3.6.1 Government Intervention

• Controlling Mergers

  • Mergers are assessed to see if there will be a substantial loss of competition as this may lead to lower quality, higher prices and consumer exploitation
  • A merger is investigated if it results in over 25% market share or a combined turnover of over £70 million
  • Very few mergers are investigated due to information asymmetry or regulatory capture
• Government intervention to Control Monopolies

  • Price regulation
  • Profit regulation
  • Quality standards
  • Performance targets
• Price Regulation


  • Regulators may force monopolists to lower prices to prevent a decline in consumer welfare using RPI-X where X is the real percentage cut in prices
  • RPI+K where K is the real percentage increase in prices allows firms to increase dynamic efficiency and invest more
  • Maximum prices can be set to achieve allocative efficiency however it is difficult to find the point MC=AR
• Profit Regulation

  Also known as rate of return regulation assesses a firm's size and determines a reasonable level of profit compared to its size so may pay a one-off tax or enforce price cuts. However, this leads to x-inefficiency and regulators may fail to evaluate reasonable profits
• Quality Standards


  Enforcing quality standards improves consumer welfare as they are forced to find the most cost-efficient way to produce goods
• Performance Targets


  The government can set price, costs, quality and consumer choice targets to boost efficiency and welfare e.g. ScotsRail had to ensure 91.3% of trains were on time. However, firms may resist this and if fines are not large enough they may choose to ignore targets
• Intervention to Promote Competition and Contestability


  • Deregulation
  • Privatisation
  • Competitive tendering for government contracts
• Deregulation


  Removing regulations e.g. minimum qualifications lowers barriers to entry therefore the market is more contestable leading to lower prices, greater efficiency and better customer service
• Privatisation


  Private firms have profit incentives so they can cut costs and increase the efficiency of government businesses e.g. BT, British Airways and British Gas
• Competitive Tendering


  The government outsourcing specific job contracts to the private sector to lower costs and increase quality by selecting the best deal out of the bids and hiring that firm
• Intervention to Protect Suppliers and Employees


  • Restrictions on monopsony power
  • Nationalisation
• Restrictions on Monopsony Power


  The CMA can fine up to 10% of annual revenue if a firm is found to be engaging in anti-competitive practices, a minimum price can be introduced or an independent regulator like the GCA, which regulates supermarkets, can force monopsonists to buy fairly
• Nationalisation


  The transfer of ownership of a private sector firm or industry to be managed by the government
• Advantages of Nationalisation


  • Maximise social welfare by providing public goods and improving equality
  • The government can consider externalities so it can lower prices to encourage the consumption of merit goods or reduce production of demerit goods
• Disadvantages of Nationalisation

  • Nationalised industries suffer from moral hazard and the principal-agent problem as the loss will be covered by the government
  • High x-inefficiency as there is no profit incentive which may cause prices to rise