Government intervention

Intervention to Control Mergers

• The Competition and Markets Authority (CMA) is the UK Government regulator tasked with ensuring that the creation of monopoly power is avoided and that consumers are not exploited in markets

  • The main forms of consumer exploitation include higher prices, less choice and/or poor quality products

• There are similar regulators in Europe (European Competition Commission) and in the USA (Antitrust Commission)

• One way to control monopoly power is to prevent it from forming in the first place

• A key function of the CMA is to monitor merger activity with the aim of preventing any single firm gaining more than 25% market share

  • If there are concerns about the merger then the CMA has the authority to stop it from happening, or they can allow it to go ahead but insist the new firm sells certain assets which would limit its market share

  • E.g. in July 2022 the CMA launched an investigation(opens in a new tab) into the merger of two companies which produce foam used in bedding and cleaning products as they believed it would lead to higher prices and less choice

Intervention to Control Monopolies

• In addition to controlling merger activity, the CMA continuously intervenes in markets in order to promote competition and to protect the interests of consumers

Price regulation	Profit regulation
Monopolies aim to produce at the profit maximisation level of output (MC=MR) This results in higher prices and restricted output in the market The CMA uses maximum prices to lower prices and increase output One way in which they determine where the maximum price should be is to identify the point of allocative efficiency and set the maximum price where AR=MC This strategy is often used on natural monopolies Firms will make less supernormal profit than before, especially when any price increases are set below the rate of inflation: RPI - X	The CMA may choose to limit the supernormal profit a monopoly can earn They do this by calculating the firm's total costs and then adding a percentage of profit to it However, it is a very contentious policy as Costs are difficult for the CMA to calculate Firms often try to inflate their perceived costs so as to make more profit than allowed Monopolies have no incentive to lower costs, so if costs are higher than they would be in perfect competition, consumers still end up paying higher prices Even with this policy in place, natural monopolies seem to post record profits year on year
Quality standards	Performance targets
One way to maximise profit is to reduce the quality of the raw materials, which reduces the quality of the end good/service If there are no substitutes then this is a likely outcome Regulators can step in to insist that certain quality standards are met It can be difficult for them to know what the potential quality of a product is or what standards to impose Firms push back on these quality standards as they reduce their supernormal profit	Regulators can also set performance targets so as to raise the quality of the service and improve customer satisfaction This is often seen in the rail industry where targets are set based on the percentage of trains runn

Intervention to Promote Competition & Contestability

1. Promotion of small business: providing tax incentives or subsidies to small firms can help increase the number of new entrants into industries and thus promote competition

2. Deregulation: Government regulations can increase industry costs or act as a barrier to entry. Removing regulations can promote competition, which will also increase the contestability in the market

3. Competitive tendering for government contracts: as a major provider of goods/services in the economy, the government could choose to manufacture many products itself, and this would decrease competition. By outsourcing the supply of these products, it generates more private sector activity and increases competition

4.  Privatisation: Firms are hesitant to enter an industry when the dominant firm is owned by the government and has access to all of the government's resources. Privatisation encourages new entrants to the industry as they feel they can compete more effectively with private firms, which perhaps have fewer resources available to them, e.g. In April 2022, the UK Government confirmed that Channel 4 would be privatised

Intervention to Protect Suppliers & EmployeesProtecting suppliers

• Monopsony power is abusive towards suppliers and, over time, can change the nature of entire industries in an economy

  • Governments can pass anti monopsony laws and issue fines if breaches occur

  • They can encourage firms to self-regulate and trade fairly

  • They can appoint a regulator to monitor the practices in the industry

  • They can subsidise firms that are suffering from abusive monopsony power

  • They can set minimum prices, which buyers have to pay suppliers

• Nationalisation can also be used to break the market power of the abusive firm, resulting in better treatment of suppliers

Protecting employees

• Wage bills for firms are often one of their highest costs as a proportion of expenditure

• With a goal of profit maximisation, firms will always seek to reduce their wage expenditure, as this will result in higher profit

• There is a role for government to protect workers who could be exploited by firms

• The government uses the following methods to protect employees:

  • National minimum wage legislation

  • Legislation on health and safety, working hours and employment conditions, e.g. maternity pay

  • Permitting trade unions to operate in the economy (some countries limit or ban the existence of unions as they view them as anti-competitive e.g. Singapore)

  • Encouraging firms to adopt best practice and draw up company codes of conduct towards their employees. This is a form of self-regulation