Gov intervention

• What does the Competition and Markets Authority (CMA) aim to promote?

  Competition
• The CMA investigates breaches of UK and EU competition law
• The CMA has the authority to bring criminal cases against individuals involved in cartels.
• Steps in the UK's merger assessment process by the CMA

  1️⃣ Assess specific circumstances

  2️⃣ Determine substantial lessening of competition (SLC)

  3️⃣ Compare competitive situation with and without the merger

  4️⃣ Approve if benefits outweigh costs
• A merger is investigated if market share exceeds 25%
• What is the combined turnover threshold for a merger to be investigated by the CMA?

  £70 million
• The aim of preventing large mergers is to avoid firms gaining monopoly power.
• Very few mergers are investigated by the CMA each year
• What is one reason the CMA may not investigate all mergers effectively?

  Regulatory capture
• The CMA allowed Tesco's takeover of Booker because it believed the impact on competition would be low.
• The European Commission blocked the merger of Ryanair and Aerlingus in 2010
• What percentage of all European flights from Ireland would the merged Ryanair and Aerlingus have controlled?

  80%
• Holding a dominant market position is illegal if the firm uses it to stifle competition.
• Monopolies are productively and allocatively inefficient
• What does X represent in the RPI-X formula for price regulation?

  Expected efficiency gains
• The RPI-X+K formula includes investment levels to encourage firms to invest.
• In which industry is the RPI-X+K formula used?

  Water industry
• Firms enjoy increased profits if they lower costs by more than X
• Why is it difficult to set the value of X in the RPI-X formula?

  Asymmetric information
• Setting maximum prices equal to marginal social cost (MSC) ensures allocative efficiency.
• In the USA, ‘rate of return’ regulation aims to ensure a ‘fair’ rate of return on capital invested
• What is one criticism of ‘rate of return’ regulation?

  Overcapitalization
• Monopolists will only produce high-quality goods if it maximizes their profits.
• What is yardstick competition used for in performance targeting?

  Comparing performance
• Performance targets can be set over price, quality, consumer choice, and costs
• Firms often resist the introduction of performance targets.
• Which firm failed to meet its performance targets in 2013-14?

  Network Rail
• The government can encourage small businesses through tax incentives or subsidies
• Promoting small businesses increases innovation and efficiency.
• What is the aim of deregulation in an industry?

  Increase competition
• Deregulation increases efficiency by allowing more firms to compete
• Deregulation of financial markets is argued to have contributed to the 2008 financial crisis.
• What is the term for government contracting out the provision of goods or services to private firms?

  Private Finance Initiatives (PFI)
• Competitive tendering helps minimize costs for the government
• The Enterprise Act (2002) allows fines for anti-competitive practices.
• Which supermarkets were fined for fixing milk and cheese prices in 2011?

  9
• Tacit collusion is almost impossible to prove
• What type of laws prevent monopsonists from exploiting suppliers?

  Anti-monopsony laws
• Minimum prices can ensure suppliers are paid a fair amount.
• The problem is that it is very difficult to prove overt collusion