Regulation And Competition Policy

Question 1

What are the 4 key types of regulation used by the CMA

Answer 1

Merger policy
Price regulation
Profit regulation
Performance targets and quality standards

Question 2

What is the merger policy

Answer 2

Blocking mergers that might give firms too much market power

Question 3

What is price regulation

Answer 3

CMA Capping the prices firms can charge consumers

Question 4

What is profit regulation

Answer 4

Taxing firms profits if they make too much SNP

Question 5

What is performance targets and quality standards

Answer 5

Imposing targets and standards so firms don’t provide dodgy goods or services

Question 6

Why would the CMA investigate mergers?

Answer 6

If they have a combined market share of over 25%
If they have a combined annual turnover over £70m

Question 7

What is regulatory capture

Answer 7

When a regulator begins to favour the company they are regulating

Question 8

How can the CMA increase contestability

Answer 8

Deregulation
Privatisation
Stopping anti-competitive practices
Helping small businesses

Question 9

What is deregulation

Answer 9

when regulations are removed to lower barriers to entry

Question 10

What is privatisation

Answer 10

When the gov transfers ownership of a public sector firm to the private sector

Question 11

What is competitive tendering

Answer 11

When the gov outsources specific job contracts to the private sector

Question 12

What are anti competitive practices

Answer 12

Includes anything a firm might do to restrict competition such as :
Predatory pricing
Collusion
Vertical integration

Question 13

What can the CMA do to respond to anti competitive behaviour

Answer 13

Fine up to 10% annual leave
Sentence CEO to jail
Name and shame firm publicly

Question 14

How can the gov help small businesses grow?

Answer 14

Access to loans
R&D tax breaks
Subsidies

Question 15

What is nationalisation

Answer 15

When the private sector transfers ownership of a private sector firm to the government

Question 16

Why does the CMA investigate mergers

Answer 16

Combined market share of over 25%

Combined annual turnover over £70m

Question 17

Examples of CMA blocking mergers

Answer 17

Three tried to acquire o2 which as they would have had a combined market share of 31% making a legal monopoly.

Virgin and David Lloyd tried to merge, their combined annual turnover was £1011m

In 2018, CMA blocked the merger of Sainsbury’s and Asda with combined market share of 33%

The CMA blocked this merger because it would not be beneficial to society as the monopoly would set high prices

Question 18

Examples of CMA accepting mergers

Answer 18

Orange and T-Mobile merged leading to a legal monopoly, EE, of 33%. This benefitted the entire market as they invested into network coverage and quality leading to improvements in the 3G network.

Question 19

Examples of gov helping small businesses to grow

Answer 19

Enterprise capital funds £400m to small firms with low IR to promote innovation and contestability

Gov gave £5000 to cypher security firms
Energy tax breaks in North Carolina gave out £235 million to renewable energy firms for innovation such as solar panels

Question 20

RPI + K

Answer 20

Regulators such as OFWAT calculates how much prices should be increased by
OFWAT found out that Thames water was struggling as pipes were rusting and machines were not working, affecting consumers
If k=2%
Prices can increase by 5% creating SNP which can be invested into producing better quality pipes

Question 21

RPI - X

Answer 21

Used by OFGEM when regulating energy firms
If X = 2%
Then energy firms can only increase prices by 1%
As energy firms are profit driven they must decrease their costs allowing them to be more x-efficient

Question 22

Examples of regulatory capture

Answer 22

Firms such as bp were favoured by regulator which lead to regulators giving free permits for bp to drill for oil in the Gulf of Mexico. This led to an oil spill which endangered wildlife damaging the environment

Quality standards are set too low, firms making cheaper quality goods, increasing profit margins affecting consumers negatively

When setting K too high (RPI + K)

When setting X too low (RPI + X)

Question 23

Examples of performance targets

Answer 23

ScotRail which is scotlands railway service has a target of 91.3% of trains being on time. If it is lower than the target, scotrail is the finer and public shamed in the media, leading to a bad reputation and decrease in trust from consumers.
Railways have to refund passengers of train is 1 hr late.

Each hospital has to respond to A&E patients within 4 hours

Question 24

Examples of Quality standards

Answer 24

BSI set standards of toys to be safe for children to play with

FSA set standards on quality and safety of food made by food providers.

If targets are met then it is approved otherwise firms cannot sell goods

KFC shut down in Essex due to rat infestations and fined 25K

Question 25

Examples of nationalisation

Answer 25

1948 Railways were nationalised

Thames water was in 14bn debt which led to renationalisation

Sweden nationalised the alcohol market in 1955 to limit negative externalities of alcohol. Alcohol only sold to consumers of age, > 20, and sober. Prices were kept high to limit bing drinking and close stores early

Question 26

Examples of collusion

Answer 26

Tesco and Asda colluded overt dairy products in 2002.
This costed consumers £270 million
And was fined £116 million

BA fined £270 million for setting high ticket prices with virgin Atlantic. VA are snakes

Question 27

Examples of privatisation

Answer 27

BT, British Gas, Royal Mail and British airways privatised

Royal Mail has 32.8% market share in 2015
Lead to royal mail introducing finger scanners, workers pickup and scan parcels faster, productivity increases

British Gas market share of 27.8% in 2023
BT market share of 33%
British Airways market share of 20%

Question 28

Examples of regulation in market structures

Answer 28

AT&T and US tech firms fined $100m for offering unlimited data to stream TV showed but they slowed the internet connection to cut costs for themselves.

Energy companies in 2016 stopped revealing profits made by each household leading to increased prices for consumers, exploiting monopoly power

Question 29

Examples of deregulation

Answer 29

Airline deregulation act in US allowing several firms to join the airline industry forcing incumbent firms to lower prices for consumers, allocative efficiency

Royal Mail cherry picking delivery routes which generate the most profit, increasing inequality