Micro 18 - Competition Policy

Question 1

Who enacts competition policy?

Answer 1

> In the UK, the main regulator is called the Competition and Markets Authority (CMA).
Beneath them there are regulatory bodies who are specialised regulators who look over specific industries and companies operating those industries. (ORR, CAA, OFCOM, OFWAT, OFGEM).
In the EU, there’s the European Competition Commission, who oversee competition within the entire single market.

Question 2

What are the aims of competition policy?

Answer 2

> PUBLIC INTEREST

1. Prevent excessive pricing.
2. Promote competition.
3. Ensure quality, standards and choice.
4. Regulate natural monopolies/ ensure effective privatisation of natural monopolies.
5. Promote technological innovation.

Question 3

When will competitive authorities intervene? - List

Answer 3

1. Anti-trust and Cartel Agreements
2. Investigate mergers
3. Liberalise concentrated markets
4. Monitor state aid control

Question 4

When will competitive authorities intervene? - anti-trust and cartel agreements

Answer 4

> i.e. collusive agreements, mainly in oligopoly market where monopoly outcome could occur, hence harming public interest.

Question 5

When will competitive authorities intervene? - investigate mergers

Answer 5

> In the UK, if any merger creates a market share greater than 25%, there will be investigation.

Question 6

When will competitive authorities intervene? - monitor state aid control

Answer 6

> i.e. in the EU we know there’s a huge agricultural subsidy scheme.
If there’s excessive subsidies in one country it shouldn’t distort competition or trade in another country.

Question 7

Monopoly regulation - list

Answer 7

1. Price regulation
2. Quality control/performance targets
3. Profit control covering costs and adding percentage return on capital employed.
4. Windfall taxes on profit.
5. Merger policy.
6. Privatisation.
7. Deregulation.
8. Reducing trade barriers.

Question 8

Monopoly regulation - price regulation main points

Answer 8

> A good way is to prevent price increase greater than yearly RPI (fair).
Stricter is RPI-X regulation which restricts price increase to below RPI by ‘X %’, idea to promote efficiency savings.
RPI +/- k, where k represents a % where enough profits can be made to allow for capital investment.
Idea is to set max price so there’s greater output, lower prices and so more competitive.

Question 9

Monopoly regulation - price regulation cons

Answer 9

1. Level of X/K? Presuming there’s perfect information. If X is set too high may lead to firms shutting down. If X is too low there may not be the competitive outcomes that this is meant to promote. If K is too low firms may shut, vice versa.
2. Cost? Costly and time consuming for regulatory bodies to go in and investigate in firms. Tax payer bears the cost so there’s an OC especially if ‘X, K’ are wrong.
3. Incentive to keep low X - not fair.
4. Regulatory capture - best regulators are those who have worked in the industry in question so they might have good contacts in that industry.

Question 10

Monopoly regulation - quality control/performance targets

Answer 10

> e.g. trains - limit delays, gas and electricity can’t cut supply, NHS - GP seeing set no. of patients, react to calls in 8 mins or less.
But there may be unintended consequences. E.g. GPs may take shortcuts, companies may say journey times take longer i.e. ‘game the system’.

Question 11

Monopoly regulation - profit control covering costs and adding % return on capital employed

Answer 11

> Long-term benefits of capital investment so regulation gives greater return on profits for doing so.
But:
-asymmetric info - ‘over’ employ.
- incentive to increase costs for monopolists.
-incentive for monopolists to over-employ capital.

Question 12

Monopoly regulation - windfall taxes on profit

Answer 12

> Worsens monopoly outcomes as shifts MC upwards, rising prices further and reducing Q.
Promotes tax evasion/avoidance and under-reporting of profit.
Risk of less innovation and dynamic efficiency as less profit after tax.

Question 13

Monopoly regulation - merger policy

Answer 13

> Break up merger or if causes monopoly in certain area they could force company to sell stores or outlets in that area.
If causes 25% +.

Question 14

Monopoly regulation - deregulation

Answer 14

> market-liberalising policies promoting competition.

Question 15

Monopoly regulation - evaluation

Answer 15

1. Level of information.
2. Cost vs benefit. Admin costs, expensive. Especially if not effective.
3. Regulatory capture.
4. Benefits of monopoly: dynamic efficiency, natural monopoly (wasteful allocation of resources, inefficiency).

Question 16

Competition policy - list

Answer 16

1. Abuse of a dominant market position.
2. Price-fixing.
3. Dividing up and sharing markets.
4. Breaking competition law.

Question 17

Competition policy - abuse of a dominant market position

Answer 17

> Mustn’t squeeze out smaller businesses.

>Competition law protects from anti-competitive activities.

Question 18

Competition policy - price-fixing

Answer 18

> When 2 or more businesses collude to decide what prices they are going to charge.
It puts less pressure on them to keep prices down.
Deprives customers from getting a fair deal and victims are often other businesses as well as consumers.

Question 19

Competition policy -dividing up and sharing markets

Answer 19

> Agree not to target same customers, specific product or geographical area.
May be less choice and higher prices.

Question 20

Competition policy - breaking competition law

Answer 20

> Fined up to 10% of annual turnover.
Victims sue.
Bans.
Prison up to 5 years.