4.1.8.7 - Competition Policy

Competition Policy =

Government policy which seeks to promote competition and efficiency in different markets and industries.

Government Agency for UK Competition Policy

Competition and Markets Authority (CMA)

• Independent deparment responsble for advising on and implementing competition policy in monopolistic markets and regulated industries.

Anti-Competitive Behaviour =

Strategies by firms designed to limit the degree of competition inside a market and reinforce the monopoly power of established businesses.

3 Focuses of the CMA

• Abuse of Monopoly Power

• Merger Policy - concerned with takeovers or mergers that might create a new monopoly

• Restrictive Trading Practice - price-fixing, market-sharing, cartel activities

3 Ways that Competition Policy promotes competition

• Change the market stsructure

• Prevent the abuse of monopoly power

• Prevent monopolies arising in the first place

Types of Competition Policy (& real world examples)

Compulsory Break-up of Monopolies - CMA has power to order the breakup of a monopoly

• e.g. In 2011, airport operator BAA were forced to sell London Stansted, and either Glasgow or Edinburgh airport.

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Price Controls - Max prices to limit monopoly profits

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Taxing Monopoly Profits

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Nationalisation - Government takes private monopoly into state ownership

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Privatisation of Monopolies - Selling state-owned industries to private sector to improve efficiency and performance

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Deregulation - Deregulatory policies to remove barriers to entry

• e.g. UK ‘Big Bang’ - deregulation of financial markets

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Introducing a Regulatory Body for a specific industry

• e.g. Ofcom, Ofgem

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Prevent Merger or Takeover - CMA has power to block mergers/takeovers if it believes it will act against the public’s interest

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Fines

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Prosecute Directors

Benefits of Competition Policy

If competition policy is effective, it should boost competition & decrease monopoly powers/cartel activity, which leads to the following benefits:

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Productive Efficiency

• ↑Competition → ↑Price competition → Firms need to minimise costs so they can offer similar prices → ↑Productive efficiency

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Reduce X-Inefficiency:

• ↑Competition → Firms have to reduce unnecessary costs and cut organisational slack to survive → Reduces X-Inefficiency

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Allocative Efficiency:

• ↑Competition → Price competition - firms undercut each other’s prices → Price falls closer to P=MC → More allocatively efficient

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Improves consumer choice:

• More alternative firms to buy from

Costs of Competition Policy

Reduces possible benefits of Monopolies:

• Reducing supernormal profits may eliminate R&D opportunities → ↓Dynamic efficiency

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Costly:

• Regulation requires lengthy investigations → large cost to taxpayers

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May lack power:

• Government may reject CMA’s recommendations

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Risk of Gov Failure:

• Regulatory capture - regulatory agencies, meant to protect the public, instead promote the commercial interests of the industry they regulate → makes misallocation of resources worse

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Free market argument:

• Process of creative destruction will remove monopoly power in LR