LS16- Monopolies & Mergers Flashcards
1
Q
Downside of monopoly power -> why governments intervene
A
- monopoly power results in higher prices and lower output than under comeptitive market conditions
- therefore, governments may intervene to protect consumers
- especially important for natural monopolies, and utilities, as they are essentials
2
Q
Anti-competitve practises
A
strategies such as predatory pricing and collusion that are designed to limit the degree of competition inside a market
3
Q
The Competition and Markets Authority
A
- a UK government department responsible for promoting competition and preventing anti-competitive practises
4
Q
Examples of industry specific regulatory bodies
5 main ones
A
- 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)
5
Q
What is RPI - X?
A
- a form of price regulation used as a price cap by OFGEM and ORR
- the maximum price rises firms are allowed to make is RPI - X where X refers to expected efficiency gains
- if RPI was 2.4% and the regulator calculated efficiency gains was 1.5%, RPI - X would be 0.9%
- i.e. the maximum price rise in the industry would be 0.9%
6
Q
What does RPI - X aim to achieve?
A
- restrain price rises for essential services
- incentivise utility providers to increase efficiency
7
Q
Why are monopolies less likely to make efficiency gains than other types of firms?
A
- they face an absence or lack of competitive pressures
- this means there is less incentive to cut costs as they are unlikely to lose customers regardless of their actions
8
Q
Disadvantages of RPI - X
A
- without access to a good level of information it may be extremely difficult for regulators to set X - if regulators lack legal powers and if punishment for poor disclosure is weak, there is a strong risk that info will be withheld
- if X is set too low, there is less incentive for firms to make efficiency gains
9
Q
What is profit regulation?
A
- used to regulate utilities in the US
- involves regulators setting limits on the amount of profit firms can make
10
Q
Rate of return regulation
A
- regulator allows firms to cover costs and earn a return based on the amount of capital they use
- therefore, the more capital a firm employs, the higher amount of profit they can earn
- incentivises capital investment necessary for maintaining and improving quality
11
Q
Negative of rate of return regulation
A
- little pressure on firms to be productively efficient as the regulator guarantees costs will be covered
- danger that firms overload on capital investment to earn more profit
12
Q
Performance targets
A
- used to regulate monopolies and incentivise improvement in public organisation e.g. schools and hospitals
13
Q
Quality standards + e.g.
A
- minimum standards of a service a regulator requires a monopolist or public body to meet
- e.g. A&E services across UK are given 4 hours to treat and discharge, admit or transfer a patient
14
Q
Advantage of performance targets and quality standards
A
- if set correctly, may act as a surrogate for competition by forcing firms to behave as if they were in a contestable market
15
Q
Disadvantages of performance targets and quality standards
A
- without sanctions in place firms may not be motivated to meet the targets/standards
- there is a risk that people game the system e.g. trains may extend journey times to avoid formal delays
- unintended consequences - e.g. GPs may misdiagnose patients if they are rushing due to needing to see a certain number of patients per day
