Theme 3.6.1

Question 1

Describe the 3 ways to reduce monopoly power

Answer 1

Prevent monopolies forming in the first place - CMA - regulates competition

Control the behaviour of existing monopolies - Price regulation, Quality standards , Profit regulation & Performance standards

Encourage competition into the industry by making the industry more contestable

Question 2

Who enacts competition policy in the UK?

Answer 2

Competition and Markets Authority

Question 3

What are the 4 roles of the CMA?

Answer 3

-To promote competition for the benefit of consumers
- investigate merges and breaches of UK and EU competition law
- enforce consumer protection law
- bring criminal cases against firms who participate in cartels.

Question 4

What can the CMA do?

Answer 4

Impose financial penalties

Prevent mergers taking place (if it’s control 25% + of the market)

Force businesses to reverse actions already taken

Question 5

Define regulatory bodies

Answer 5

Bodies who’re established by the gov or other orgs to oversee the functioning and fairness of financial markets and the firms that engage in financial activity.

They work beneath/report to the CMA.

Question 6

Who is the regulatory body of railways?

Answer 6

ORR

Question 7

Who is the regulatory body of airports and airlines?

Answer 7

CAA

Question 8

Who is the regulatory body of telecommunications?

Answer 8

OFCOM

Question 9

Who is the regulatory body of water?

Answer 9

OFWAT

Question 10

Who is the regulatory body of gas and electricity?

Answer 10

OFGEM

Question 11

What is the name of those who enact competition policy in the EU?

Answer 11

European Competition Commission

Question 12

What are the main aim of the competition policy?

Answer 12

To protect public interest

Question 13

What are the 5 aims of competition policy?

Answer 13

Prevent excessive pricing (way beyond MC)

Promote competition ( in highly concentrated markets through privatisation or de-regulation)

Ensure quality, standards and choice

Regulate natural monopolies/ Ensure effective privatisation of natural monopolies

Promote technological innovation (ensuring SNP made by monopolies or oligopolies are used in the public interest , instead of being given to shareholders all the time)

Question 14

When will competition authorities intervene?

Answer 14

Antitrust & Cartel Agreements

Investigate Mergers

Liberalise concentrated markets

Monitor state Aid Control - ensuring if there are excessive subsidies given in one country, that doesn’t distort competition/trade in another country

Question 15

When will a merger be investigated?

Answer 15

If it will result in a market share GREATER than 25%

OR

If it meets the turnover test of a combined turnover of £70 million or more

Question 16

What is the aim of preventing two large companies merging?

Answer 16

So they don’t exploit their customers by :
raising price
offering poorer quality service
Reducing choice

Question 18

What is the problem with controlling mergers?

Answer 18

Very few mergers are investigated each year . The CMA can suffer from regulatory capture (when the regulator has too close of relationship with the firm is supposed to be regulating-> leads to impartial decisions) and may not have all the necessary info to make a decision.

Question 19

Define regulatory capture

Answer 19

A form of government failure where those bodies regulating industries because sympathetic towards the businesses they’re supposed to be regulating

Question 20

AO2- Blocked merger of Ryan Air & Aerlingus

Answer 20

The European Commission blocked the merger of RyanAir & Aerlingus in 2010 as they would control more than 80% of all of Europe flights from Ireland

Question 21

Controlling the behaviour of existing monopolies- define price regulation in detail

Answer 21

a form of government intervention used to control the prices that monopolies can charge, to protect consumers from being exploited.

In a monopoly, firms can set prices well above the competitive level, which leads to:

Higher prices for consumers.
Lower output than is socially optimal.
Allocative inefficiency (welfare loss).

The government can step in by capping prices to a more socially efficient level

Question 22

What is RPI?

Answer 22

Retail Price Index

Measures inflation- shows how much the general price level is rising . Firms could theoretically increase prices in line with inflation to maintain real revenue.

Question 23

Explain the RPI-X formula (Controlling the behaviour of existing monopolies -price regulation)

Answer 23

The price cap is allowed to rise each year by RPI minus X. (Prices aren’t allowed to be above the next year beyond RPI).

X= expected efficiency savings that regulators believe the firm can achieve.

Allowed Price increase= RPI-X
E.g if RPI= 4% and X = 2%, the firm can only raise prices by 2% (4-2).

This encourages monopolies to cut costs by at least X% each year or lose profit, while consumers enjoy lower prices than if prices rose with inflation alone.

It promotes the incentive of efficiency savings-> used in the airport industry.

Question 24

Explain RPI - X + K ( Controlling the behaviour of monopolies- price regulation)

Answer 24

This is used for industries that require heavy infrastructure investment (like water companies).

K represents the allowed return for capital investment.

It’s added to ensure the firm has the incentive to reinvest and maintain infrastructure

Allowed Price increase = RPI - X + K
E.g If RPI = 3%, X = 1%, K = 2%
Allowed price increase = 3% - 1% + 2% = 4%

This ensures that:

The firm is rewarded for efficiency (X).

The firm can afford long-term investments (K).

Consumers are still protected from excessive price rises.

Question 25

Simple- explain RPI-X

Answer 25

Regulators concept price controls to force monopoly to charge a price below profit maximising price using the RPI-X formula. X represents the expected efficiency gains of the firms and the aim is to ensure firms pass on their efficiency gains to consumers. This is using the airport industry.

Question 26

Simple - explain RPI - X + K

Answer 26

K represents the level of investment this is used in the water industry and has allowed investment of £130bn. It gives an incentive for firms to be as efficient as possible as if they can lower cost by more than X they will enjoy increased profit. It prevents excessive prices and ensure that games are passed onto the consumer.

Question 27

What are the positive evaluation of using RPI-X / RPI - X + K formulas for price regulation

Answer 27

Gives monopolies an incentive to cut costs. Protects consumers from overpricing. Still allows for infrastructure investment (when K is used). Easy to apply year-on-year

Question 28

What are the negative evaluation of using RPI-X / RPI - X + K formulas for price regulation

Answer 28

Information gap: Regulators may struggle to set the right X due to rapid improvement in tech & because any info on what the efficiency gains will be have to come from the firm, who could easily lie as there is asymmetric information. As a result there may be certain prices or rebates for customers, for example the water industry was false to cut prices by 10% in 2000. Regulatory capture risk: Firms might influence regulators to set soft targets. Reduced innovation: If profit is squeezed too tightly, firms lose incentives for R&D.

Question 29

Define quality standards

Answer 29

legal requirements set by governments or regulators to ensure products or services meet minimum levels of safety, reliability, and performance.

Question 30

What is the purpose of quality standards

Answer 30

Protect consumers from harmful or poor-quality products. Reduce information gaps (consumers can’t always assess quality before purchase). Encourage firms to compete on quality, not just price. Drive product innovation and consumer confidence.

Question 31

A02 - Example of Quality standards - Euro NCAP safety certification

Answer 31

in the UK and EU, automotive firms such as Tesla must pass the European New Car Assessment Programme (Euro NCAP), which tests for crash safety, braking systems etc before selling vehicles in the UK or EU. This forces firms to meet minimum safety levels, reducing the risk of consumers unknowingly purchasing unsafe cars — helping correct asymmetric information and protect welfare

Question 32

What are the positive effects of quality standards on firms and markets?

Answer 32

Forces firms to improve product quality. Reduces market failure from asymmetric information. Can encourage competition on non-price factors (quality, service)

Question 33

What are the negative effects of quality standards on firms and markets

Answer 33

Increases costs for firms (compliance, testing, certification). May raise barriers to entry — especially for small businesses - reduces competition If standards are too strict, could reduce consumer choice.

Question 34

What are some evaluation points for quality standards?

Answer 34

Effective if consumers cannot easily assess quality on their own. Can reduce dynamic efficiency if smaller firms can't afford to innovate. If too lax, regulatory failure occurs and consumers still face risks Corrects market failure (reduces asymmetric info)

Question 35

Define performance targets

Answer 35

Government sets quantitative goals for state-funded or regulated firms to improve service quality, efficiency or delivery — rather than focusing solely on profit.

Question 36

Define profit regulation

Answer 36

A form of government intervention where a regulator limits the level of profit a firm can earn, especially in industries where monopolies or oligopolies have market power (e.g. utilities, rail).

Question 37

What is the purpose of profit regulation?

Answer 37

Prevents firms from charging excessive prices by capping profits at a reasonable rate of return — forcing prices closer to competitive levels.

Question 38

What is the purpose of performance targets?

Answer 38

Ensures firms prioritize outcomes valued by society (e.g. punctuality, customer satisfaction, treatment success) — especially important in public services.

Question 39

How do performance targets work?

Answer 39

Targets are published and monitored — firms can face financial penalties or bonuses for underperformance or exceeding expectations.

Question 40

How does profit regulation work?

Answer 40

Regulators set a limit based on the firm's capital base and an acceptable return, e.g. 5% return on investment. Any profit above this is either taxed or refunded to customers via lower prices

Question 41

AO2- Performance targets - Train companies

Answer 41

Train companies are given punctuality and reliability targets by the (ORR). If they fail to meet these — for example, if trains run late or are cancelled excessively — they face fines or even risk losing their contract.

Question 42

AO2 - performance targets - NHS

Answer 42

GP may be required to see a number of patients per hour to meet NHS productivity targets can lead to shorter, rushed consultations, where doctors focus on meeting quotas rather than fully addressing patient health — lowering the quality of care and increasing the risk of misdiagnosis (UNINTENDED CONSEQUENCES)

Question 43

Evaluation for profit regulation

Answer 43

Reduced Dynamic Efficiency: Profit regulation can limit the reward for risk-taking, reducing firms' incentives to innovate, invest, or improve services over time

Question 44

Evaluation for performance targets

Answer 44

firms prioritising short-term compliance over long-term investment or service quality. The focus on avoiding penalties may result in distorted business decisions

Question 45

Name 3 market liberalisation policies

Answer 45

Privatisation Deregulation Reducing trade barriers Competition and competitive outcomes are promoted

Question 46

General evaluation for monopoly regulation

Answer 46

Level of info - no guarantee that regulatory bodies will have the correct info - reg could be too strict- causing UNINTENDED CONSEQUENCES of firms shutting down- too lax- could still be monopoly outcomes generated. - gov failure Costs vs Benefits- significant costs for regulation such as admin costs + tax payer money is used to employ these bodies and there aren’t high benefits especially if reg is too strict/lax - cost > benefit- gov failure. Regulatory capture - gov failure Benefits of Monopoly such as Dynamic Efficiency may be lost if regulation is too harsh

Question 47

In what 4 ways does the gov intervene to promote competition

Answer 47

enhancing competition between firms through promotion of small business deregulation competitive tendering for government contracts privatisation