Government Intervention: Competition Policy (Edexcel IGCSE 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 Commission is the EU regulator that is responsible for overseeing competition policy in the European Union

• Governments regulate competition through

  • Promoting competition

  • Protecting consumer interests

  • Limiting monopoly power

  • Controlling mergers and takeovers

Promoting Competition

• 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

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

• E.g. The building of a new motorway or hospital

  • The private sector bids to supply these products, which generates more private sector activity and increases competition

4. Privatisation

• Firms are hesitant to enter an industry when the dominant firm in the industry  is government owned

• Privatisation encourages new entrants to enter the market as they feel they can compete more effectively with private firms.

  • E.g. in 2021 Air India was sold to the private sector

Protecting Consumer Interests

• Legislation is created in many countries to protect consumers from faulty goods, false advertising and unfair business practices

  • E.g. In the UK, the Consumer Rights Act 2015 provides consumers with rights to refunds, repairs, or replacements if goods are faulty, not as described, or not fit for purpose

• Laws can also protect consumers against false and misleading claims

  • E.g. Australian company Unilever was fined in 2016 by the competition authority. They falsely advertising their Paddle Pop ice creams as being a healthy option for children when they contained artificial additives

• Data protection and privacy laws can protect consumer details

  • The EU's General Data Protection Regulation (GDPR) is responsible for protecting consumers data

  • E.g. In 2019, France fined Google €50 million for breaching GDPR regulations.

    • Google did not get valid consent to use consumer data when creating personalised and targeted advertisements

Limiting Monopoly Power

• Monopolists can restrict output and raise prices. This is not in the best interest of consumers

• Government regulators continuously monitor markets in order to promote competition and protect the interests of consumers

Examples of competition policy in monopoly markets

Controlling Mergers and Takeovers

• Government regulators are 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

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

  • A key function of a regulator is to monitor merger and takeover activity with the aim of preventing any single firm gaining excessive market share

  • If there are concerns about a proposed merger or takeover, the regulator usually has the authority to prevent the merger/takeover, 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 May 2023, the European Union's Competition Commission approved the takeover of Activision by Microsoft providing the latter offered free licences to stream certain services

Evaluating the Use 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 and disadvantages of competition policies