Regulation and competition policy

• What are the types of regulation used by the CMA

  1) Merger policy - blocking mergers that might give firms too much market power

  2) Price regulation - capping the prices firms can charge consumers

  3) Profit regulation - taxing firm's profits if they make too much supernormal profit

  4) Performance targets and quality standards - imposing targets and standards so firms don't provide dodgy goods or services
• What is the purpose of merger policy

  to block mergers and acquisitions
• Why might the CMA investigate a merger?

  1) If the combined market share is over 25% - over this, firm will have too much power and can exploit consumers with higher prices

  
  

  2) If the combined annual turnover is over £70m
• Give examples and reasons of mergers investigated by the CMA

  1) Three Mobile and O2 - total market share would've been 31% market share, creating a legal monopoly. CMA believed the merger will give Three and O2 too much power and will mean higher prices for consumers

  
  

  2) Virgin Active and David Lloyd - combined turnover was £1011m.

  
  

  Ev:

  
  

  3) Orange and T-Mobile formed EE - had a market share of 33% but were allowed to go ahead with the merger even if the share was over 25% as there was little evidence that the merger would have a negative impact of consumers - EE could improve quality of network coverage and can use economies of scale to help EE innovate
• What is price regulation

  limits how much a firm can increase its prices in order to protect consumers
• What are the two types of price caps?

  1) RPI + K

  used by OFWAT to regulate water companies:

  Used to work our how much companies such as water companies should be allowed to increase their prices by

  RPI - measure of inflation

  K - an extra amount firms will be allowed to increase prices by

  This price cap can be used to help struggling firms meet consumer needs as their profits will increase and they can invest - benefitting consumers in the LR

  
  

  2) RPI - X

  Used by ofgem to regulate energy firms:

  Similar principle to RPI + K.

  RPI - measure of inflation

  X - efficiency gains - subtracted amount from the RPI

  This is used to increase competitiveness of energy firms as well as increase efficiency in the SR to decrease their costs
• What is regulatory capture

  It is a situation in which a firm being regulated successfully influences the regulatory agency's actions to benefit the interests of the firm, rather than the public interest.

  - Favours the firm

  - Harms the consumer
• Give examples of Regulatory capture

  1) Setting quality standards too low

  2) Setting K too high in the RPI + K formula

  3) Setting X too low in the RPI - X formula
• What is profit regulation

  governments can control the profits that firms earn by ensuring they are not excessive. The extra profit made by the firm will then have to be reinvested
• Evaluate the use of profit regulation

  Ineffective

  - Taxing away a firms profits above a certain level will remove the profit incentive which will reduce the incentive to be efficient and costs will start to spiral

  - This is why the CMA will mush rather stick to price regulation than profit regulation
• what are performance targets

  targets for firms to meet, to ensure they're providing a top quality service
• what are quality standards

  standards of quality that firms have to meet to sell their goods and services
• How can we get new firms to enter the market?

  Lowering entry barriers and increasing contestability
• How can the CMA promote contestability?

  1) Deregulation

  2) Privatisation

  3) Stopping anti-competitive practices

  4) Helping small business
• How can deregulation promote contestability

  - Lower prices

  - Better customer service

  - Increased efficiency

  Deregulations mean barriers to entry are lower

  - Benefits the consumer more than the producer
• How can privatisation promote contestability

  Privatisation is almost always followed by deregulation

  - Increases efficiency because of the profit motive

  - Lower prices

  - Improved quality
• Evaluate the use of privatisation as a way of increasing contestability

  To increase profits, some firms may decide to lower their costs, reducing quality or even increasing their prices and exploiting consumers

  
  

  Alternative: Competitive tendering
• How can competitive tendering be used to increase contestability?

  Competitive tendering is when the government outsources specific job contracts to the private sector.

  
  

  Private sector firms bid to win the contract, by offering the best deal - the highest quality for the lowest cost.

  
  

  The government then chooses the firm which offers the best value for money - and awards them the contract
• What are anti-competitive practices?

  Anti-competitive (or restrictive) practices include anything a firm might do to restrict competition
• Give examples of anti-competitive practices

  1) Predatory Pricing

  2) Price collusion

  3) Vertical Integration
• How is predatory pricing an anti-competitive practice

  When a firm aggressively cuts its prices below AVC to force out competitors from the market

  
  

  SR: firm incurs a loss

  LR: Forcing out competition means the incumbent firm can take over the market -restricting competition
• How is price collusion an anti-competitive practice?

  Collusion is when two or more firms agree to limit or restrict competition
• How is vertical integration an anti-competitive practice

  Vertical integration is when firms at different stages of the same prices join together.

  
  

  Backwards: moves closer to the consumer, restricts competition
• What can the CMA do if the firms are caught engaging in these anti-competitive practices?

  1) Fine up to 10% annual revenue

  2) Sentence CEOs to jail

  3) Name and shame the firm
• How can the government help small businesses grow?

  1) Access to loans

  2) R&D tax breaks

  3) Subsidies
• How can access to loans help small bsinesses grow?

  Funds lent out to businesses (enterprise capital funds) with really low interest rates so the small firms can enjoy economies of scale so eventually they can compete with incumbent firms; driving down prices and improving contestability
• How can R&D tax breaks help small businesses grow?

  Small to Medium sized firms may receive reduced corporation tax rates if they are using their profits to invest into R&D (are more dynamically efficient) - this reduced corp. tax rate will decrease a firms costs and increasing profits meaning investments into R&D will increase and so on
• How can subsidies help small businesses grow?

  Reduces costs (show on diagram) reducing prices and increasing contestability
• How can Nationalisation support small businesses

  Nationalisation is when the private sector transfers ownership of a private sector firm to the government e.g. British Railway

  Nationalisation means prices will be set at AR=AC (allocatively efficient point) as there is no profit incentive - no profit.
• Regulatory capture

  A situation where a regulatory agency advances the commercial or political concerns of the industry it is supposed to regulate, rather than acting in the public interest.
• Setting quality standards too low

  An example of regulatory capture where a regulatory agency allows a product to remain on the market, even if it poses a risk to consumers, as long as the company is making a profit.
• Setting X too low in the RRI - X formula

  An example of regulatory capture where a regulatory agency sets X too low, resulting in less stringent regulations, which allows the industry to operate with fewer restrictions.
• High K in RPI + K formula

  Setting the constant K too high in the RPI + K formula can result in fewer regulations being put in place, which can have a number of potential impacts, including increased risk to public safety, environmental damage, reduced competition, and lack of accountability.
• Increased risk to public safety


  Fewer regulations in an industry can lead to an increased risk to public safety, as companies may be more likely to prioritize profits over safety measures.
• Reduced competition


  Fewer regulations in an industry can result in reduced competition, as larger companies may be better able to navigate the regulatory landscape and smaller companies may be squeezed out, leading to higher prices and less innovation.
• Environmental damage


  Fewer regulations in an industry can also lead to environmental damage, as companies may be less constrained in their actions and more likely to prioritize profits over environmental concerns.
• Lack of accountability


  When regulatory agencies prioritize the concerns of the industries they are supposed to regulate over the public interest, it can lead to a lack of accountability, as companies may act without regard for the consequences of their actions.
• Low X in RPI - X


  Setting X too low in the RPI - X formula can result in less stringent regulations, which can have a number of potential impacts, including increased risk to public safety, environmental damage, reduced consumer protection, and lack of accountability.
• Increased risk to public safety


  Less stringent regulations in an industry can lead to an increased risk to public safety, as companies may be more likely to prioritize profits over safety measures.