Competition policy

• What is competition policy?

  • Competition policy is government policy that aims to make markets more competitive and to ensure that the public interest is protected
• What are the main forms of consumer exploitation by firms?

  The main forms of consumer exploitation by firms include higher prices, lack of choice and/or poor quality products
• What does competition policy aim to control?

  • Competition policy aims to control anti-competitive mergers and monopolies, prevent restrictive trading practices and promote competition in markets
  • The Competition and Markets Authority (CMA) is the UK Government responsible for overseeing competition policy in the UK
• What is the CMA?

  • The Competition & 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
• What are examples of other regulatory bodies in the Uk under the CMA?

  • There are other regulatory bodies the UK which operate under the CMA such as the Civil Aviation Authority (CAA) or the Office of Gas and Electricity markets (OFGEM)
  • Within the EU, the European Commission seeks to restrict anti competitive behaviour within EU countries and with its trading partners
  • UK companies trading in the EU need to consider both UK and EU competition law
• What is one way to control monopolies?

  • 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
• Why do monopolists restrict output and raise prices?

  to gain supernormal profit. This reduces consumer surplus and so is not in the best interest of consumers
• Why does the CMA continuously intervene in markets?

   CMA continuously intervenes in markets in order to promote competition and protect the interests of consumers
• What are examples of competition policies in competitive markets?

  Compulsory break-up

  price regulation

  profit regulation

  taxation

  public (state) ownership
• What is the compulsory break up?

  • Some would argue that monopolies should be forcibly broken-up
  • This has happened on rare occasions in the UK, to ensure that no single company controls the supply of electricity, or controls all the country’s major airports
  • E.g In 2009, the airport operator BAA was told to sell three of its airports
• What is price regulation?

  • Monopolies aim to produce at the profit maximisation level of output and have higher prices and limited output in the market
  • Regulators set maximum prices to lower prices and increase output
  • Effective price regulation sets the maximum price at the level where there is allocative efficiency
  • E.g Fare rises for train operating companies in the UK are capped by the retail price index (RPI)
• What is profit regulation?

  • The CMA can 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
  • It is a very contentious policy, as
  • Costs are difficult to calculate and firms often try to inflate their perceived costs so as to make more profit than allowed
  • There is 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 often post record profits year on year
• What is taxation on monopolies?

  • To limit excessive monopoly profits, windfall taxes may be implemented
  • This leads to an increase in the costs of production, resulting in higher prices and lower output
  • In the UK, energy firms such as BP and Shell paid tax on profits made from extracting gas and oil
• What is public (state) ownership?

  • Publicly owned monopolies are more likely to operate in the best interests of society
  • Monopolies often abuse market power to make profits, an objective that is removed under state ownership
• What policies can help to improve Competition & Contestability?

   Promotion of small business

  deregulation

  Competitive tendering for government contracts

  privatisation
• What is promotion of small businesses?

  • Providing tax incentives or subsidies to small firms can help increase the number of new entrants into industries and therefore promote competition. In 2022, the UK government introduced the Supporting Small Business (SBB) scheme which caps bill increases at £600 for some small businesses
• How does deregulation promote competitiveness?

  • Government regulations can increase industry costs or act as a barrier to entry. Deregulating a market can promote competition, which will also increase the market's contestability
• How does Competitive tendering for government contracts

  promote competitiveness?

  nstead of the government manufacturing goods and services itself, this is often outsourced to firms. This is done by outsourcing the supply of these products, this generates more private sector activity and increases competition
• How does privatisation promote competitiveness?

  • Firms are hesitant to enter an industry when the dominant firm is owned by the government. Privatisation encourages new entrants to enter the market as they feel they can compete more effectively with private firms. E.g. In 2022 the UK Government confirmed that Channel 4 would be privatised
• What are advantages of competition policies?

  • Increased competition may lead to a fall in market price 
  • Firms will strive to provide better quality and a range of products and customer service or risk losing market share 
  • Firms invest in R&D and increase innovation to improve production processes to lower costs over time
  • Both productive efficiency and allocative efficiency will occur as a result
  • This will benefit society as a whole as these new products and processes lead to improvements e.g. technical change that can be used across markets
• What are disadvantages of competition policies?

  • Reduces creative destruction, where firms with monopoly power are dynamically efficient as they can provide huge investment in R&D leading to innovative products and production processes. This would have benefited society as a whole 
  • Stop some firms, particularly natural monopolies, from realising huge economies of scale which could have been passed on to the consumer
  • May lead to government failure as the authorities create distortions in the market leading to inefficiencies