Theme 3.6: Regulation and competition policy Flashcards
the law interferes with such economic prosperity
4 Types of regulation
-Merger policy
-Price regulation
-Profit regulation
-Performance targets and quality standards
Explain merger policy
-Blocking mergers which might give firms too much market power
E.g. When 3 mobile tried to buy O2, SMA were alerted because if they did merge they would have 31% market share (which is above 25% limit), it was blocked to prevent formation of a natural monopoly
However, investigation doesn’t mean it gets blocked all the time
E.g. Orange and T-Mobile merged to form EE (combined to 33% market share). CMA found little evidence that the merger would negatively impact consumers
The CMA will investigate a merger if…
-2 firm’s have a combined market share of above 25%
E.g. When 3 mobile tried to buy O2, SMA were alerted because if they did merge they would have 31% market share (which is above 25% limit), it was blocked to prevent formation of a natural monopoly
However, investigation doesn’t mean it gets blocked all the time
E.g. Orange and T-Mobile merged to form EE (combined to 33% market share). CMA found little evidence that the merger would negatively impact consumers
-2 firm’s combined turnover is above £70 million
E.g. Merger between David Lloyd and virgin active was blocked because their combined turnover would be £1011 million
Explain price regulation
Caping the prices firms can charge consumers
Explain profit regulation
Taxing firms if they make too much supernormal profit
When the government takes 100% of a firm’s profit in tax, after they have reached a certain profit limit
Explain performance targets and quality standards
-Imposing targets and standards so firms don’t provide dodgy goods or services
-CMA set targets and standards for firms to meet in order to sell their product
-Examples of performance targets include:
-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.
Examples of quality standards include:
-The Food Standards Agency (FSA) give out a quality standard as do the British Standards Institute (BSI).
What is meant by regulatory capture and give an example
When regulators begin to favour a company they are regulating
E.g. When regulators at BP become fond of the staff so they gave them a permit to drill in the Mexican gulf without checking if it was safe. Bp began to make large supernormal profits BUT two weeks later they had a massive oil spill which killed lots of wildlife and was bad for the environment
Explain how profit regulation can encourage firms to invest in better capital
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.
How can profit regulation be ineffective?
Completely taxing away a firm’s profit above a certain level, removes profit incentive. This makes firms less efficient and less productive as their costs increase which translates to higher prices for consumers, so consumer surplus decreases.
So CMA sticks to price regulation instead.
4 ways to increase contestability
-Deregulation
-Privatisation
-Stopping anti-competitive practices
-Helping small businesses
Explain deregulation
-Lowers the barriers to entry
-Encourages new firms to enter and compete with incumbent firms
-Leads to: lower prices, better customer service, increased efficiency
E.g.
Cab drivers in London used to need to be good at geography but now Uber entered the market and 50,000 people drive taxis in London now, without needing any qualifications
Explain privatisation
When ownership is transferred from the government to the private sector
Competitive tendering is when:
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
What are anti-competitive practices?
Anti-competitive (or restrictive) practices include anything a firm might do, to restrict competition.
Anti-competitive practices include:
-Predatory pricing
-Price collusion
-Vertical integration
