Government intervention and competition policy 3

Specification Evaluate measures aimed at enhancing competition between firms and their impact on prices, output and market structure Compare and evaluate the strengths and weaknesses of methods of regulation for example price capping, monitoring of prices and performance targets Explain why governments may intervene to encourage competition, or prevent monopolies and mergers Be aware of various types of private sector involvement in public sector organisations, including contracting out, competitive tendering and public private partnerships (PPP/PFI) Next Lesson

Objectives for this lesson Complete the theory on why monopolies are not always bad Explain the roles of the Competition Commission and the Office of Fair Trading (OFT) Review two contrasting merger investigations to understand how competition policy is applied

Competition Policy Promote Competition Protect Consumers Enhance Efficiency Toughened since 1997: Competition Act 1998 Enterprise Act 2002 Assumption is that competition eliminates x- inefficiency Better resource allocation vs. Economies of scale

PC Consumer Surplus Thank You! PC and “Multi-plant” Monopoly compared Quantity Price D=AR LRS (=LMCm) PmPm QmQm P pc Q pc O B E C MR Big Assumption! No cost difference between the two market structures PC firms prepared to supply any quantity at this price The Monopolist at constant returns to scale can continue to supply with no change in MC PC firms supply Qpc at price Ppc Monopolist supplies Qm at price Pm Part of consumer surplus transferred to Monopoly as profits Deadweight loss = cost on society Government Remedy = Increase Competition!

Competition Policy If this line of reasoning is accepted then monopoly is always BAD M&A leading to higher market concentration always leads to allocative inefficiency However…

PC and “Natural” Monopoly compared Quantity Price D=AR LRS PmPm QmQm P pc Q pc O MR PC firms prepared to supply any quantity at this price The Natural Monopolist enjoys economies of scale that offer much better cost conditions PC firms supply Qpc at price Ppc Monopolist supplies Qm at price Pm LMCm Q*Q* N.B. whilst allocative efficiency is not attained, the monopolist is able to produce more at a cheaper price than under PC What about if the cost structures are NOT the same??

And finally…

PC and Monopoly compared Quantity Price D=AR LRS PmPm QmQm P pc Q pc O MR PC firms prepared to supply any quantity at this price The Natural Monopolist enjoys economies of scale that offer much better cost conditions PC firms supply Qpc at price Ppc Monopolist supplies Qm at price Pm LMCm Q*Q* A less extreme example Deadweight loss Gain in productive efficiency N.B. here, production under the monopoly is less wasteful in its use of resources in the production process CHECK DIAGRAM for where the productive efficiency box ends

So… Is society any better off under monopoly or under perfect competition? Technically if is bigger than then society is better off But we should take account of where the benefit goes too…to the producer (profits) rather than to consumers (cheaper prices) Gain in productive efficiency Deadweight loss

Other economic considerations for the government… Contestability Concentration and collusion Globalisation  Some Economists believe the government should allow a firm to dominate its domestic market to improve its competitiveness in global markets  ‘national champions’ e.g. airlines

Competition policy in the UK

Define the term “Competition Policy” and explain why it exists

Competition Policy Competition Policy refers to  a range of measures  designed to promote competition in markets  and to protect consumers  in order to enhance the efficiency of markets in resource allocation

Competition Policy Competition Policy OFT Competition Commission Preliminary responsibility for investigating a proposed merger: - either imposes sanctions directly Or - refers the market to the Competition Commission for a full investigation A merger is subject to OFT investigation if 1. The firms involved have a combined market share >25% AND 2. Combined assets >.£70 million worldwide Under competition policy when is a merger “subject to investigation”? In the UK, the conduct of competition policy is entrusted to two agencies…what are they? 1.Investigates planned mergers to check if they lead to excessive monopoly power 2.Court of appeal for firms engaged in anti-competitive practices (e.g. cartel)

Case studies 1. Ferries: Stena and P&O in the Irish Sea 2. Biscuits: Jacobs and UB 1.For both cases answer the following questions 2.What is the relevant market? 3.Why was the case referred? 4.What was the result? 5.Why?