Competition Policy & Regulation

Question 1

What are the aims of Competition Policies?

Answer 1

• Promote competition for the benefit of consumers

• Consumers get lower prices and better quality

• The most innovative, consumer-focused companies are the
ones that survive; promotes dynamic efficiency

• Investigate (potential) mergers to ensure that the outcome won’t reduce consumer welfare

• Investigate entire markets if there are problems for consumers,
especially in concentrated markets

• Initiate action against companies involved in cartels or other illegal
anti-competitive practices e.g. bid-rigging, collusion, predatory pricing

• Encourage market liberalisation e.g. deregulation, to improve
contestability, make markets work more efficiently

• Analyse “state aid” measures to make sure it is fair and doesn’t distort competition

• Protect consumers from “unfair” trading practices

• Encourage the government and regulators to promote competition

Question 2

Advantages of Price Regulation?

Answer 2

• reduces monopoly power

• less consumer exploitation

• greater efficiency

• helps control inflation

Question 3

Disadvantages of price regulation?

Answer 3

• possible job loss

• distorts price mechanism

• there may be information failure & regulatory capture

• lower profits may mean less investment

Question 4

What is profit regulation?

Answer 4

Profit regulation considers the size of firms and evaluates a ‘reasonable’ rate of return from the capital base; more common in USA

If profit exceeds this rate, the regulator imposes price cuts or a one-off (windfall) tax

Question 5

Advantages of Price Regulation?

Answer 5

• Prevents profiteering

• Less consumer exploitation

Question 6

Disadvantages of Profit Regulation?

Answer 6

• Discourages profits

• Encourages ‘cost padding’

• No efficiency incentive’ scope for regulatory failure