3.6 Flashcards
(9 cards)
What is competition policy?
The set of rules and powers that are used to increase competition within markets.
What are examples of competition authorities?
1- Competition and markets authority (CMA) in the UK
2- The Federal Trade commission in the USA
3- The European Competition Commission.
What are the types of government intervention?
1- To control mergers
2- To control monopolies
3- To promote competition and contestability
4- To protect suppliers and employees
How does the government control mergers?
The CMA will investigate mergers if the business being taken over has a UK annual turnover of at least £70 million or the combined businesses have at least a 25% share of the market.
The CMA can also force firms to demerge.
How does the government control monopolies?
1- Price Regulation: For example a price cap for energy
2- Profit Regulation: The government can set a maximum percentage profit relative to a firms assets.
3- Quality Standards: The government can control the quality of provision of services by setting out quality standards.
4- Performance targets: Businesses may be set specific measurable targets, for example, the proportion of first class post arriving the next day.
How does the government promote competition and contestability?
1- Promotion of small businesses: The UK government has taken various measures to promote small business, which should increase competition and contestability. E.g start up loans
2- Deregulation: Reduces or removes the legal barriers to enter an industry in order to increase competition and efficiency.
3-Competitive tendering for government contracts: when the government uses private sector businesses to build major projects or to provide services by inviting suppliers to bid for the work
4- Privatisation: The selling of public sector businesses to the private sector.
How does the government protect suppliers and employees?
1- Restrictions on the monopsony power of firms: firms in a strong position as sole buyers may face regulation to ensure that their suppliers are not exploited.
2- Nationalisation: when private firms are taken into public or state ownerships.
What are the benefits of government intervention?
1- Prices and choice: if the measures succeed in promoting competition between firms then prices should be reduced resulting in an increase in consumer surplus.
2- Profit
3- Efficiency: increased competition will provide an incentive for firms to reduce costs and to find ways to reduce waste practices.
4- Quality: if the measures are effective in increasing competition then firms will have an incentive to improve the quality of their products.
What are the limits of government intervention?
1- Regulatory capture: Regulatory capture is a situation that occurs when a regulatory agency that is created to promote the public interests prioritizes the interests of the industries they regulate. The agencies that promote the firms’ needs rather than the public’s interests are referred to as captured agencies.
2- Asymmetric information: this could make it difficult for authorities to investigate because the operating businesses are likely to know much more about the market than the regulators/.
