Government Intervention: Competition Policy (AQA A Level Economics)

Competition Policy

• Competition policy is government policy that aims to make markets more competitive and to ensure that the public interest is protected

• The main forms of consumer exploitation by firms include higher prices, lack of choice and/or poor quality products

  • Competition policy aims to control anti-competitive mergers and monopolies, prevent restrictive trading practices and promote competition in markets

  • The Competition and Markets Authority (CMA) is the UK Government responsible for overseeing competition policy in the UK

Intervention to Control Mergers

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

  • The main forms of consumer exploitation include higher prices, less choice, and/or poor quality products
    

• There are other regulatory bodies the UK which operate under the CMA such as the Civil Aviation Authority (CAA) or the Office of Gas and Electricity markets (OFGEM)

• Within the EU, the European Commission seeks to restrict anti competitive behaviour within EU countries and with its trading partners

  • UK companies trading in the EU need to consider both UK and EU competition law

• One way to control monopoly power is to prevent it from forming in the first place

  • A key function of the CMA is to monitor merger activity with the aim of preventing any single firm gaining more than 25% market share

  • If there are concerns about the merger, then the CMA has the authority to stop it from happening, or they can allow it to go ahead but insist the new firm sells certain assets which would limit its market share

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

Intervention to Control Monopolies

• Monopolists can restrict output and raise prices to gain supernormal profit. This reduces consumer surplus and so is not in the best interest of consumers

• In addition to controlling merger activity, the CMA continuously intervenes in markets in order to promote competition and protect the interests of consumers

Competition Policies in Monopoly Markets

Intervention to Promote Competition & Contestability

• The following policies can help promote more effective competition:

1. Promotion of small business

• Providing tax incentives or subsidies to small firms can help increase the number of new entrants into industries and therefore promote competition. In 2022, the UK government introduced the Supporting Small Business (SBB) scheme which caps bill increases at £600 for some small businesses

2. Deregulation

• Government regulations can increase industry costs or act as a barrier to entry. Deregulating a market can promote competition, which will also increase the market's contestability

3. Competitive tendering for government contracts

• Instead of the government manufacturing goods and services itself, this is often outsourced to firms. This is done by outsourcing the supply of these products, this generates more private sector activity and increases competition

4. Privatisation

• Firms are hesitant to enter an industry when the dominant firm is owned by the government. Privatisation encourages new entrants to enter the market as they feel they can compete more effectively with private firms. E.g. In 2022 the UK Government confirmed that Channel 4 would be privatised

Evaluation of Competition Policies

• For competition policies to be effective, there needs to be continuous monitoring and reviewing of policies

  • It can be expensive and time consuming to ensure firms or industries are complying with competition policies

The Advantages & Disadvantages of Competition Policies