Governments Controlling Monopolies Flashcards
What do the CMA do
regulate the market by encouraging competition to ensure efficiency and keep prices low for consumers
What are the four things the CMA will look out for in the market
- 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
OFWAT
Water
OFCOM
Communications
OFGEM
Gas and Electricity
What merger created the worlds third largest food company in 2015
Heinz and kraft
When will mergers be investigated
resulting in 25% market share or 70million combined turnover
Whats the problem with CMA
- Prone to regulatory capture
- Doesn’t investigate all mergers
- Is selective - allows Tescos and booker but blocks Ryanair and aerlingus
Methods to control Monopolies
- Price regulation
- Profit regulation
- Quality Standards
- Performance Targets
- Subsidies
- Self regulation
- Breaking them up
What is the price control used on monopolies
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
What is the aim of RPI - X price regulation
Encourages monopolies to be efficient as it means they can gain more profit, also ensures lower prices for consumers
What is another price regulation that can be put on monopolies
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
What is the problem with RPI - X
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
RPI - X + K
Accounts for the level of investment needed for the efficiency improvements
What is the primary form of profit regulation
Windfall Taxes
Windfall tax
Tax put on to monopoly firms supernormal profits if the government believes these have been made unfairly or by chance
Where is the windfall tax put on the graph
horizontal line put somewhere in normal profit, the top half is governments tax revenue then the bottom half is SNP kept by the firm
Problems with windfall taxes
- 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
Why are quality standards imposed on monopolies
Lack of competition means quality of monopolies goods will drop, so regulators can put in standards to stop customers getting exploited
How are performance targets imposed on monopolies
- 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
Why are performance targets imposed on monopolies
To help maintain competition and ensure customers aren’t exploited
Problems with performance targets
- Requires political will
- greenwashing
- punishment for not meeting not harsh enough
Why will governments break up monopolies
Split them up to increase competition leading to better quality goods and lower prices
How do governments use subsidies to control monopolies
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
How can monopolies self regulate
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
CMA
Competition Markets Authority
