Government Intervention in the Market A2 Economics

Starter  Define imperfect competition.  Give two examples of imperfect markets.  Describe the main features of these two markets.

Aims and Objectives Aim:  To understand industrial policy concerning monopolies. Objectives:  Define industrial policy.  Describe the roles of competition bodies in the UK.  Investigate the supermarket industry and competition.  Evaluate the supermarket industry and competition.

Industrial Policy  Governments generally replace interventionist policies with free market policies.  Switch from Keynesian demand side policies, which led to inflation rather than FE.  To supply side policies.  Try to increase economic efficiency, productivity and competitiveness.

Demand and Supply Side Policies  In groups decide on:  Two Demand Side Policies or..  Two Supply Side Policies

Competition Policy  Methods that the UK/EU authorities use in order to make markets more efficient.  Current Competition policy has four main strands: 1) Monopolies 2) Mergers 3) Restrictive Trade Practices 4) Promotion of new competition

Competition Bodies  Competition Commission: investigate monopolies and proposed mergers.  Investigate monopolistic power in oligopolistic industries.  Office of Fair Trading: responsible for implementing policy.  Merging together.

Monopolies  Define Monopoly. Statutory Monopoly:  One firm 25% of market supply of goods. (scale monopoly).  A number of firms have a 25% share and conduct their affairs to restrict competition. (complex monopoly).

Investigating Monopolies  One indicator used is concentration ratios.  Calculate the three firm concentration ratio. Energy Provider Market Share % Eon 27% Powergen 23% British Gas 20% Southern Electric 12% EM Power 4% Scottish Power 3%

Investigating Monopolies Other indicators include:  Evidence of price discrimination and price leadership.  Merger activity.  Ratios of advertising expenditure to sales. (Barrier to Entry).  Profit Margins  Ratio of capital employed to sales. (Barrier to Entry).  Evidence of collusive practice.

Investigating Supermarkets. The OFT's investigation had lasted for over two years

 Evidence 1: The price of own brand sliced white bread, 4 pints of milk, 6 value eggs across five supermarkets. (mysupermarket.com. Dec 2010).  Evidence 2: Recent Mergers and Acquisitions. List of Defunct Supermarkets, which have merged or been bought out by a supermarket in the last 30 years.  Evidence 3: Sales Figures 2010 of largest five supermarkets and advertising expenditure (Annual Reports & The Guardian Online).  Evidence 4: Net Profit Margins of UK’s Largest five supermarkets.  Evidence 5: Market Share of Supermarkets 2010.

Group Task Now that you have analysed each piece of evidence from the OFT, it is your job to present your findings to the Competition Commission Directors. You should produce a summary of your analysis, and provide a judgement on whether or not you feel there is ‘Monopolistic Behaviour (both scale and complex monopoly existing in the market) existing in the supermarket industry’. You should justify your evaluation of the analysis with facts and figures.

Competition Commission Reports Back

Supermarkets Report  nu88 nu88

OFT Investigation Article  Discussion  Findings  Actions