Lecture 10 - Competition Policy And Regulation Flashcards
What is competition policy
It aims at ensuring that competition in the marketplace is not restricted in a way that is detrimental to society
- Government Measures directly affecting both firm behaviour and industrial structure
Why do we need competition policy
Because un-monitored firms may resort to actions that increase their profits, but harm society
Examples:
- Collusion
- Mergers which lessen competition
- Predatory behaviour
A competition policy should include both what?
- Economic policies adopted by government, that enhance competition in local and national markets
- Competition law designed to stop anti-competitive business practices
What does competition policy aim to do
- Promote competition
- Control or eliminate abuses of market power
Generally, it seeks to increase efficiency, promote innovation, or improve consumer choice
What are the three principle areas competition policy deals with
- Monopoly
- Mergers
- Restrictive practices
If a firm is in a dominant position in a market what practices are prohibited
- Directly or indirectly imposing unfair purchase/selling prices
- Limiting production, markets or technical development
- Price discrimination (e.g. to exclude competitors)
- Predatory Pricing
- Vertical restraints, e.g. tie-in sales
- Price fixing
- Collusive tendering
- Limiting supply
What is government intervention motivated by
A desire to correct various types of market failure
- Asymmetric information
- Externalities
- Public goods
- Competition Failure
What’s Nationalisation
Type of regulation
Creation of a monopoly owned and controlled by the government (natural monopolies)
- Competition is prohibited
- Aim is to correct market failures associated with market power, public goods and externalities and satisfy the conditions for allocative efficiency
- If P=MC causes monopoly to realise losses (subsidy from the government)
- Due to competition being prohibited, little incentive to be efficient
What’s privatisation
Regulation
This is essentially denationalisation
- Economic rationale is to create market pressures in these industries (X-efficiency)
Important privatised enterprises include:
- British telecom
- British Gas
- British rail
- Water authorities
Why is privatising natural monopolies a complex process
As new entrants often rely on existing infrastructure, e.g. the privatisation of British Rail
- Privatised monopolies are subject to regulation
- This comes from regulatory bodies known as watchdogs, like OfGem and OfCom
- Watchdogs are tasked with ensuring standards and service are maintained. E.g. fair price rises
Two types of regulation
- Structural regulation = Focuses on the market structure
- Conduct regulation = Influences the behaviour of the firms
For regulation to be effective, regulator requires information on changes in costs and market conditions. However, in a dynamic market when conditions change rapidly it is difficult
There are three broad problems in relation to regulation
1) Too many opportunities for lobbyists and lawyers who waste time and money
2) Often regulatory bodies will side with the supplier, not the consumer
3) Prices are regulated to give a satisfactory rate of return in capital. This does not, however, incentivise efficiency and cost cutting, resulting in higher costs than would be achieved in a free market
