3.6.1 - Gov intervention

• Government intervention to control mergers:

  • The Competition and Markets Authority (CMA) is the main competition regulator in the UK
  • A merger is investigated if it will result in market share greater than 25% or if it meets the turnover test of a combined turnover of £70 million or more.
• Government intervention to control mergers:

  • the problem is that very few mergers are investigated each year. The CMA can suffer from regulatory capture and may not have all the information necessary to make a decision.
• Government intervention to control monopolies:

  • Holding a dominant position in an industry is not wrong in itself but if the firm exploits this to stifle competition, they are deemed to be anti-competitive. Monopolies are allocative and productively inefficient and so it can be argued that they need to be controlled.
• Government intervention to control monopolies:

  • Price regulation
  • Profit regulation
  • Quality standards
  • Performance targets
• Price regulation: Regulators can set price controls to force monopolists to charge a price below profit maximising price
• Price regulation:

  • Maximum prices could be set where the price is equal to the MSC, ensuring monopolies are allocative efficient.
  • However, it is difficult for governments to know where they should set the price as they do not know the exact allocative efficient output. It can also increase dynamic inefficiency as firms are unable to maximise profit so may not invest.
• Profit regulation

  • Governments can control the profits that firms earn by ensuring they are not excessive. In the UK, firms have to pay corporation on any profits they earn.
• Profit regulation:

  • This aims to encourage investment and prevents firms from setting high prices. However, it gives firms an incentive to employ too much capital in order to increase their profits.
• Quality standards:

  • Monopolists will only produce high quality goods if this is the best way to maximise profits. The government can introduce quality standards, which will ensure that firms do not exploit their customers by offering poor quality.
• Performance targets:

  Regulators can introduce yardstick competition, such as setting punctuality targets for train operating companies based on the best-performing European train operators.
• Performance targets:

  • The problem is that firms will resist the introduction of targets, so again it requires political will and understanding. They will also attempt to find ways to meet targets without actually improving ,
• Government intervention to promote competition and contestability:

  • enhancing competition between firms through promotion of small business
  • deregulation
  • competitive tendering for government contracts
  • privatisation
• Government intervention to promote competition and contestability:

  Promotion of small business

  • The government can give training and grants to new entrepreneurs and encourage small businesses through tax incentives or subsidies . This will increase competition since there will be more firms within the market,
  • It increases innovation and efficiency , since new firms are likely to provide new products and incumbent firms will no longer be able to be X-inefficient.
• Promoting competition and contestability: Deregulation

  • This is the removal of legal barriers to entry to a previously protected market to allow private enterprises to compete. This will increase efficiency in the market by allowing greater competition as more firms can enter and conduct more activities
  • However, it can have some negative effects, leading to poor business behaviour . Licenses for specific industries are necessary to ensure standards are upheld
• Promoting competition and contestability: Competitive tendering

  • The government provides some goods and services because they are public or merit goods, and they are underprovided in the free market.
  • The firm which offers the lowest price and best quality of provision wins the government contract. This saves the government money, since the public sector can be bureaucratic and inefficient.
• Government intervention to protect suppliers and employees:

  • restrictions on monopsony power of firms
  • nationalisation
• Government intervention to protect suppliers and employees: Restrictions on monopsony power

  • Monopsonists are able to exploit suppliers by reducing prices. The government can prevent these by passing anti-monopsony laws which make certain practices illegal and can introduce an independent regulator who will force monopolists to buy fairly.
  • Fines can be put in place for those who exploit their power and minimum prices may be introduced to ensure suppliers are paid a fair amount. Self-regulation can also be used, but this is weak.
• Protecting suppliers and employees: Privatisation

  • Privatisation is the sale of government equity in nationalised industries or other firms to private investors. The aim is to revitalise inefficient industries but can sometimes lead to higher prices and poor services.
• Protecting suppliers and employees: Nationalisation

  • Nationalisation is when a private sector company or industry is brought under state control, to be owned and managed by the government.