theme 3- 3.6 government intervention in product markets

Question 1

competition policy definition

Answer 1

the set of rules and powers used to increase competition in markets
e.g. govt uses competition authorities

Question 2

examples of competition authorities

Answer 2

• Competition and Markets Authority (CMA) in the UK- power to fine a firm up to 10% of its annual worldwide turnover
• Federal Trade Commission USA
• European Competition Commission

Question 3

aims of competition authorities

Answer 3

promote the interests of the consumer:
- prices
- profit
- efficiency
- quality
- choice

Question 4

types of govt intervention: to control mergers

Answer 4

the CMA will investigate proposed mergers if the business being taken over has an annual turnover of at least £70 million or the combined businesses will have a 25%+ market share
e.g. stopped a merger between Sainsbury’s and Asda in 2019
CMA can force firms to demerge

Question 5

types of govt intervention: to control monopolies

Answer 5

the regulator looks at aspects of monopoly behaviour and can:
- regulate prices e.g. OFGEM regulates a price cap for energy since 2019
- set a max percentage profit relative to a firm’s assets
- control quality of services by setting standards + gives a limited franchise period so if don’t meet standards = shut down

Question 6

types of govt intervention: to promote competition and contestability

Answer 6

• promotion of small businesses e.g. venture capital schemes
• deregulation
• competitive tendering for govt contracts- bidding by private firms-better value for money for taxpayers
• privatisation- force firm to be more efficient as they no longer rely on govt subsidies

Question 7

types of govt intervention: to protect suppliers and employees

Answer 7

• restrictions on monopsony power of firms
• nationalisation- to protect workers and other firms that rely on the failing firm

Question 8

possible benefits of govt intervention

Answer 8

• lower prices
• increased choice for the consumer
• fall in supernormal profit for firms
• increased efficiency of firms
• improved design and quality of products

Question 9

possible limits of govt intervention

Answer 9

• regulatory capture- regulated industries can gain influence over their regulator so it acts in their interest- form of govt failure
• asymmetric info- makes it diff for authorities to investigate as business operators know more than market regulators