Lesson 10 - Competition Policy

Question 1

What are the benefits of perfect competition?

Answer 1

• can only earn normal profits in the long run, so they are productively efficient in order to get costs and low as possible
• in the short run firms may innovate to get a slight competitive advantage and make supernormal profits
• firms are allocatively efficient

Question 2

What are the disadvantages of perfect competition?

Answer 2

• firms only make normal profits in the long run, so they cant invest SN profits into R&D and innovate
• products aren’t differentiated
• lack of economies of scale means that costs are higher, so prices are also higher

Question 3

What are the advantages of monopolies?

Answer 3

• economies of scale, can lower costs and be reflected through lower prices, if firms choose to do so
• long run SN profits, so firms can invest in innovation and create new products
• SN profits incentivise firms to be allocatively efficient

Question 4

What are the disadvantages of monopolies?

Answer 4

• x-inefficiency = firms can make SN profits without being at the lowest point on the AC curve, so prices may remain high
• lack of competition may mean that firms are not incentivised to invest in R&D
• can restrict supply and increase prices
• lack of choice

Question 5

What are the 3 methods of assessing market power?

Answer 5

• contestable markets
• price discrimination
• producer surplus

Question 6

What is price discrimination?

Answer 6

Dynamic/personal pricing - the degree to which a firm is able to charge different customers different prices

Question 7

What are the 3 degrees of price discrimination?

Answer 7

First degree - customers are charged the maximum price that they are willing to pay
Second degree - charging based on the quantity bought (e.g bulk buying)
Third degree - charging different groups different prices

Question 8

Price discrimination is only possible when you have:

Answer 8

Market power

Question 9

Give an example of price discrimination

Answer 9

Airlines
- business customers have inelastic demand, since the flights are necessary for them, so prices are higher
- some customers pay higher prices than other for the same flight

Question 10

What is consumer surplus?

Answer 10

The extra amount that consumers would have been willing to pay compared to what they actually paid

Question 11

What is producer surplus?

Answer 11

The extra amount that producers are paid above what they were willing to sell for

Question 12

What are contestable markets?

Answer 12

• How easy it is for new firms to enter the market
• firms will operate competitively if they fear competition in some way
• even if there is not current competition

Question 13

How can the government ensure that there is not abuse of market power from monopolies?

Answer 13

Focus on minimising barriers to entry instead of regulating monopolies, because the risk of competition will incentivise firms to work efficiently

Question 14

What do free marketeers argue about the impact of creative destruction on markets?

Answer 14

Those markets will grow richer and more productive

Question 15

What organisation implements the UK’s competition policy?

Answer 15

CMA - Competition and Markets Authority

Question 16

What are the 3 components to competition policy in the UK?

Answer 16

• monopoly policy
• merger policy
• restrictive trade policy

Question 17

Describe monopoly policy

Answer 17

• cost benefit approach, and if the benefits outweigh the costs than the monopoly should be permitted
• conduct and perfomance indicators (trade and customer complaints)
• focus on features that may prevent or restrict competition

Question 18

Example of the CMA using monopoly policy:

Answer 18

• lots of complaints about high gas prices
• CMA considered a price cap as one of its solutions

Question 19

Policies for dealing with monopoly power

Answer 19

• nationalisation (public ownership removes the issue of profit maximisation
• tax them
• privatise (introduces competition to the market)

Question 20

Describe merger policy

Answer 20

• investigates mergers that result in a substantial fall in competition

Question 21

What are the 2 types of restrictive trade policy?

Answer 21

Independent - full-line forcing, price discrimination, refusing to supply to certain outlets
Collective - carving up a market (collusion), price rigging (changing prices at the same time)