Regulation And Competition Policy Flashcards
What are the 4 key types of regulation used by the CMA
Merger policy
Price regulation
Profit regulation
Performance targets and quality standards
What is the merger policy
Blocking mergers that might give firms too much market power
What is price regulation
CMA Capping the prices firms can charge consumers
What is profit regulation
Taxing firms profits if they make too much SNP
What is performance targets and quality standards
Imposing targets and standards so firms don’t provide dodgy goods or services
Why would the CMA investigate mergers?
If they have a combined market share of over 25%
If they have a combined annual turnover over £70m
What is regulatory capture
When a regulator begins to favour the company they are regulating
How can the CMA increase contestability
Deregulation
Privatisation
Stopping anti-competitive practices
Helping small businesses
What is deregulation
when regulations are removed to lower barriers to entry
What is privatisation
When the gov transfers ownership of a public sector firm to the private sector
What is competitive tendering
When the gov outsources specific job contracts to the private sector
What are anti competitive practices
Includes anything a firm might do to restrict competition such as :
Predatory pricing
Collusion
Vertical integration
What can the CMA do to respond to anti competitive behaviour
Fine up to 10% annual leave
Sentence CEO to jail
Name and shame firm publicly
How can the gov help small businesses grow?
Access to loans
R&D tax breaks
Subsidies
What is nationalisation
When the private sector transfers ownership of a private sector firm to the government
Why does the CMA investigate mergers
Combined market share of over 25%
Combined annual turnover over £70m
Examples of CMA blocking mergers
Three tried to acquire o2 which as they would have had a combined market share of 31% making a legal monopoly.
Virgin and David Lloyd tried to merge, their combined annual turnover was £1011m
In 2018, CMA blocked the merger of Sainsbury’s and Asda with combined market share of 33%
The CMA blocked this merger because it would not be beneficial to society as the monopoly would set high prices
Examples of CMA accepting mergers
Orange and T-Mobile merged leading to a legal monopoly, EE, of 33%. This benefitted the entire market as they invested into network coverage and quality leading to improvements in the 3G network.
Examples of gov helping small businesses to grow
Enterprise capital funds £400m to small firms with low IR to promote innovation and contestability
Gov gave £5000 to cypher security firms
Energy tax breaks in North Carolina gave out £235 million to renewable energy firms for innovation such as solar panels
RPI + K
Regulators such as OFWAT calculates how much prices should be increased by
OFWAT found out that Thames water was struggling as pipes were rusting and machines were not working, affecting consumers
If k=2%
Prices can increase by 5% creating SNP which can be invested into producing better quality pipes
RPI - X
Used by OFGEM when regulating energy firms
If X = 2%
Then energy firms can only increase prices by 1%
As energy firms are profit driven they must decrease their costs allowing them to be more x-efficient
Examples of regulatory capture
Firms such as bp were favoured by regulator which lead to regulators giving free permits for bp to drill for oil in the Gulf of Mexico. This led to an oil spill which endangered wildlife damaging the environment
Quality standards are set too low, firms making cheaper quality goods, increasing profit margins affecting consumers negatively
When setting K too high (RPI + K)
When setting X too low (RPI + X)
Examples of performance targets
ScotRail which is scotlands railway service has a target of 91.3% of trains being on time. If it is lower than the target, scotrail is the finer and public shamed in the media, leading to a bad reputation and decrease in trust from consumers.
Railways have to refund passengers of train is 1 hr late.
Each hospital has to respond to A&E patients within 4 hours
Examples of Quality standards
BSI set standards of toys to be safe for children to play with
FSA set standards on quality and safety of food made by food providers.
If targets are met then it is approved otherwise firms cannot sell goods
KFC shut down in Essex due to rat infestations and fined 25K
Examples of nationalisation
1948 Railways were nationalised
Thames water was in 14bn debt which led to renationalisation
Sweden nationalised the alcohol market in 1955 to limit negative externalities of alcohol. Alcohol only sold to consumers of age, > 20, and sober. Prices were kept high to limit bing drinking and close stores early
Examples of collusion
Tesco and Asda colluded overt dairy products in 2002.
This costed consumers £270 million
And was fined £116 million
BA fined £270 million for setting high ticket prices with virgin Atlantic. VA are snakes
Examples of privatisation
BT, British Gas, Royal Mail and British airways privatised
Royal Mail has 32.8% market share in 2015
Lead to royal mail introducing finger scanners, workers pickup and scan parcels faster, productivity increases
British Gas market share of 27.8% in 2023
BT market share of 33%
British Airways market share of 20%
Examples of regulation in market structures
AT&T and US tech firms fined $100m for offering unlimited data to stream TV showed but they slowed the internet connection to cut costs for themselves.
Energy companies in 2016 stopped revealing profits made by each household leading to increased prices for consumers, exploiting monopoly power
Examples of deregulation
Airline deregulation act in US allowing several firms to join the airline industry forcing incumbent firms to lower prices for consumers, allocative efficiency
Royal Mail cherry picking delivery routes which generate the most profit, increasing inequality
