1. 3.6.1 government intervention unit content
Students should be able to:
Assess the reasons for government intervention to control mergers
Assess government intervention to control monopolies: price regulation, profit regulation, quality standards, performance targets
Evaluate government intervention to promote competition and contestability: enhancing competition between firms through promotion of small business; deregulation; competitive tendering for government contracts; privatisation
Evaluate government intervention to protect suppliers and employees: restrictions on monopsony power of firms; nationalisation

2. What is government intervention? (remember 1.4.1)
It is an __________ undertaken by a group of people empowered to make __________ on behalf of a country’s citizens. Typically it is to:
correct _________ ____________
achieve a __________ distribution of income and wealth (to improve economic and social welfare)
improve the ___________ of the economy both domestically and internationally
action, decisions, failure, fairer, market, performance

3. Why should government intervene?
Why should governments intervene in markets? To:
Edexcel: “useful to look at the European Competition Commission and the Competition and Markets Authority (CMA) in the UK . Another example is the Antitrust Commission in the US.”

4. Regulatory authorities in the UK
Regulators are the rule-enforcers appointed by the government to oversee how a market works and the outcomes that result for producers and consumers
The main competition regulator in the UK is the Competition and Markets Authority (CMA)
The CMA is an independent department with responsibility for carrying out investigations into mergers, markets and the regulated industries and enforcing competition and consumer law.
From 1 April 2014 it took over the functions of the Competition Commission

5. Examples of regulatory authorities in the UK
________
Monopolies
CMA
___________ & Broadcasting
___________
Services
Rail Regulator
General _______
Markets

6. What do the regulators do?
Monitor and regulate prices so that
Check firms meet specific standards and
Open up markets: encourage competition by __________ or lowering barriers to entry e.g. forcing dominant firm to allow others to use its infrastructure network. The regulator has to fix a fair price for firms wanting to use the existing infrastructure
Act as a “surrogate competitor” attempting to ensure that prices, profits and service quality are similar to what could be achieved in ______________ markets

7. Merger investigations by the CMA
The Competition and Markets Authority is the body given the power to investigate mergers and takeovers in the UK
They can block an acquisition if they find that the integration of two businesses will lead to a “significant lessening of competition” in one or more markets at local, regional or national level
They have the power to give a merger the go-ahead providing certain conditions are met such as:

8. Merger in the UK Gym Industry
Merger clearance in 2015
Merger in the UK Gym Industry
14 August 2015:
The CMA has cleared the acquisition by Pure Gym Limited of the LA fitness business
British Telecom and EE
We provisionally think that the retail mobile market in the UK, with 4 main mobile providers and a substantial number of smaller operators, is competitive. As BT is a smaller operator in mobile, it is unlikely that the merger will have a significant effect on competition. By the same token, it is unlikely that the merger will have a significant effect on competition in the retail broadband market, where EE is only a minor player. (CMA Report 2015)

9. Merger investigations in 2015
19 October 2015:
The CMA has accepted undertakings in lieu of reference for the anticipated acquisition by Muller UK & Ireland Group LLP of the dairy operations of Dairy _______ Group plc.
17 December 2015: The CMA has cleared the anticipated merger of Betfair Group plc and _______ Power plc
Müller has agreed to sell to Medina Dairy Limited the option to require Müller to process up to 100 million litres of milk each year in Dairy Crest’s Severnside dairy for supply to national grocery retailers. The option is for a period of at least 5 - and up to 8 - years.

10. What is competition policy?
What are the aims of competition policy?
Competition policy aims to ensure
Technological __________ which promotes dynamic ___________ in different markets
Effective _______ competition between suppliers
Safeguard and promote the _______ of consumers through increased _______ and lower price levels
choice, efficiency innovation, interests, price

11. Main pillars of competition policy
Anti-trust & cartels:
Market liberalisation:
State aid control:
Merger control:

12. Anti-competitive behaviour
Price fixing and market sharing
Predatory pricing (__________________________ _________________________________________________________________________________) and limit pricing (___________________________ _________________________________________________________________________________)
Refusal to deal/discrimination e.g.
Patent misuse
Protectionist policies limiting (overseas) trade e.g.

13. Example: natural monopoly
Economies of scale
Industry demand is ___________ to exploit all of the economies of scale
Only ________ business will reach the MES
Allocative efficiency and losses
LRAC is _________ over all ranges of output
If price is set = to MC, then _______ will be made
Makes sense for the core aspect of the industry to be served by one business
falling, insufficient, losses, one

14. Natural monopoly diagram

15. Example: natural monopoly
Core “network” service
Core service e.g might be left in the hands of one business
“Final mile” service to the consumer
Possible to introduce competition in other aspects of the industry
Examples:

16. Examples of anti-competitive behaviour
Aug 2015: Pfizer and a UK company, Flynn Pharma, found to have charged “excessive and unfair prices” for an anti-epilepsy drug, phenytoin sodium, inflating the annual NHS drugs bill by tens of millions of pounds
April 2015: EU Competition Commission accused Google of illegally abusing its dominance in web search to steer European consumers to its own in-house shopping services

17. Legal collusion/ business co-operation
Not all collusive behaviour is deemed to be illegal by the European Union Competition Authorities. Practices are not prohibited if they "contribute to improving the production or distribution of goods or to promoting technical progress in a market.” e.g.:
Development of improved industry standards which benefit consumers, e.g.
Information sharing designed to give better information to
Research joint ventures and agreements which seek to promote

18. Whistle blowing and UK cartel policy
Microeconomics Topic 2c: The Allocation of Resources - demand and supply in a market
Whistle blowing and UK cartel policy
The Competition Act allows for businesses who are members of cartels to become a whistle-blower and inform on other members of a price-fixing agreement
“We are prepared to offer lenient treatment to businesses that come forward with information about a cartel in which they are involved. Under our leniency programme, members of cartels may have their financial penalty reduced substantially or they may be able to avoid a penalty altogether.
To qualify for leniency, a business must cooperate fully with our investigation and stop their involvement in the cartel from the time they come forward”

19. Government intervention to control mergers
The UK government regulates mergers through the
Any merger which creates a company with a market share of _____% or more must be reported to the CMA. It can investigate the merger and has the power to forbid it.
Some industries have additional regulations e.g. the number of ______________ in a local area is capped and an existing pharmacy, wishing to expand, can only do this by buying another pharmacy.

20. Government intervention to control monopolies
Why might the government want to intervene to control monopolies? Draw a diagram (on the next slide) showing the profit of a monopolist.
What type of profit do monopolies make?
Who does NOT benefit from this?
Are they allocatively and/or productively efficient?

21. Monopoly diagram

22. Price regulation to control monopolies
The maximum price that a monopolist could charge could be set equal to the marginal cost of production
So they would be _________ efficient (_____ = MC).
Draw a diagram showing this.
HINT: the effect would be that they face a perfectly elastic demand curve so…
Perfectly elastic demand curve D =

23. Price regulation to control monopolies: diagram

24. Price controls
Price controls are used to regulate privatised monopolies e.g. train fares and water firms
What are the problems?

25. Profit regulation
Maximum profit levels can be set by the government which is used in the US to control utility firms.
What are the problems?

26. Quality standards
Profit maximising monopolists often ignore quality, unless it allows them to make higher profits.
Government can set quality standards e.g. Post Office has a legal obligation to:
What might the firms do?

27. Performance targets
Similarly the government may impose performance targets e.g. % of trains that arrive on time
What might the firms do?

28. Other methods to control monopolies

29. Intervention to promote competition and contestability
Increasing the contestability of markets is a key supply-side economic policy
What is contestability?

30. Intervention to promote competition and contestability
Increasing the contestability of markets is as an important supply-side economic policy
How might this be done?

31. capital, finance, long, major, repaid
What is PFI?
PFI (private _______ initiative) is a scheme whereby public services such as the National Health Service raise funds for __________ projects from commercial organizations.
Typically a PFI contract is _________ by the government over a 30 year period
Under PFI, __________ projects including new infrastructure are built by the private sector, the government uses the resource over the ______ term for example between years
capital, finance, long, major, repaid

32. PFI benefits

33. PFI drawbacks

34. Intervention to protect suppliers and employees
Restrictions on monopsony power of firms e.g.
Nationalisation:

35. 3.6.2 The impact of government intervention unit content
Students should be able to:
Analyse the impact of government intervention on: prices, profit, efficiency, quality and choice
Analyse the limits to government intervention: regulatory capture; asymmetric information

36. The impact of government intervention
Edexcel notes:
“(a) When exploring government intervention it is important to consider what the government aims to achieve in terms of: prices, profit, efficiency, quality and choice.
(b) Government intervention may fail to bring about the social optimal position; for example, through regulatory capture. It is also important to consider how asymmetric information could make it difficult for the authorities to investigate and discover anti-competitive practices.”

37. Price fixing and UK competition
UK competition law prohibits almost any attempt to fix prices, you cannot:
Agree ________ with competitors or agree to share markets or limit production to raise market prices.
Impose _______________ prices on different distributors such as shops.
Agree with your __________________ what purchase price you will offer your suppliers.
Cut prices below ______ in order to force a weaker competitor out of the market ____________ pricing
competitors, cost, minimum, predatory, prices

38. Price fixing and UK competition
Under the Competition Act 1998 and Article 81 of the EU Treaty, cartels are prohibited. Any business found to be a member of a cartel could be fined up to ___ per cent of its worldwide turnover.
In addition, the Enterprise Act 2002 makes it a criminal offence for individuals to dishonestly take part in the most serious types of cartels. Anyone convicted of the offence could receive a maximum of ______ years imprisonment and/or an unlimited fine.

39. disrupts, economic, once, small, viability
State aid
State aids _________ competition if they give certain firms favoured treatment to the detriment of others. Under current EU state aid rules, a company can be rescued ________. Any restructuring aid offered by a national government must be approved as being part of a feasible and coherent plan to restore the firm’s long-term __________. Government aid designed to boost research and development, regional __________ development and the promotion of __________ businesses is permitted
disrupts, economic, once, small, viability

40. State aid
In 2014, the EU competition authorities ordered RyanAir to pay back €10m in illegal state aid on the grounds that state aid gave them unfair advantage & distorted competition on several routes

41. Main UK regulators
___________: water services regulation authority, responsible for economic regulation of the privatized water and sewerage industry in England and Wales
__________: the UK's communications regulator
________: Office of Gas and Electricity Markets, GB regulator for the electricity and natural gas market
Office of the Rail Regulator: UK agency for regulation of the country's railway network
___________ Conduct Authority: the FCA regulate firms and financial advisers so that markets and financial systems remain sound, stable and resilient.

42. Price intervention in the UK and EU
Not all prices are set by the free-market forces of supply and demand. In Britain, a number of prices are affected by regulators who may impose a pricing formula on suppliers
E.g.
In the UK rail industry, some fares are unregulated allowing train operating companies to set their own prices. But around _____ of the fares are set by the rail regulator.
The EU has capped _______________________

43. competitive, efficiency, inflation, quality, utility
Price capping in the UK
Price capping is now being phased out as most utility markets have become more ___________. Price capping is an alternative to rate-of-return regulation, in which _____ businesses are allowed to achieve a given rate of profit on capital. In the UK, price capping has been known as "RPI-X". This takes the rate of _______ and subtracts expected _____________ savings X. So, if inflation is 5% and X is 3% then an industry can raise prices on average by only 2% per year. In the water industry, the formula is "RPI - X + K", where K is based on capital investment requirements designed to improve water quality and meet EU water _________ standards.
competitive, efficiency, inflation, quality, utility

44. Arguments for price capping

45. Arguments against price capping

46. Draw a diagram showing high prices and high profits

47. Draw another diagram showing capped prices with fairly high profits

48. Impact of price capping on a market
A maximum price also involves a __________ judgment on behalf of the government about what that price should be
To be effective, the cap must be set __________ the normal profit maximizing price
A price cap ________ the monopoly (supernormal) profit made by dominants firms in the market
May stimulate attempts to improve _______ efficiency
In theory it leads to an improvement in allocative efficiency and consumer welfare
May also lead to the _________ of some firms from the industry which might actually reduce competition

49. Overview of price capping on a market
Benefits
A useful ___________ for competition
Holds prices _______, consumer welfare gains
Incentives for businesses to _______ costs to maintain profits
Alternatives
Measures to _______ entry barriers in an industry
Higher _________ on monopoly profits e.g. a windfall tax
cut, down, reduce surrogate, taxes

50. How can the effectiveness of regulation be judged?

51. Regulatory capture and asymmetric information (1.4.2 and 4.4.2)
Regulatory capture is an example of government failure. When does it occur?
Asymmetric information is where …
Both regulatory capture and asymmetric information are reasons why there are limits to government intervention being successful.

52. Possible causes of regulatory failure

53. B an increase in consumer surplus C a decrease in contestability
Microeconomics Topic 2c: The Allocation of Resources - demand and supply in a market
Multiple choice
Barr and Britvic are two of the three largest soft drink firms in the UK. In February 2013, the proposed takeover by Barr of Britvic was referred to the CMA for investigation. There were likely to have been concerns that the takeover would lead to:
A economies of scale
B an increase in consumer surplus
C a decrease in contestability
D a reduction in external economies of scale
E a signal for more firms to enter the industry

54. A increase producer surplus B substantially lessen competition
Microeconomics Topic 2c: The Allocation of Resources - demand and supply in a market
Multiple choice
Severn Trent Water is a local monopoly supplier of water in the Midlands. In 2008 it was fined by Ofwat, the water regulator, and required to reduce its planned charges. The most likely effect of this decision would be to:
A increase producer surplus
B substantially lessen competition
C increase monopsony power
D satisfy the shareholders
E increase consumer surplus

55. Microeconomics Topic 2c: The Allocation of Resources - demand and supply in a market
Multiple choice
In a review in March 2011 Ofgem, the energy regulator, reported that it had concerns over the vertically integrated energy markets. The figure below shows the UK market share of the largest vertically integrated energy firms:
% of UK market (volume of sales)
EDF Energy 24
E.ON 12
RWE npower 10
SSE 10
Scottish Power 9
Centrica 6
The most likely reason for Ofgem’s concern is:
A there is a low level of producer surplus
B vertical integration tends to decrease the concentration ratio
C Centrica is too small to achieve economies of scale
D vertical integration can create a barrier to entry
E EDF Energy is a legal monopoly

56. Microeconomics Topic 2c: The Allocation of Resources - demand and supply in a market
Multiple choice
In January 2010 the Office of Fair Trading referred the UK’s local bus services to the CMA over concerns about pricing. It had received complaints about the ‘predatory behaviour’ of existing firms, designed to exclude new entrants from the market. Which characteristic was likely to have been observed?
A prices equal to marginal cost
B high prices in the short run
C prices set above average costs in the short and long run
D revenue maximisation pricing
E prices set below average variable costs in the short run