Competition Policy

Who enacts competition policy

CMA Competition and Markets Authority

What are the aims of competition policy

To protect public interests

What would competition policy achieve

Prevents excessive pricing and exploitation of consumers

Promotes competition within the market

Ensures standards, quality and choice

Natural monopolies are regulated particularly with essential products

Promotes technological innovation - ensuring some profits are invested

When will the CMA intervene

To break up cartels and punish those involved with cartel agreements

Investigating mergers - if a merger results in a market share of over 25 percent they may intervene to prevent this

Liberalise concentrated markets

Monitor state aid control - Subsidies given to farmers for example do not harm competition between firms , industries and countries basically ensuring the subsidy is distributed fairly

What are the types of price regulations used

RPI - relatively fair - firms are allowed to raise their prices proportional to rate of inflation

RPI - X - Restrict price below rate of inflation by ‘X’ percent - promotes efficiency and cost cutting

RPI ± K - This measure accounts for capital investment - if profit is not enough for a firm to invest into capital improvements then they will be allowed to rise their prices by K and vice versa

Draw a diagram of monopoly price regulation

Evaluation of price regulations

Imperfect information - could lead to x or k being set inaccurately

Cost of implementing this regulation opportunity cost

When using RPI ± k there is no incentive to cut costs as it will simply adjust to allow for capital investment

Regulatory capture - Regulations may be too lax as investigators end up sympathising with firms in the industry due to previous experience with these firms

What are the other regulation methods used

Quality control/ performance targets

Windfall taxes on profit

Profit control covering costs and adding percentage return on capital employed

Merger policy

Privatisation

Deregulation

Reducing trade barriers

Evaluate usage of all monopoly regulation

Level of information that the individual has access to when making the decision so that it is accurate

Costs of regulations are very high (Not worth it for all the benefits) gov failure

Regulatory capture

Benefits of monopoly - if monopolies are regulated too harshly then it will result in benefits of monopoly being removed (Dynamic efficiency) but also promoting competition in a natural monopoly results in a wasteful duplication of resources