LS16 : Monopolies & Mergers

Question 1

why is government intervention important in some monopolies?

Answer 1

some monopolies tend to be utilities which are essential services. monopoly power results in higher prices and lower output. gov has to protect interest of consumers to make essential goods and services affordable.

Question 2

what is the CMA responsible for?

Answer 2

promoting competition and preventing anti-competitive practices. also regulating mergers

Question 3

what are anti-competitive practices?

Answer 3

strategies such as predatory pricing and collusion that are designed to limit the degree of competition inside a market

Question 4

what is competition policy?

Answer 4

any policy which seeks to promote competition and efficiency in markets and industries

Question 5

what is surrogate competition?

Answer 5

following the privatisation of industries in the 80s, many of these industries were natural monopolies so the gvt had to regulate these industries. aimed to replicated the effect of competition, this is known as surrogate competition.

Question 6

who regulates the water industry in the UK?

Answer 6

OFWAT (The Water Services Regulation Authority)

Question 7

who regulates the telecoms industry in the UK?

Answer 7

OFCOM (The Office of Communications)

Question 8

who regulates the financial services industry in the UK?

Answer 8

FCA (Financial Conduct Authority)

Question 9

who regulates the rail industry in the UK?

Answer 9

ORR (Office of Rail Regulation)

Question 10

who regulates the energy markets industry in the UK?

Answer 10

OFGEM (Office of Gas and Electricity Markets)

Question 11

what does price regulation aim to achieve?

Answer 11

regulate natural monopolies in the UK, by bringing price closer to the allocative efficiency (P=MC). important for utilities such as gas and water as they need to be affordable.

Question 12

what are the two main forms of price regulation used in the UK?

Answer 12

RPI - X
RPI + K

Question 13

what is RPI - X?

Answer 13

form of price regulation used as a price cap by OFGEM and the ORR. the maximum price rise firms are allowed to make is RPI - X, where X = expected efficiency gains

Question 14

what does RPI - X aim to achieve?

Answer 14

• restrain price rises for essential services
• incentivise utility providers for increase efficiency

Question 15

how does RPI - X aim to force producers to make efficiency gains?

Answer 15

RPI - X lowers the price of the good / service, limiting total revenue. to maintain or increase profit,the firm must reduce costs, arising from efficiency gains

Question 16

why are monopolies less likely to make efficiency gains than other types of firms?

Answer 16

absence of competitive pressures so less incentive to cut costs as they are unlikely to lose customers

Question 17

how does the regulator calculate X?

Answer 17

the regulator investigates the costs of firms in the industry to gain an understanding of possible efficiency gains. it is vital that the regulator has access to all necessary information and has a sufficient number of competent staff

Question 18

what are the advantages of RPI - X?

Answer 18

• protects consumers from raised prices for essential goods or monopoly power markets
• gives incentive to be efficient if they can lower costs
• prevents excessive prices and ensures gains passed onto the consumer

Question 19

what are the disadvantages of RPI - X?

Answer 19

• accurately setting X is difficult and requires time and manpower
• if regulators lack legal powers, there is a strong risk information will be withheld
• if X set too low, less incentive for firms to make efficiency gains
• if X set too high, less likely to make profit so leave the market

Question 20

what is profit regulation?

Answer 20

regulators set limits on the amount of profit using rate of return regulation

Question 21

where is profit regulation used?

Answer 21

regulate utilities in the US

Question 22

how does rate of return regulation work?

Answer 22

allows firms to cover costs and earn a return based on the amount of capital they use. the more capital, the higher profit earned. regulator incentivises investment as productivity gains and general maintenance are vital for utilities.

Question 23

what is the advantage of rate of return regulation?

Answer 23

firms incentivised to increase capital investment which is vital for maintaining and improving quality

Question 24

what are the disadvantages of rate of return regulation?

Answer 24

• little pressure for firms to be productively efficient as the regulator guarantees costs will be covered
• danger firms overload on capital investment to earn higher profit

Question 25

what are performance targets?

Answer 25

used to regulate monopolies and incentivise improvements in public organisations

Question 26

what are quality standards?

Answer 26

minimum standards of services set by a regulator for monopolies or public bodies

Question 27

what is the logic behind using quality and performance targets to regulate monopolies?

Answer 27

by setting quality standards and performance targets regulators aim to motivate monopolies to meet a minimum standard of provision

Question 28

what is the advantage of performance targets and quality standards?

Answer 28

if set correctly they may act as a surrogate for competition by forcing firms to behave as if they were in a contestable market

Question 29

what are the disadvantages of performance targets and quality standards?

Answer 29

• sufficient sanctions need to be in place to enforce standards
• risk people game the system
• unintended consequences

Question 30

who is responsible for investigating mergers?

Answer 30

CMA

Question 31

what are the conditions for the CMA to investigate mergers?

Answer 31

• combined firm would have market share over 25%
• combined firm would have turnover of over £70m

Question 32

what conditions are necessary for effective merger control?

Answer 32

• competent regulators
• accurate and up to date information
• sufficient time to thoroughly investigate

Question 33

what is RPI + K?

Answer 33

price cap used by OFWAT to regulate private water companies in E&W

Question 34

what is RPI + K used for?

Answer 34

determines maximum price firms are allowed to make, where K stands for capital investment

Question 35

why is using K in RPI + K necessary?

Answer 35

regulators and water industry argue that capital investments required to maintain high quality service are far larger in the water industry. firms need higher revenues to make investment viable.