Theme 3: Regulation and Competition policy Flashcards
4 types of regulation of firms
- Merger policy
- Price regulation
- Profit regulation
- Performance targets and quality standards
What is merger policy?
Blocking mergers that might give firms too much power.
What is price regulation?
Capping prices firms can charge consumers.
What is profit regulation?
Taking firms profits if they make too much supernormal profit
What are performance targets and quality standards?
Imposing targets and standards so firms don’t provide dodgy goods or services.
What are the two reasons the CMA might investigate a merger policy?
- Combined market share of over 25% eg 3 mobile and O2
- Combined annual turnover over £70m
What are the two equations for price regulation?
- RPI + K
- RPI - X
What does RPI + K mean?
RPI means the % a firm can increase their price by with inflation and + K means any additional % a firm can increase their prices by in order to improve efficiency by investing in R&D.
What does RPI - X mean?
RPI amount a firm can increase their prices by and - X means that the regulators believe the firm is X inefficient and therefore must improve efficiency to reduce costs and maintain profits.
What is regulatory capture?
When a regulator begins to favour a company they regulate eg by setting low quality standards, setting K too high and setting X too low.
What is the aim of profit regulation?
Meant to cause any additional profits to be reinvested.
What is the issue with profit regulation?
It removes the profit incentive as firms profits are taxed 100% above a certain limit.
No extra profit means no incentive so they become less efficient and their costs spiral.
What are 2 examples of performance targets?
Scott rail have a target of 91.3% of trains being on time.
The NHS has a target of those in A&E waiting less than 4 hrs.
What are two institutes in the UK that regulate standards?
FSI- Food standards institute
BSI- British standards institute
What are the 4 ways the government promotes contestability?
- Deregulation
- Privatisation
- Stopping anticompetitive practices
- Helping small businesses
What are the benefits of promoting contestability?
New entrants increase competition which stops exploitation.
What are deregulations?
When regulations are removed to encourage new firms by lowering/removing barriers to entry.
What is privatisation?
When government transfers ownership of public sector to private sector.
What are anticompetitive practices?
Anything a firm may do to restrict competition
What are examples of anti competitive practices?
Predatory pricing- prices below AVC to force out competitors.
Price collusion- 2 or more firms agree to limit or restrict competition.
Vertical integration- When a firm merges with another firm at another stage of the the production process.
How does the government help small businesses to grow?
- Access to loans
- R&D tax breaks
- Subsidies
What is competitive tendering?
Outsourcing certain sectors and get them to bid to get a deal eg the NHS might outsource catering and get the best price by getting them to bid for their business.
