government intervention

• Competition and Markets Authority (CMA)

  Work to promote competition for the benefit of consumers and investigate mergers and breaches of UK and EU competition law, enforce consumer protection law and bring criminal cases against individuals who participate in cartels
• Controlling mergers

  1. Assess in terms of the specific circumstances of each case, considering whether there will be a substantial lessening of competition (SLC)

  2. Consider the likely competitive situation if the merger goes ahead compared to if it does not, and the merger will be approved if its potential benefits are greater than its cost

  3. Investigate 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
• Aim of preventing two large companies merging


  To prevent them from exploiting their customers by raising price, offering poorer quality service and reducing choice, and to prevent firms from gaining monopoly power
• 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
• Merger cases

  • Tesco's takeover of Booker was allowed as the CMA believed the impact on competition would not be too high
  • The European Commission blocked the merger of Ryanair & Aerlingus in 2010 as they would control more than 80% of all Europe flights from Ireland
• Holding a dominant position in an industry


  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
• Most of this regulation occurs for utilities, which are natural monopolies
• Price regulation

  1. Regulators can set price controls to force monopolists to charge a price below profit maximising price, using the RPI-X formula

  2. RPI-X+K formula where K represents the level of investment, used in the water industry and has allowed investment of £130bn

  3. Gives an incentive for firms to be as efficient as possible as if they can lower costs by more than X they will enjoy increased profit, prevents excessive prices and ensures that gains are passed onto the consumer
• Problems with RPI-X and RPI-X+K


  • Difficult to know where to set X due to rapid improvement in technology and because any information on what the efficiency gains will be have to come from the firm, who could easily lie as there is asymmetric information
  • Maximum prices could be set where the price is equal to the MSC, ensuring monopolies are allocative efficient, but it is difficult for governments to know where they should set the price as they do not know the exact allocative efficient output, and it can also increase dynamic inefficiency as firms are unable to maximise profit so may not invest
• Profit regulation

  1. In the USA, 'rate of return' regulation is used where prices are set to allow coverage of operating costs and to earn a 'fair' rate of return on capital invested, based on typical rates of return in a competitive market

  2. Aims to encourage investment and prevents firms from setting high prices, but gives firms an incentive to employ too much capital in order to increase their profits

  3. Criticised since a reduction in costs will not improve the firm's situation and so there is little incentive to be efficient, and regulators need sufficient knowledge of the industry and so will suffer from asymmetric information
• Quality standards


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


  • The Post Office has to deliver letters on a daily basis to all areas
  • Electricity generators are forced to have enough capacity to prevent blackouts
• The problem with quality standards is that it requires political will and understanding to introduce
• Performance targets

  1. Regulators can introduce yardstick competition, such as setting punctuality targets for train operating companies based on the best-performing European train operators, or split up a service into regional sectors to compare the performance of one region against another

  2. They could set targets over price, quality, consumer choice and costs of production, to help firms improve their service and lead to gains for customers

  3. The problem is that firms will resist the introduction of targets, so again it requires political will and understanding, and they will also attempt to find ways to meet targets without actually improving
• Other firms will fail to meet their performance targets and so there will be no improvements, the government need to ensure that fines and other deterrents are strong enough that firms at least work to ensure targets are met
• Promotion of small business

  • The government can give training and grants to new entrepreneurs and encourage small businesses through tax incentives or subsidies, which will increase competition since there will be more firms within the market, and will offer a chance for more firms to join
  • 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
• Schemes to promote small business

  • The Red Tape Challenge aims to decrease regulation, particularly for small businesses
  • The Enterprise Investment Schemes and Seed Enterprise Investment Scheme provide tax relief for people who buy shares in small companies to help them grow
• Deregulation

  The removal of legal barriers to entry to a previously protected market to allow private enterprises to compete, which will increase efficiency in the market by allowing greater competition as more firms can enter and conduct more activities than they could before
• The Deregulation Act of 2015 aims to continue deregulation
• Privatisation

  Allows for competition in the market
• Deregulation can have some negative effects, leading to poor business behaviour, and licenses for specific industries are necessary to ensure standards are upheld
• Competitive tendering


  1. The government has to provide certain goods and services because they are merit or public goods but this does not mean that the state has to be the producer of all these goods and services, the government can contract out the provision of a good or service to private companies

  2. Competition can be introduced into the market as the government will request competitive tenders by drawing up a specification for the good or service and inviting private firms to bid for the contract to deliver it, the firm offering the lowest price wins the contract, subject to quality guarantees
• Benefits of competitive tendering

  Helps to minimise costs for the government and ensures efficiency by allowing for competition in the market, the private sector will have more experience running the projects, so it is likely they will be better managed
• The process of collecting bids is costly and time-consuming, the private sector may not aim to maximise social welfare in the same way the government would and could use cost-cutting methods that reduce quality
• Anti-competitive practices

  Collusion and predatory pricing, the Enterprise Act (2002) means firms engaging in these practices can be fined up to 10% of worldwide annual sales and those who organise cartels can face up to five years in prison and unlimited fines
• Anti-competitive practices

  • In 2011, the 9 supermarkets in the UK were found to be fixing the price of milk and cheese products and Tesco alone was fined for £10 million
• It is very difficult to prove overt collusion and almost impossible to prove tacit collusion
• 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 monopsonists 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
• Workers' rights

  The government protects workers' rights to ensure fair treatment and prevent exploitation
• Tesco was fined £10 million for fixing the price of milk and cheese products
• Monopsony power

  • Monopsonists are able to exploit suppliers by reducing prices
• Restrictions on monopsony power

  • Anti-monopsony laws which make certain practices illegal
  • Independent regulator who will force monopsonists to buy fairly
• Protecting suppliers and employees


  • Fines can be put in place for those who exploit their power
  • Minimum prices may be introduced to ensure suppliers are paid a fair amount
  • Self-regulation can also be used, but this is weak
• Workers' rights

  • Health and safety laws
  • Employment contracts
  • Redundancy processes
  • Maximum hours at work
  • Right to be in a trade union
  • Codes of conduct relating to employment practice
• If workers' rights are too strong, employers will be unwilling to take on new workers due to the extra cost of employing these workers
• Privatisation

  The sale of government equity in nationalised industries or other firms to private investors
• Nationalisation

  When a private sector company or industry is brought under state control, to be owned and managed by the government
• Advantages of privatisation

  • Encourages greater competition
  • Managers become more accountable
  • Reduces the public sector net cash requirement
  • Reduces government interference
  • Puts utilities into the hands of the people
• Disadvantages of privatisation

  • May lead to higher prices and poor services
  • Firms may abuse their monopoly position
  • Negatively affects the public sector net cash requirement
  • Leads to externalities and inequality