Ls16 - Monopolies, Mergers Flashcards
Why is government regulation often required when firms have monopoly power?
Monopoly power results in higher prices and lower output than under competitive conditions. Governments intervene to protect the interests of consumers especially for natural monopolies, and utilities (as these are necessities).
State a few methods of regulation which governments might consider to counteract monopoly power.
- Competition and Markets Authority (CMA)
- Industry specific Regulatory Bodies
- Price regulation
- profit regulation
- Quality standards and targets
- merger control
Describe how the CMA limits the downsides of monopoly power
- The CMA is a UK government department responsible for promoting competition and preventing anti-competitive practices. One of the CMA’s responsibilities is regulating mergers
- The CMA is a key pillar of UK competition policy. Before 2014, the Competition Commission and the Office of Fair Trading were responsible for competition policy in the UK.
What are the industry specific regulatory bodies for utilities in the uk
Water: The Water Services Regulation Authority (OFWAT)
Telecoms: The Office of Communications (OFCOM)
Financial Services: Financial Conduct Authority (FCA)
Rail: Office of Rail Regulation (ORR)
Energy Markets: Office of Gas and Electricity Markets (OFGEM)
Describe how industry specific regulatory bodies limit the downsides of monopoly power
In the 1980s/1990s a number of industries were privatised under Margaret Thatcher. Many of these industries were natural monopolies, such as the water industry, or industries in which were was likely to be a high degree of market concentration e.g. energy.
The number of competitors in these privatised industries is small. By regulating the industries the government aimed to replicate the effects of competition e.g. a need to maintain high quality. This is known as surrogate competition.
Describe how price regulation limits the downsides of monopoly power
Price regulation is used to regulate natural monopolies in the UK. The objective is to bring price closer to the allocatively efficiency (P = MC). This is important for utilities such as gas and water because there is a need to make them affordable since they are essential. There are two main forms of price regulation used by regulators in the UK: RPI - X and RPI + X
Describe how profit regulation limits the downsides of monopoly power
An alternative to price regulation is profit regulation. This is used to regulate utilities in the US. It involves regulators setting limits on the amount of profit firms can make. One form of profit regulation is rate of return regulation.
Describe how setting quality standards and targets limits the downsides of monopoly power
Performance targets regulate monopolies and iincentivise improvements in public organisations. Office of Rail and Road: sets out quality standards such as the number of times a train company is allowed to be late.
Quality standards are minimum standards of service a regulator requires a monopolist or public body to meet.
1. A&E services across the UK are given four hours in which to treat and discharge or admit or transfer a patient.
2. OFGEM requires energy providers to restore power supplies within a certain time period.
For a pure/natural monopoly, the incentive to improve quality is absent as there are no competitors and a captive market. By setting quality standards and performance targets, regulators aim to motivate monopolies to meet a minimum standard of provision. Standards act as a surrogate for competition.
Describe how controlling and investigating mergers limits the downsides of monopoly power
Determining if mergers will lead to beneficial outcomes for the consumer and efficiency is part of competition policy. In the UK, the CMA investigates mergers if either of the following conditions are met:
• The combined firm would have a market share of over 25%.
• The combined firm would have a turnover of over £70m.
turnover: how much money a business earns in a period of time
EVALUATION
conditions necessary for effective merger control:
• Competent regulators
• Accurate and up-to-date information
• Sufficient time to thoroughly investigate
Define anti-competitive practices
Anti-competitive practices: strategies such as predatory pricing and collusion that are designed to limit the degree of competition inside a market. ILLEGAL
Define competition policy
Competition policy: any policy which seeks to promote competition and efficiency in markets and industries.
What is RPI-X?
RPI - X is a form of price regulation used as a price cap by OFGEM and the ORR. The maximum prices firms are allowed to make is RPI - X where X refers to expected efficiency gains.
If the RPI was 2.4% and (X) was 1.5%, RPI - X would be 0.9% i.e. the maximum price rise in the industry would be 0.9%.
RPI - X hopes to:
1) Restrain price rises for essential services.
2) Incentivise utility providers to increase efficiency.
How does RPI - X aim to force producers to make efficiency gains?
RPI - X lowers the price of the good/service thereby limiting total revenue. Therefore, to maintain or increase profit a firm must reduce costs i.e. become more efficient.
monopolies are less likely to make efficiency gains than other types of firms as they face a lack of competitive pressures. This means there is less incentive to cut costs are they are unlikely to lose customers regardless of the actions they take.
How does the regulator calculate X?
The regulator investigates the costs of firms in the industry to gain an understanding of possible efficiency gains. It is vital that the regulator has access to all necessary information and has a sufficient number of competent staff.
What are the advantages of RPI - X?
- It protects consumers by restraining producers’ ability to raise prices. This is important for goods and services that are considered essential or are produced by firms that have significant monopoly power
- It gives an incentive for firms to be as efficient as possible as if they can lower costs by more than X they will enjoy increased profit. It prevents excessive prices and ensures that gains are passed onto the consumer.
