Government Intervention (Theme 3 CC4)

CMA

Competition and Markets Authority, investigates mergers which can lessens competition substantially, act against business which engage in unfair behaviour, protect people from unfair trading practices, investigate entire markets, and provide advice over competition and consumer law.

Merger

Combination of two or more companies into a single firm

Takeover

An act of taking control of a company by buying most of its shares

Regulatory Failure

Where government regulation of an industry fails to achieve the best outcome for consumers and the economy.

Price regulation

Using regulation to place a limitation on the price a monopolist is allowed to charge

Price cap

A government-imposed limit on industry prices that make markets fairer to consumers, and also incentivise efficiency.

Deregulation

The lifting of government restrictions on business, industry, and professional activities, in order to try and stimulate growth, but also to remove any adverse restrictions on competition or on the freedoms of the market, such as lowering barriers to entry such as low cost finance or relaxing licensing requirements.

Competitive tendering

When the government contracts out the provision of a good or service and invites firms to bid for the contract to produce the goods/services which are then provided by the state.

Privatisation

A transfer of ownership of the public sector (the government) to the private sector (the private owners).

Nationalisation

The sale of private sector businesses to the government. The sale may be voluntary, forced, coerced or the assets simply expropriated

Regulatory Capture

The situation that occurs when a governmental regulatory agency ends up being controlled by the industry that it is supposed to be regulating rather than the public interest.

Price capping

A form of government intervention in market, by practising active limits on the price charged for a product. Often introduced as a way of controlling the monopoly pricing power of businesses with a large amount of market power

RPI - X

RPI is retail price index, a measurement of inflation while X is expected fall in costs due to gain in efficiency, formula imposed on monopolies by regulators to limit the scale of their price increases.

RPI + K

This takes the RPI and allows the addition of the K factor - accounts for the additional capital spending that a firm has agreed with the regulator is necessary such as replacing aging water infrastructure or rail networks.

Absolute profit regulation

Regulation of profits where firms can only earn a fixed £million in profit.

Relative profit regulation

Where the firm can only earn profit as a % of their revenue or using the formula Return on capital employed = Operating profit / capital employed (Total assets - Total liabilities)

Asymmetric information

A situation in which one side of the market has more reliable information than the other side, resulting in inefficient market outcomes.

Rationalisation

Reducing the number of resources, particularly labour and capital, put into the production process, by a monopoly/merger usually undertaken because a business has excess capacity

Asset stripping

The practice of buying businesses and breaking them up. The profitable parts are sold for cash and the rest are closed down in the aim to make profits.

Creative Destruction

The creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business, which often comes through the promotion of small businesses.