Market Power & Government Intervention (DP IB Economics)
Revision Note
The Advantages and Disadvantages of Market Power
Market power refers to a situation in which a firm has the ability to influence prices, output levels, or other market outcomes due to its significant market share or unique competitive advantage
The advantages to firms of having market power
The advantages and disadvantages of market power can vary depending on the specific industry, market dynamics, and the behaviour of the firms involved
Government intervention and anti monopoly policies play a crucial role in ensuring fair competition, protecting consumers, and addressing potential negative consequences associated with market power
An Explanation of the Advantages Offered by Market Power
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Higher Profits |
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Research, Development & Innovation |
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Economies of Scale |
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Branding and Reputation |
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Strategic Decision-Making |
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An Explanation of the Disadvantages Created by Market Power
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Reduced Competition |
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Lack of Innovation & Efficiency |
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Regulatory & Legal Risks |
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The Use of Legislation & Regulation to Reduce Market Power
Legislation involves the creation of new laws by government
Regulation involves enforcing the laws
This is usually assisted by the creation of regulatory agencies such as the Environmental Protection Agency (EPA) in the USA or the European Competition Commission
Legislation and regulation play a critical role in reducing market power and promoting fair competition within industries
Governments implement laws and regulations to prevent anti-competitive practices and protect consumers, workers and the environment
Overregulation can stifle competition and deter investment, while insufficient regulation can lead to market dominance and anti-competitive behaviour
Common Approaches used in Legislation & Regulation to Reduce Market Power
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Creating a Competition Regulator |
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Protecting Suppliers |
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Protecting Employees |
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The use of Government Ownership to Reduce Market Power
Nationalisation can occur for various reasons, including
Governments may choose to nationalise industries or companies that are considered strategically important for national security or economic stability e.g energy and telecommunications
Nationalisation can be implemented to ensure the provision of essential services to the public such as healthcare or education
Nationalisation can be used to promote economic development, address market failures, or redistribute wealth by bringing key industries under state control
The Advantages & Disadvantages of Nationalisation
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The use of Fines to Reduce Market Power
Fines are usually imposed by regulators in specific markets
In Europe, firms are fined 10% of their sales revenue for breaching anti-competitive practices
These fines can be significant as many firms have profit margins of less than 10%
Advantages of Using Fines
Corrects anti-competitive behaviour
Generates additional revenue for the government to redistribute
Disadvantages of Using Fines
Monopoly firms have high profits and use these to take legal action against regulators
The court cases often take years to settle
The firms settle out of court and pay reduced fines
The level of the fine is often less than the profit generated by the anti competitive behaviour so does not necessarily change their behaviour
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