Monopolies and Mergers Flashcards
Define Anti-competitive practices
Strategies that are designed to limit the degree of competition inside a market
Define Competition Policy
Any policy which seeks to promote competition and efficiency in markets and industries
What is the CMA
A UK government department responsible for promoting competition and preventing anti-competitive practices
Define Surrogate Competition
Attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets
Why is Price Regulation important for utilities such as gas and water
There is a need to make them affordable
What is the objective for price regulation in natural monopolies
Bring price closer to allocative efficiency
What are the two main forms of price regulation used by regulators in the UK
RPI - X and RPI + K
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.
What does RPI-X aim to achieve
Restrain price rises for essential services
Incentivise utility providers to increase efficiency
How does RPI-X aim to force producers to make efficiency gains
A firm’s total profit is equal to total revenue minus total cost. 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
Why are monopolies less likely to make efficiency gains than other types of firms?
They face an absence or 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?
Protects consumers by restraining producers’ ability to raise prices
Gives firms an incentive to be as efficient as possible
What are the disadvantages of RPI – X?
1) Setting X is difficult and requires time and manpower
2) Lack of access to good level of information
3) If X is set too low, there is less incentive for firms to make efficiency gain
4) If X is set too high, firms are less likely to make profit
Define Utility
An organization supplying the community with electricity, gas, water, or sewerage
What is Profit Regulation
Regulators setting limits on the amount of profit firms can make
How does rate of return regulation work
Regulator allows firms to cover costs and earn a return based on the amount of capital they use. The more capital a firm employs the higher amount of profit it can earn. This is done to incentivise investment
Advantage of rate of return regulation
Firms are incentivised to increase capital investment which is vital for maintaining and improving qualit
Disadvantages of rate of return regulation
Little pressure for firms to be productively efficient as there is a guarantee costs will be covered
Firms may overload on capital investment in order to earn higher profit.
Define Performance Targets
Targets used to regulate monopolies and also incentivise improvements in public organisations such as schools and hospitals
Define Quality Standards
Minimum standards of service a regulator requires a monopolist or public body to meet
Advantages of performance targets and quality standards
They may act as a surrogate for competition by forcing firms to behave as if they were in a contestable markers
Disadvantages of performance targets and quality standards
Firms may not be motivated to meet the, if sanctions aren’t sufficient
Risk that people game the system
Unintended consequences
Who is responsible for investigating mergers
CMA
Conditions needed for the CMA to investigate a merger
Combined firm would have a marker share of over 25%
Combined firm would have a turnover of over £70m
Conditions necessary for effective merger control
Competent regulators
Accurate and up to date information
Sufficient time to thoroughly investigate
What is RPI+K
Price cap used by OFWAT to regulate private water companies in England and Wales. Maximum price firms are allowed to make is determined by RPI+K where K stands for capital investment
Why is K necessary in RPI+K
Capital investment allows the water industry to maintain a high quality service - incentivises them t invest in order to earn higher revenues
What is the demand curve equal to for the monopolist
Average revenue
