Regulation and Competition Policy

Question 1

So, in summary, the CMA will investigate a merger if:

Answer 1

The CMA will investigate a merger for two reasons:

If the merging firms will have over 25% market share together (like 3 and O2)
The “turnover test”: if the merging firms have a combined annual turnover above £70m

Question 2

So, in summary, there are two main types of price regulation - what are they:

Answer 2

RPI-X
RPI+K
Both allow firms to increase their prices with RPI (inflation), X is
K is gonna be used for new capital, etc
x is used by the regulators to punish firms (e.g if they thought they did a bad job)

Question 3

So, in summary, regulatory capture is when:

Answer 3

Regulatory capture is when a regulator begins to favour the company they’re regulating.

Question 4

Profit regulation is when:

Answer 4

firms’ profits are taxed at 100% above a certain limit

Question 5

Explain how profit regulation can encourage firms to invest in better capital:

Answer 5

No one wants to government stealing all their profits. This encourages them to reinvest extra profit back into the company and improve the quality of service they provide.

Question 6

Examples of performance targets include:

Answer 6

Performance targets include, ScotRail, who have the performance target of 91.3% of its trains running on time!

Performance targets also extend to the NHS - each hospital has the performance target of responding to accident and emergency patients in less than 4 hours.

Question 7

What happens as the Gini coefficient increases?

Answer 7

As the Gini coefficient increases, income inequality increases.

Question 8

What is the correct calculation for the Gini coefficient?

Answer 8

G={A}/{(A+B)}

Question 9

1. Income Inequality

Answer 9

When the best paid workers take home more income than the rest of a country’s workers.

Question 10

2. Lorenz Curve

Answer 10

A graph to show income inequality. The further a Lorenz curve is from the 45° line of perfect equality, the more unequal the economy is.

Question 11

Gini Coefficient

Answer 11

A measure of income inequality. The higher the number, the more unequal the economy is.

Question 12

Gini Coefficient Formula

Answer 12

The formula is: G = A/(A+B)

Question 13

What is the number span for gini co efficient

Answer 13

The Gini coefficient is always between 0 and 1. A value of 0 means that the distribution of income is perfectly equal. A value of 1 means that the distribution of income is perfectly inequal.

Question 14

What does it mean if area ‘B’ on a Lorenz graph is larger?

Answer 14

If Area B is larger then the economy will be closer to the line of perfect equality. This means that the distribution of income is more equal. If B is larger then A will be smaller and so the numerator of the Gini coefficient will be a smaller number. This will make the Gini coefficient smaller, which means the economy is more equal.

Question 15

What does it mean if area ‘A’ on a Lorenz graph is larger?

Answer 15

If Area A is larger then the economy will be further from the line of perfect equality. This means that the distribution of income is more unequal. If A is larger then the numerator of the Gini coefficient will be a larger number and so the Gini will be larger. A larger Gini means a more unequal economy.

Question 16

Income inequality

Answer 16

Income inequality is when the best paid workers take home far more income than the rest of a country’s workers.

Question 17

What is the definition of wealth?

Answer 17

Wealth is the stock of all your assets added up e.g. house, car, cash in the bank, shares etc.

Question 18

What impact is a national minimum wage likely to have for the rich business people at the top of many UK companies?

Answer 18

A national minimum wage will increase costs for UK companies. This will decrease the profit made by these companies. A lower profit will mean that the rich managers may see a decrease in their salary.

Question 19

deregulation

Answer 19

Deregulation is when regulations are removed to lower barriers to entry.

Question 20

Define privatisation:

Answer 20

Privatisation is when the government transfers ownership of a public sector firm to the private sector.

Question 21

Competitive tendering is when:

Answer 21

Competitive tendering is when the government outsources specific job contracts to the private sector. Private sector firms bid to win the contract, by offering the best deal - the highest quality for the lowest cost. The government then chooses the firm which offers the best value for money - and awards them the contract!

Question 22

Competitive tendering is great for the government because:

Answer 22

Competitive tendering beneficial for the government because, by getting private sector firms to bid against each other for the contract, private sector firms will undercut each other’s prices and offer better quality. This means the government can make sure it’s getting the best deal possible - saving money, and increasing quality.

Question 23

Or predatory pricing, which is when:

Answer 23

Predatory pricing is when a firm aggressively cuts its prices below AVC to force out competitors from the market.

In the short run, the firm incurs a loss.

But in the long run, firm forces out its competitors, so they can take over the market - restricting competition.

Question 24

Or price collusion, which is when:

Answer 24

Collusion is when two or more firms agree to limit or restrict competition.

Question 25

Or vertical integration, which is when:

Answer 25

Vertical integration is when firms at different stages of the same production process join together.

Question 26

So, in summary, anti-competitive practices include:

Answer 26

Predatory pricing, price collusion, vertical integration.

Question 27

In response to anti-competitive behaviour, the CMA can:

Answer 27

If the CMA catches firms engaging in anti-competitive practices, they can:

Set a fine up to 10% of annual revenue
Sentence CEOs to jail time
Name and shame the firm publicly

Question 28

The lower corporation tax will cause:

Answer 28

A decrease in firm’s costs increasing profit

Question 29

And the government helps small businesses grow using:

Answer 29

subsidies, tax cuts, loans.

Question 30

Nationalisation is when:

Answer 30

Nationalisation is when the private sector transfers ownership of a private sector firm to the government.

Question 31

So the railways were nationalised into British Rail, and the government set the price of train tickets to:

Answer 31

MC=AR
P = MC
A huge loss at this price

Question 32

At this price, the British Rail were making:

Nationalisation price

Answer 32

C A huge loss

Question 33

So, in summary, nationalisation is when:

Answer 33

Nationalisation is when the private sector transfers ownership of a private sector firm to the government.

Question 34

Nationalisation gives the government total control over the firm and market, so it can set prices to:

Answer 34

P = MC

Question 35

Privatisation

Answer 35

Privatisation is the transfer of a business, industry, or service from public to private ownership and control.

E.g. British Telecom was sold to private investors in 1984