MICRO - competition policy

Question 1

xwhat is competition policy

Answer 1

set of policies and laws which ensure that competition isn’t restricted in a way that reduces economic welfare

Question 2

when are competition policies used

Answer 2

• when the market fails to successfully regulate the activity of firms and consumers
• governments recognise the misallocation of resources brought about by concentrated markets
• governments also have policies which limit monopoly power on the grounds of equity (anti-trust policies)

Question 3

what are sources of monopoly

Answer 3

• natural
• technological
• legal
• public sector

Question 4

should the gov regulate natural monopolies

Answer 4

• some natural monopolies need to stay as just that, like national grid.
• very high fixed costs (infrastructure) and low marginal costs.
• needs regulation to ensure prices dont get massively high

Question 5

should the gov regulate technological monopolies

Answer 5

• free market approach to do nothing as they have created their own success
• interventionist approach to regulate to make the technology shareable and to open up the market

Question 6

should the gov regulate legal monopolies

Answer 6

• patents on certain products and government permits legal monopoly to incentivise innovation
• eg pharmaceutical companies encouraged to make more money from innovated medicines that are patented

Question 7

should the gov regulate public sector monopolies

Answer 7

• NHS is near monopoly power
• royal mail, education nationalised
• control it by survival of the fittest
• private sectors in healthcare and education exist

Question 8

is monopoly power always exploited

Answer 8

no!
regulation exists when firms exploit monopoly power

Question 9

what are aims of competition policy

Answer 9

• promote efficiency in markets through competition and contestability
• protect the interest of consumers

Question 10

what does competition policy consider

Answer 10

• behaviour of dominant firms
• growth of market powers through mergers
• oligopolistic collusion and cartels
• anti-competitive practices

Question 11

what is the UK’s competition policy

Answer 11

• UK is similar to both EU and American competition laws
• competition act 1998 brought UK into line with EU and USA
• authority to search business premises
• fines up to 10% of firm’s turnover

Question 12

what is the competition market authority

Answer 12

• promotes competition to make markets work well
• has the power to investigate monopolies (defined as a firm having more than 25% market share)

Question 13

what is price fixing

Answer 13

• collusion to keep prices the same as other businesses
• raising price to raise profit
• deprives consumers of getting a good deal and also impacts other businesses
• collusion can be fined

Question 14

what is bid rigging

Answer 14

• bidders create the illusion of competition whilst secretly agreeing who will win the tender
• makes prices higher to give artificial profit
• they can take turns in making extreme profits
• can waste tax payers money as they bid for contracts

Question 15

what is territorial exclusivity

Answer 15

• businesses agree to not go after the same customers
• divide the market
• eg/ geographical area or demographics (age) so they face less pressure to compete with each other and customers end up paying more
• creating mini monopolies

Question 16

what is resale price maintenance

Answer 16

• seller forcing retailer to sell at a minimum price that other businesses can resell their products with
• online and shop based
• cant prevent resellers at lower prices
• benefits supplier but not poor consumer

Question 17

what are mergers

Answer 17

when larger companies will gain more than 25% market share and might prove anti-competitive

Question 18

why should governments NOT intervene to prevent mergers?

Answer 18

NO BECAUSE MERGERS ENABLE…
- economies of scale, bigger firms become more efficient. economies of scale includes bulk buying, technical economies, marketing economies
- lower prices from the efficiency of scale and synergy
- more investment and research from higher profits
- can save an unprofitable firm from going out of business
- avoids duplication in natural monopoly
- enables companies to enter new markets which achieves growth

Question 19

why should governments intervene to prevent mergers

Answer 19

• higher prices - if monopoly power increases
• a firm with monopoly power may become inefficient
• two very different firms may struggle to merge
• less choice for consumers
• job losses
• diseconomies of scale

Question 20

what is the red tape challenge

Answer 20

• aims to simplify regulation for businesses. It is especially aimed towards small businesses
• aims to make it cheaper and easier to meet environmental targets and create new jobs.

Question 21

what are SMEs and their importance

Answer 21

Small and Medium Sized Enterprises (SMEs) are important for creating a competitive market

They create jobs, stimulate innovation and investment and promote a competitive environment.

Question 22

what is creative destruction

Answer 22

Schumpeter, an economist, proposed the idea of ‘creative destruction’.

This is the idea that new entrepreneurs are innovative, which challenges existing firms.

The more productive firms then grow, whilst the least productive are forced to leave the market.

This results in an expansion of the economy’s productive potential.

Question 23

what is red tape

Answer 23

• Excessive regulation is also called ‘red tape’. It can limit the quantity of output that a firm produces.
• For example, environmental laws and taxes might result in firms only being able to produce a certain quantity before exceeding a pollution permit.
• Excessive taxes, such as a high rate of corporation tax, might discourage firms earning above a certain level of profit, since they do not keep as much of it.
• This might limit the size that a firm chooses, or is able to, grow to.

Question 24

what is privatisation

Answer 24

assets are transferred from the public sector to private sector

government sells a firm so it is no longer in their control and the firm is left to the free market and private individuals