T3 Regulation and Competition Policy

Question 1

What are the 4 Uk regulations in place?

Answer 1

Merger Policy
Price regulation
Profit regulation
Performance target and quality standards

Question 2

Describe the merger policy limit

Answer 2

Combined market share over 25%

Question 3

The CMA will investigate a merger for what two reasons:

Answer 3

1. If the merging firms will have over 25% market share together (like 3 and O2)
2. The “turnover test”: if the merging firms have a combined annual turnover above £70m

Question 4

If RPI is 3%, and -X (efficiency gains) is 2%
, how much can energy firms increase their prices by:

Answer 4

1%

Question 4

what is rpi

Answer 4

Retail Price Index, An economic indicator measuring inflation by tracking the change in the cost of a fixed basket of goods and services.

Question 4

there are two main types of price regulation - what are they:

Answer 4

RPI-X, RPI + K

Question 5

regulatory capture is when:

Answer 5

Regulatory capture is when a regulator begins to favour the company they’re regulating.

Question 6

Profit regulation is when:

Answer 6

firms’ profits are taxed at
100% above a certain limit

Question 7

Define privatisation:

Answer 7

Privatisation is when the government transfers ownership of a public sector firm to the private sector.

Question 8

competitive tendering is when:

Answer 8

Competitive tendering is when the government outsources specific job contracts to the private sector

Question 9

Competitive tendering is great for the government because:

Answer 9

Competitive tendering beneficial for the government because, by getting private sector firms to bid against each other for the contract, private sector firms will undercut each other’s prices and offer better quality.

Question 10

What are anti-competitive practices?

Answer 10

anything a firm might do, to restrict competition.

Question 11

predatory pricing is when:

Answer 11

when a firm aggressively cuts its prices below AVC to force out competitors from the market.

Question 12

price collusion is when:

Answer 12

when two or more firms agree to limit or restrict competition.

Question 13

vertical integration is when

Answer 13

Vertical integration is when firms at different stages of the same production process join together.

Question 14

In response to anti-competitive behaviour, the CMA can: (3)

Answer 14

1. Set a fine up to 10% of annual revenue
2. Sentence CEOs to jail time
3. Name and shame the firm publicly

Question 15

What is the CMA

Answer 15

Competition and Markets Authority in the UK

Question 16

what is Nationalisation

Answer 16

Nationalisation is when the private sector transfers ownership of a private sector firm to the government.

Question 17

What is deregulation

Answer 17

Deregulation is when regulations are removed to lower barriers to entry.

Question 18

What 4 tools can the government use to control monopolies

Answer 18

price regulation

profit regulation

quality standards and performance targets

Question 19

what are the two formulas for price regulation, that can be put in place on monopolies

Answer 19

RPI - x

RPI - k

Question 20

What is RPI and what is x in the RPI - x formula

Answer 20

RPI - retail price index, measure of inflation

X - is the expected efficiency savings

meaning firms can only increase prices by less than the rate of inflation

encourages cost cutting

Question 21

Explain the drawbacks and benfits of profit regulating monopolies

Answer 21

benefits:

Stops firms making excess profits, improving consumer surplus as firms cannot justfiy high prices.

incentives reinvestment into capital to improve quality

drawbacks:

reduced incentive to cut costs

less dynamic efficiency

Question 22

what effect can quality standards have on monopolies

Answer 22

Enforcing minimum service/ quality

prevents firms from sacrificing quality to maximise profits.

Question 23

What effect can performance targets + fines or penalties have on monopolies

Answer 23

Encourages dynamic efficiency and x efficiency, continuous improvement to avoid paying penalties

Question 24

How can the government increase competition and contestability (4)

Answer 24

SME support Deregulation Competitive tendering Privatisation

Question 25

What is SME support

Answer 25

Loans grants or improved tax incentives to small or medium sized enterprises, aimed at improving competition in markets

Question 26

What is deregulation

Answer 26

Removal of legal or administrative barriers to entry

Question 27

what is privatisation

Answer 27

Transfering from public to private ownership eg. BT or british gas Improves efficiency of the firm through profit driven incentives and increases competition in the market

Question 28

Why do natural monopolies still require regulation even after privatisation

Answer 28

They dont face real competition as it would be inefficient to have two firms in the market due to high fixed/infrastructure costs (National rail, water) New firms cant easily enter the market therefore the y may raise prices excessively cut corners on service or safety underinvest and become slack/lazy

Question 29

What are the reasons for nationalising (4)

Answer 29

Public interest - ensures universall access to vital goods Control over strategic resurces Correct market failure - like underproduction of merit goods Prevent collapse of a firm to protect jobs and stabilise economy

Question 30

What are the drawbacks of nationalising

Answer 30

Lack of profit driven efficiency risk of political interference Cost to tax payers to buy out firms Reduced competition

Question 31

What is lobbying

Answer 31

when individuals, groups, or organisations try to influence government policy or decisions, often to promote their own interests.

Question 32

what are the limitations to government intervention

Answer 32

Regulatory capture asymmetric information