Microeconomics - Competition Policy

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Competition Policies are government policies to prevent and reduce the abuse of monopoly power

-Government choose to intervene in markets where monopoly power is causing market failure

- can occur if monopoly has prices above market equilibrium- misallocation of resources and deadweight welfare loss

Government intention is to protect interests of consumers by promoting completion and encouraging market to function more efficiently

1998 Competion Policy Act sought to bring Uk in line with European Act

Both the European Commission and UKS completion and market authority (CMA) monitor competition to look for unfair monopolistic behaviour. This behaviour includes:

Mergers

- monitor mergers/ takeovers to prevent those which arent beneficial for the market or consumer

Agreements between firms such as cartels, collusive oligolipes

- price fixing, splitting markets and limits on production are anti-competitive- cause market inefficiency

Opening of markets to competition

- markets which were state owned are privatised, th government need to make sure this newly privatised firm doesn't dominate the market

Financial support

- If one country in the EU gives financial support in a market, this may give them unfair advantage over other firms in different EU countries in same market

Regulation bodies are common In monopolistic and oligopolistic markets. These include OFWAT, OFCOM, OFGEM

Bodies have varying responsibilities- include regulating prices, monitoring safety and product standards

Risk of Regulatory capture

Is Competition Policy effective?

Effectiveness is greatly affected by different information available to European Commission/ CMA- their job to deice whether behaviour in markets is unfair/ anti competitive

Reliable information will mean government can intervene in market in a way to improve efficiency, allocate more resources efficiency and improve fairness

Unreliable information can lead to market failure

Government policy can have costs

Ways that Government can intervene

Privatisation

- Can introduce competition into a market where a public monopoly exists

- Publicly owned monopoly can be opened up to competition- force it to respond to market signals

-However privatisation alone won't increase competition as new private monopoly could increase prices, reduce output as the private monopoly is less likely to act in best interest of consumers

- Steps need to be taken alongside privatisation to increase competition

Regulation

- Rules enforced by an authority and theyre usually backed by legislation

- Government use regulation to prevent a firm from gaining monopoly power or to increase completion by reducing monopoly power a firm has

-Introudction of price caps- stop firms charging prices deemed too high

Two type of price caps:

RPI-X- firms make real price cuts

RPI-X+K. K amount of investment firms will need to make to achieve efficiency improvements, Firms charge higher prices to offset cost of efficiency improvements

Price caps make market fairer to consumers as they limit price rises

-Increase incentive for firms to be efficient as they keep the profit, which consumers benefit from

Government/ regulator could monitor prices to ensure they stay reasonable and fair to consumers

Regulations on quality standards

Tax higher profits at higher rate= Windfall taxes help to prevent firms from gaining too much monopoly power

Set performance targets- combined with a fine

Disadvantages of performance targets include

- Health and safety, quality and other areas of business could be overlooked

Examples include PPI and Mobile Phone Roaming Charges

Deregulation

- Removing or reducing regulations. Deregulation removes barriers to entry so it can increase competition

- Easier for new firms to enter the market

-Increase competition, causing price to fall closer to marginal cost & output to increase

Include deregulation of directory enquiries- such at BT, allowed other firms to enter the market