Competition Policy

What is competition policy?

Government policy to make markets more competitive and protect consumers from unfair behaviour.

Why do governments use competition policy?

To prevent firms abusing market power and to improve efficiency.

What problems does lack of competition cause?

• Higher prices

• Less choice

• Poor quality goods

Who is responsible for competition policy in the UK?

Competition and Markets Authority (CMA)

What does the CMA do?

• Stops anti-competitive mergers

• Controls monopolies

• Protects consumers

Why does the CMA control mergers?

To prevent firms becoming too powerful (monopolies).

What market share level is a concern?

Around 25%+ market share.

What can the CMA do about mergers?

• Block them

• Allow them with conditions (e.g. sell assets)

What is the goal of merger control?

Prevent higher prices and less choice.

Why are monopolies a problem?

They can:

• Restrict output

• Charge high prices

• Make supernormal profits

What does this do to consumers?

Reduces consumer surplus and welfare.

What is a break-up policy?

Forcing a monopoly to split into smaller firms.

What is price regulation?

Government sets a maximum price for monopolies.

Goal of price regulation?

Achieve allocative efficiency (P = MC).

What is profit regulation?

Limits how much profit a monopoly can make.

Problem with profit regulation?

• Hard to measure costs

• Firms may exaggerate costs

• Little incentive to cut costs

How does taxation reduce monopoly power?

Taxes reduce profits → may lower output or increase prices.

What is public ownership?

Government runs the monopoly.

Why is it used?

To make firms act in the public interest, not profit-maximisation.

How does the government support small firms?

• Subsidies

• Tax relief

Why do governments support small firms?

To increase competition and entry into markets.

What is deregulation?

Reducing government rules in a market.

Why does it help?

Lowers barriers to entry → more competition.

What is competitive tendering?

Government contracts are given to private firms, instead of the government manufacturing goods and services itself. The supply is outsourced and generates more private sector activity.

What is privatisation?

Selling state-owned firms to private companies. - firms are hesitant to enter an industry when the dominant firm is owned by the government. therefore privatisation encourages new entrants.

Benefits of competition policy?

• Lower prices

• Better quality

• More choice

• More innovation (R&D)

• Productive + allocative efficiency

Why does competition improve innovation?

Firms compete to survive, so they improve products and reduce costs.

Problems with competition policy?

• Expensive to monitor

• Time-consuming

• Can cause government failure

Why might competition policy reduce efficiency?

It may stop firms from achieving economies of scale.