3.6 Government Intervention Flashcards
Aims of competition policy
To promote competition, make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of businesses in overseas markets
Competition policy aims to ensure
Technological innovation which promotes dynamic efficiency in different markets
Effective price competition between suppliers
Safeguard and promote the interests of consumers with more choice and lower prices
Competition Policy: Anti-trust and cartels
Elimination of agreements that restrict competition including price fixing by firms who hold a dominant market position
Competition Policy: Market liberalisation
Introducing competition in previously monopolistic sectors e.g. energy suppliers
Competition Policy: State Aid Control
Policy analyses state aid measures such as airline subsidies to ensure that such measures do not distort competition in the market
Competition Policy: Merger Control
Investigation of mergers and take overs between firms which could result in their dominating the market
Examples of Anti-Competitive behaviour
Price fixing and market sharing
Predatory pricing and limit pricing
Charging excessively high prices
Refusal to deal/ discrimination
Patent misuse
Protectionist policies limiting overseas trade
Price regulation (RPI-X)
Price capping means businesses are allowed to achieve a given rate of profit on capital
RPI-X
RPI: inflation X: No. subtracted
e.g Inflation is 5% and X is 2% so the most they can raise prices is by 2%
Arguments for price capping with a monopoly
Capping can limit the monopoly power of natural monopolies by stopping them making excessive profits
Cuts in the real-price levels will lead to more consumer surplus
Leads to higher productive efficiency as firms are forced to lower costs to increase a producers profits
Arguments against Price Capping
Price caps have led to large numbers of job losses in the utility industries
The industry regulator may not have enough accurate information when setting the price caps for future years
Capping prices means lower profits which in turn can lead to reduced capital investment by the utility businesses and consumers can suffer from under investment in utility infrastructure
Price Capping
To be effective, has to be set below QPM
Price cap lowers the supernormal profit made by dominants firms in the market
May stimulate attempts to improve cost efficiency
In theory- leads to an improvement in allocative efficiency and consumer welfare
May lead to exit of some businesses which may reduce competition
Alternatives to Price Capping for increasing competitiveness in a market
Measures to reduce entry barriers in an industry
Higher taxes on monopoly profits
De regulation of markets
Attempts to liberalise a market to encourage new entrants to act as challengers to established firms
Advantages of deregulation of markets
Market supply should increases
Increased competition and higher contestability may lead to improved productive efficiency, allocative efficiency and dynamic efficiency
Reduced x-inefficiency
In the LR investment into the market could lead to macroeconomic implications e.g Increased Employment and economic growth and improvement in standards of living
Reasons for privatisation
Creates a better incentive for businesses to be run efficiently
Reduces trade union power, widening share ownership and increasing investment as they can raise funds through stock market
Can increase supply as competition improves
