Monopoly Regulation and Competition policy Flashcards
What is the role of monopoly regulation
To promote competition, make markets work better and to improve the efficiency and competitiveness, as well as protecting consumers
When does the government intervene?
There is a rationale for competition authorities to intervene in an industry when public interest is harmed
Main regulating body
CMA
UK Energy price cap
As of April 2024
This will reduce the energy price cap from £1,928 to £1,690 per year, a reduction of around 12%.
4 types of monopoly regulation
Price regulation
Windfall taxes on monopoly profits
Merger policy
Privatisation
Name the 4 types of price regulation
Price cap
RPI
RPI-X
RPI+K
What are windfall taxes
Higher tax on profits made by a firm that has benefitted from something they went responsible for
Aim of windfall taxes
to incentivise firms to reduce prices and lower their overall profit they make and to promote efficiency saving for firms to reduce their costs.
4 negatives of windfall tax
- Increases AC and MC resulting in even higher prices and lower quantities than before
- Can promote tax evasion and tax avoidance
- Reduce significant dynamic efficiency gains so consumers lose out on innovative and lower prices
- Unintended consequences
Example of windfall tax imposed in the UK
Energy Profits Levy
Set in 2022, in place till 2029
What is a real world example of a regulator and their role (airline industry)
CAA (Civil Aviation Authority)
Impose a price cap on landing charges at Heathrow, given the airports dominant control of the airport market, can abuse its monopoly power by charging excessive landing charges which would then increase passenger fares, harming travellers which goes against public interest.
What was the market share of Heathrow Airport between the years 2015 and 2021
30.1%
3 negatives of price regulation
- Government setting price regulation to high or too low, do not have perfect information
- Extremely costly - opportunity cost
- Regulatory capture
What is an example of regulatory capture
Boeing accepting fault to 2 fatal crashes the 737 Max in 2019, an agreement with the US government made them immune from legal prosecution by paying $2.5Bn in fines and compensation without the knowledge and acceptance of the victims families.
What is a merger policy?
Grounds on which the CMA will investigate proposed mergers if they would have a combined market share of over 25% and if the mergers have a combined annual turnover of over £70m
Example of when merger policy was used
2018 proposed merger between Asda and Sainsbury’s
Combined market share of 30%
Blocked by CMA from taking place
Diagram of price cap regulation
What is a price cap
A maximum price ceiling that monopolists can charge consumers. Capped at allocative efficiency. Prevents monopolies charging excessive prices and exploiting consumers
Explain RPI price regulation
Considered a relatively fair form of price regulation that can be used to restrict price increases by using the RPI inflation rates as a cap. Firms can only increase their prices as much as RPI inflation rate allowing firms to cover costs and make small profit
Explain RPI-X
Harsh price regulation on firms that have abused their monopoly power. Firms can increase they prices by RPI inflation rate but then firms can increase their prices by an additional -X% which results in the firm only being able to charge prices below RPI inflation
Aim of RPI-X
to encourage firms to make efficiency gains in the short run to push their costs back downing order to remain profitable.
Explain RPI+K
Allows firms to increase their prices by RPI inflation rate and then by an additional K%. Enables the firm to charge prices above the inflation rate.
When might RPI+K be used?
When firms have infrastructural problems affecting their efficiency. Can make extra profit to reinvest in better infrastructure and technology to improve efficiency and quality of service that would otherwise not be achieved by simple RPI price regulation and would damage public interest
3 negatives of price regulation
- Assumed governments have perfect info, not the case so could set regulation too high or too low
- Regulation is costly in maintaining existence of regulatory bodies → opportunity cost
- Risk of regulatory capture
Consequence of X being set too low or K being set too high…
Results in prices still being charged in excess above marginal cost, burdening consumers and reducing their CS
What is the end outcome of regulatory capture in price regulation
Lower values of X being set
Higher values of K being set
Slight improvements in allocation but not to the full extent to eliminate inefficiency of monopoly firms
Misallocation of resources persists
What are the two ways in which competition can be increased?
Privatisation and deregulation
Define privatisation
the transfer of state owned assets into private ownership
Define deregualtion
Process of removing regulation to lower the barriers to entry and exit, increasing contestability and actual competition
What are 3 forms in which privatisation can come in?
- Sale of state owned firms or industries to private sector corporations or individuals
- Government can contract out services to the private sector where the gov still control and monitor the market output but the jobs themselves are carried out by private sector firms
- A Public Private Partnership (PPP) which can occur when the government works alongside private sector firms to complete a project
What is an example of a common public private partnership
Private Financial Initiative (PFI)
Where private firms pay for all construction costs on a project and then the government pays them back overtime in interest payments
Why are PPIs powerful policies to use?
Because it allows the government to pursue key infrastructure projects even if finance isn’t available at the current time, often useful when in a deep budget deficit
Diagram of privatisation outcomes
P&D encourage competition, whilst P also creates a profit motive and generates rev for the gov. They promote outcomes like those found in competitive markets where AE can be achieved with prices close to or equal to marginal cost. Resources allocated according to consumer demand with consume getting what they want at the quantity they desire.
Why might privatisation and deregulation not promote competitive outcomes
If potential suppliers don’t actually join the market after deregulation
Private firms could form a monopoly or oligopoly
Private firms abuse their market power
Private firms have profit incentive so may actually charge high prices and restrict output, consumer surplus lost
But could non-competitive outcomes actually be beneficial?
Yes
Although it may seem that firms abuse their market power and exploit consumers
They may use these higher profits to reinvest into the company in the long run, bringing innovative products through R&D
Better tech and capital, so in the long run may actually lower costs of production and lead to future price reductions for consumers
Strength of Privatisation and Deregulation (efficiency)
Lead to productive efficiency, private firms have an incentive to reduce costs as much as possible. All possible economic software scale are exploited. Lower average costs is translated as lower prices for consumers. Can also benefit the firm if their costs lead to lower prices than rival firms, increasing market share
Does privatising firms actually lead to dynamic efficiency?
May not always
If incumbent firms are faced with lots of contestability and actual intense competition in the market, this would force the to drive down their prices to stay competitive which reduces the firms ability to make supernormal profit, thus restricting reinvestment and overtime consumers lose out on innovative tech reducing their choice and prevents any future price falls.
Limitation of Private Financial Initiatives
Can increase government debt substantially more overtime.
Governments are still responsible for paying for maintenance costs and with payments with additional interest also being paid back to the private firm. As a result this could lead to unintended consequences of future generations having too bear the burden of tax increases or perhaps government cutting spending on key public services just to service the debt.
Define Nationalisation
The process of taking a private owned industry into public ownership
What are the intentions of nationalisation
Promoting efficient outcomes and results in the industry or firm being completely in the hands of the government.
Aims at running an industry in the best interest of society
What is one argument for nationalisation
Likely to bring allocative efficient outcomes into the industry. Government focussing on the full social costs and benefits of actions and focussing on service provision.
Public sector focus on meeting needs and wants of the public to maximise social welfare as well as taking into account any externalities unlike private firms
Consequently could be lower prices and no over or under production. Resources allocated at the socially optimum level of output. Fixing any previous market failures.
Why might nationalisation not lead to lower prices?
Public sector firms lack the incentive to minimise costs.
Lack competitive pressure and lack profit motives
Unlikely to operate at the minimum point on their AC curve and so unlikely to reach their MES
Voluntarily forgo economies of scale
Not productively efficient
Leads to higher prices charged to consumers
Second negative of nationalisation
Public sector provision is expensive and relies on taxpayer funding.
Large opportunity cost if there is no surplus tax revenue
Money could’ve been spent on other important services like education or healthcare
Are nationalisation expenses that bad?
despite being expensive it can be argued that the delivery of key public services provides more benefit than the cost to provide them in the market. These services would’ve otherwise been underproduced or under-provided by private sector firms.
Correct missing markets which would otherwise lead to complete market failure if left to private firms to provide public goods.
What is the final con of nationalisation
Lack of supernormal profit made in the public sector
because objective is to satisfy public interest with low prices and high output.
No dynamic efficiency
Implying less innovation, or improvements in infrastructure and capital and service
Keeps costs high and prices high
How could lack of dynamic efficiency be solved in nationalised firms
Government pursuing Public Private partnerships.
Maximise social welfare
Resources allocated at the socially optimum levels with low prices due to the government monitoring and controlling the business.
But dynamic efficiency is likely to be achieved because of the efficiency and profit motivated drives of private firms.
What are Social tariffs
A system of reduced prices or subsidies for certain goods and services that are designed to make them more affordable for low income and disadvantaged groups
When are social tariffs often used?
Often used in utility industries like broadband, electricity and water
E.g Ofcom set social tariffs to offer cheaper broadband and phone packages to people claiming universal credit and other benefits.
When was the water industry privatised
1989 for Welsh and English companies - 16 monopoly water companies
RWA: fine given to company following raw sewage discharge
In 2022 Southern Water company were fined £330,000 for stream pollution that killed nearly 2000 fish because of mismanagement and faulty sewage pumping systems.
RWA: total times of sewage discharge
In the year 2022 alone, united utilities discharged raw sewage into English waterways 69000 times. Was the highest discharger of raw sewage, compared to thames valley who had discharged 8000.
What is the UK’s water industry responsible for?
Collecting, treating ad delivering billions of tonnes of water to households and businesses.
Who are Thames Valley and how much debt are they in?
Thames is the UK’s largest water company, with 16 million customers in London and the Thames Valley region. However, it currently has debts of about £15.4bn and it has also come under fierce criticism for water leaks and sewage spillages
Negtaive externalities of production RWA in China
The mining and processing of Earth Elements in northern China has caused years of toxic leaking into surrounding water sources.
Dumping of radioactive and toxic wastes into vast tailing ponds, seeping into the ground below and exposed to the air.
Led to water for nearby villagers being poisoned and even 35-40% of villagers got cancer
