government intervention

• The Competition & Markets Authority (CMA) is the UK Government regulator tasked with ensuring that the creation of monopoly power is avoided & that consumers are not exploited in markets
• Forms of consumer exploitation

  • Higher prices
  • Less choice
  • Poor quality products
• There are similar regulators in Europe (European Competition Commission) & in the USA (Antitrust Commission)
• Controlling monopoly power


  1. Prevent it from forming in the first place

  2. Monitor merger activity

  3. Prevent any single firm gaining more than 25% market share

  4. Stop mergers from happening

  5. Allow mergers but insist the new firm sells certain assets to limit its market share
• In addition to controlling merger activity, the CMA continuously intervenes in markets in order to promote competition & to protect the interests of consumers
• Monopoly power


  The ability of a single firm to dominate a market
• Controlling monopoly power


  1. Prevent it from forming in the first place

  2. Monitor merger activity to prevent any single firm gaining more than 25% market share

  3. If concerns, CMA can stop the merger or allow it but insist the new firm sells certain assets to limit market share
• Intervention by CMA


  • In July 2022 the CMA launched an investigation into the merger of two companies which produce foam used in bedding & cleaning products as they believed it would lead to higher prices & less choice
• Intervention to control monopolies

  Controlling merger activity, continuously intervening in markets to promote competition & protect consumer interests
• Types of intervention in monopoly markets

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


  CMA uses maximum prices to lower prices & increase output, often on natural monopolies
• Profit regulation


  CMA limits the supernormal profit a monopoly can earn by calculating the firm's total costs and adding a percentage of profit
• Profit regulation is a contentious policy as costs are difficult to calculate, firms try to inflate perceived costs, and monopolies have no incentive to lower costs
• Even with profit regulation, natural monopolies seem to post record profits year on year
• Quality standards


  Regulators can insist on certain quality standards to prevent monopolies reducing quality to maximise profit
• Performance targets


  Regulators can set targets to raise quality of service and improve customer satisfaction, often seen in the rail industry
• Interventions to promote competition & contestability

  • Promotion of small business
  • Deregulation
  • Competitive tendering for government contracts
  • Privatisation
• Monopsony power


  Abusive power of a single buyer over suppliers
• Interventions to protect suppliers

  • Anti-monopsony laws
  • Encouraging self-regulation
  • Appointing regulators
  • Subsidising affected firms
  • Setting minimum prices
  • Nationalisation
• Interventions to protect employees

  • National minimum wage legislation
  • Legislation on health & safety, working hours & employment conditions
  • Permitting trade unions
  • Encouraging best practice & codes of conduct
• Desired Outcomes of Government Intervention

  • Prices: Affordable & stable prices
  • Profit: Permitting enough to keep firms in the industry (normal profit) but limiting how much they make so that household income is protected
  • Efficiency: Reducing wastage of valuable resources & one of the best ways to achieve this is by developing rigorous competition
  • Quality: Ensuring products are fit for purpose & contribute to a better standard of living
  • Choice: Wider choice improves the standard of living & also helps to improve product quality. More choice also generates more economic activity in an economy & increases the gross domestic product (GDP)
• Limits to Government Intervention

  • Government intervention is not always effective. Two of the main reasons for this are the existence of regulatory capture & asymmetric information
• Regulatory Capture


  Occurs when firms influence the regulators to change their decisions/policies to align more with the interests of the firm
• Firms spend millions lobbying regulators directly - or in many cases lobbying politicians who can issue instructions to the regulators e.g in 2021 the former UK Prime Minister, David Cameron, was caught in an embarrassing case of lobbying for a failed financial venture by a firm called Greensill Capital
• Some lobbying activity is corrupt & there is a fine line between influencing activity & bribing. The UK Government has an agenda to improve the transparency of any lobbying activity
• Regulatory capture can completely prevent fair outcomes in the markets concerned
• Asymmetric Information


  Often governments believe they are making the best decision in order to meet their aims. Many times it is not the best decision due to the fact that the government or regulators either do not have the full & relevant information - or they do not understand the market they are trying to regulate e.g. many financial markets are fast moving & incredibly complex
• The existence of asymmetric information has been responsible for some spectacular government failures
• 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
• Merger investigation

  • 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, and the CMA can suffer from regulatory capture and may not have all the information necessary to make a decision
• Tesco's takeover of Booker was allowed as the CMA believed the impact on competition would not be too high since supermarkets are in a hypercompetitive industry, but the European Commission blocked the merger of Ryanair & Aerlingus in 2010 as they would control more than 80% of all Europe flights from Ireland
• 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 where X represents the expected efficiency gains of the firms and the aim is to ensure firms pass on their efficiency gains to consumers

  2. A better system is 'RPI-X+K', where K represents the level of investment, which gives an incentive for firms to be as efficient as possible
• It is 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. This aims to encourage investment and prevents firms from setting high prices, but it gives firms an incentive to employ too much capital in order to increase their profits, and it also means that regulators need sufficient knowledge of the industry and so will suffer from asymmetric information