Competition policy

Question 1

Who enacts competition policy

Answer 1

• Main regulator in the UK is called the competition and markets authority (CMA)
• There are smaller regulatory bodies beneath them who are more specialised and look over specific industries and have to report back to CMA e.g. ORR for rail, CAA for airports/airlines, OFCOM for telecommunications, OFWAT for water, OFGEM for gas and electricity
• European competition commission for the whole EU

Question 2

What is the overall aim of competition policy

Answer 2

To protect public interest

Question 3

How does competition policy protect public interests

Answer 3

1. Intervene if there are monopolists or certain oligopolists charging prices much > than MC
2. Promote competition in highly concentrated markets e.g. through privatisation or deregulation
3. Ensure quality, standards and choice if there are monopolies exisiting
4. Regulate natural monopolies where we need allocative efficiency and ensure privatisation of natural monopolies is successful
5. Promote technological innovation by monopolies making supernormal profit

Question 4

When would we see competition authorities intervene

Answer 4

1. If there are collusive agreements and cartels being agreed in oligopoly markets, leading to monopolistic outcomes
2. Mergers could cause monopolistic outcomes if market share increases past 25%
3. When they need to liberalise highly concentrated markets
4. To monitor state aid control like subsidies which impacts competitiveness of exports between countries, or it could distort competition between industries or between firms in the same industry, if some firms or industries are subsidised more

Question 5

What are the different types of price regulation

Answer 5

• Prices not allowed to be increased by more than RPI (i.e. inflation) by the next year. Fair as the firm can still maintain their profit margins when costs of production rise due to inflation
• RPI - x where the firm can’t increase prices more than a rate lower than inflation. This is to encourage firms to cut costs and become X efficient to maintain profit levels
• RPI +/- k where k depends on how much more profit is needed for more capital investment e.g. regulators increase k if they want more investment and decrease if less

Question 6

How can price regulation be shown on a diagram

Answer 6

• Monopoly diagram but set a max price at the allocative efficiency level

Question 7

What are the problems with price regulation

Answer 7

1. Imperfect info about the firms means the level of x or k may be set wrong e.g. high x means firms forced to shutdown, low x means non-competitive outcomes
2. Very costly and time consuming for regulatory bodies to investigate firms and is paid by taxpayer. Means opportunity cost is high, especially if the level of x or k is set wrong
3. If firms go through effort of cutting costs due to RPI - x and make even higher profit than before, the regulator will increase x further which is unfair
4. Regulatory capture where big owners and managers become friends with regulators and make regulation more lenient. This government failure especially the case since the best regulators have worked in the industry before

Question 8

What are quality control policies by competition authorities

Answer 8

Ensure quality of certain goods and services, especially essentials
They may set performance targets e.g. no. of delays that train companies are allowed each day or 8 min for an ambulance to arrive after emergency call

Question 9

What are the problems with quality control/performance targets

Answer 9

Some targets may have unintended consequences

e.g.
GP’s need to see a certain number of patients per hour, causing them to maybe take shortcuts
or train companies increasing the expected time of journeys to reduce number that is counted as delays

Question 10

What is profit control regulation

Answer 10

• Where the authority limits the amount of profit that can be made by the firm
• They could do this by setting a % rate of return on capital employed e.g. they will make profits of 8% of the capital in the business
• Therefore, they can reward investment and risk taking whilst still making it fair

Question 11

What are the problems with profit control policies

Answer 11

• Asymmetric info means the firm can overreport their costs and total capital so they can make more profit
• Incentive for monopolists to let their costs increase as they will still earn the same 8% profit for example
• Incentive for firms to over-employ capital to increase profit

Question 12

Why would a competition authority tax profits

Answer 12

Reduce monopoly profits to encourage more competition in the market

Question 13

What are the problems with profit taxing policies

Answer 13

1. MC shifts in causing price to rise even more and make the monopoly outcomes worse
2. There could be tax evasion/avoidance including underreporting profits
3. Less innovation and dynamic efficiency

Question 14

What are merger polices by competition authorities

Answer 14

• Breaking up a merger
• Allowing the merger but forcing firms to sell stores in any locations where the market would become too concentrated
• These policies are to prevent monopoly outcomes

Question 15

What is the role of policies like privatisation, deregulation and reducing trade barriers

Answer 15

Market liberalisation policies to promote competition and competitive outcomes

Question 16

What are evaluative points on whether competition policies will be effective

Answer 16

1. Level of information that regulatory bodies have e.g. level of price regulation or profit control
2. Regulation is expensive and paid by taxpayers and cost may exceed benefits if level of information is low
3. Regulatory capture
4. There are benefits of monopolies as well so don’t want regulation to be too strict