, giving private sector monopolies is unpopular usually only happens in natural monopolies

Question 25

How can monopolies self regulate

Answer 25

Monopolists propose to regulate themselves by setting codes of practice which saves governments legislating and costs
—> They won’t regulate themselves to the extent they need

Question 26

CMA

Answer 26

Competition Markets Authority