Theme 3: Regulation and Competition policy

Question 1

4 types of regulation of firms

Answer 1

1. Merger policy
2. Price regulation
3. Profit regulation
4. Performance targets and quality standards

Question 2

What is merger policy?

Answer 2

Blocking mergers that might give firms too much power.

Question 3

What is price regulation?

Answer 3

Capping prices firms can charge consumers.

Question 4

What is profit regulation?

Answer 4

Taking firms profits if they make too much supernormal profit

Question 5

What are performance targets and quality standards?

Answer 5

Imposing targets and standards so firms don’t provide dodgy goods or services.

Question 6

What are the two reasons the CMA might investigate a merger policy?

Answer 6

1. Combined market share of over 25% eg 3 mobile and O2
2. Combined annual turnover over £70m

Question 7

What are the two equations for price regulation?

Answer 7

1. RPI + K
2. RPI - X

Question 8

What does RPI + K mean?

Answer 8

RPI means the % a firm can increase their price by with inflation and + K means any additional % a firm can increase their prices by in order to improve efficiency by investing in R&D.

Question 9

What does RPI - X mean?

Answer 9

RPI amount a firm can increase their prices by and - X means that the regulators believe the firm is X inefficient and therefore must improve efficiency to reduce costs and maintain profits.

Question 10

What is regulatory capture?

Answer 10

When a regulator begins to favour a company they regulate eg by setting low quality standards, setting K too high and setting X too low.

Question 11

What is the aim of profit regulation?

Answer 11

Meant to cause any additional profits to be reinvested.

Question 12

What is the issue with profit regulation?

Answer 12

It removes the profit incentive as firms profits are taxed 100% above a certain limit.

No extra profit means no incentive so they become less efficient and their costs spiral.

Question 13

What are 2 examples of performance targets?

Answer 13

Scott rail have a target of 91.3% of trains being on time.

The NHS has a target of those in A&E waiting less than 4 hrs.

Question 14

What are two institutes in the UK that regulate standards?

Answer 14

FSI- Food standards institute

BSI- British standards institute

Question 15

What are the 4 ways the government promotes contestability?

Answer 15

1. Deregulation
2. Privatisation
3. Stopping anticompetitive practices
4. Helping small businesses

Question 16

What are the benefits of promoting contestability?

Answer 16

New entrants increase competition which stops exploitation.

Question 17

What are deregulations?

Answer 17

When regulations are removed to encourage new firms by lowering/removing barriers to entry.

Question 18

What is privatisation?

Answer 18

When government transfers ownership of public sector to private sector.

Question 19

What are anticompetitive practices?

Answer 19

Anything a firm may do to restrict competition

Question 20

What are examples of anti competitive practices?

Answer 20

Predatory pricing- prices below AVC to force out competitors.

Price collusion- 2 or more firms agree to limit or restrict competition.

Vertical integration- When a firm merges with another firm at another stage of the the production process.

Question 21

How does the government help small businesses to grow?

Answer 21

1. Access to loans
2. R&D tax breaks
3. Subsidies

Question 22

What is competitive tendering?

Answer 22

Outsourcing certain sectors and get them to bid to get a deal eg the NHS might outsource catering and get the best price by getting them to bid for their business.