The government aims to promote competition as it leads to innovation, lower prices and more consumer choice. They try to control monopoly power as it has potential for market failure. They do so in the following ways:
Price regulation: They can keep monopolies from charging excessively high prices, which could lead to a loss in allocative efficiency. They can use price-capping, which they often do in privatised industries.
Profit regulation: Governments can ensure that profits are not excessive – in the UK firm have to pay corporation tax on their profits. In April 2015 this was decreased from 21% to 20% in hopes of increasing investment.
Quality standards: Regulators can also ensure that minimum standards are met e.g. gas and electric industries. This ensures the quality of goods and services.
Performance targets: The government sets minimum targets on organisations (e.g. schools) to ensure a certain level of quality.
Another way that competition can be promoted is through privatisation of public sector industries. This occurred in the case of British Airways which was privatised and now operates in the free market. Privatisation became popular in the 1980s to make these businesses more efficient as in the public sector there is little pressure to control costs and consequently may be wasteful.
In the private sector, businesses have profit incentive which gives them incentive to work efficiently therefore increasing economic welfare. Since they are operating on the free market, firms also have to produces the goods and services consumers want. This increases allocative efficiency and might mean goods and services are of a higher quality. Competition might also result in lower prices. However, firms which profit maximise in a competitive market might compromise on quality
Regulating natural monopolies
- Regulators check target prices and standards but allow suppliers to make a healthy profit.
- They will also allow prices to rise but by less than the rate of inflation which pushes productive efficiency and keeps consumers form being exploited.
- If these industries re not regulated then they may have: abnormal profits, bad level of service, and high prices with little innovation.
- There are regulators for each industry e.g. OFGEM (gas), OFWAT (water), ORR (rail).
- Consumer protection laws mean that you can’t mislead customers into buying products and services.
- Also means you cannot sell dangerous or unsafe items.
- Also, must carry out work properly and adhere to quality requirements etc.
Competition and Markets Authority (CMA)
The Competition and Markets Authority (CMA) are the main organisation that promotes competition, their aim is to “make markets work well for consumers, businesses and the economy.”
They investigate breached of EU and UK law with regard to anti-competitive practices and are able to pursue criminal proceedings against cartels. This protects consumer interests by widening consumer choice and keeping prices low. This prevents anti-competitive practices.
They also enforce the consumer protection law as well as investigating mergers (mergers will remove at least one competitor from the market). If the market share is 25% or higher, or if the firm will have £70m in revenue the CMA will investigate them. If the merger has no adverse effects on consumers it will be allowed but if it damages market competition it will be prevented/blocked.
They also grant leniency to whistle-blowers which encourages businesses to go to the CMA first if they are involved in collusion. They can fine business and deal with appeals from business who suffer from anti-competitive behaviour from rivals
Impact of EU competition policy
- Useful to control multi-national businesses
- The EU has rules for firms to stop them fixing or dividing markets, abusing a dominant position or mergers that give too much control
- Larger businesses based outside the EU who do a lot of business in the EU cannot merge without prior approval from the EU.
- They can also impose fine of up to 10% of global sales.
- Within the EU a market share of 38% is treated as an unacceptable market power.
- Employees have the right to work in a safe environment (health and safety).
- They are entitled to minimum wage.
- They have [protection form unfair dismissal.
- They have the right to join a union.
- They are allowed maternity/paternity leave.
- They are allowed to work 48 hours maximum per week (EU social chapter) – the working time directive.