Government Promotion of Competition

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UK Competition Policy

The UK's competition policy aims to reduce the amount of anti-competitive behaviour in markets and to protect consumers - it is undertaken by the Competition and Markets Authority (CMA).

Principles of UK Policy

UK competition policy looks for anti-competitive play in the market.
This can come from a number of different sources:
E.g monopolies, mergers, cartels or financial support.
There are industries that have their own regulatory bodies
E.g. OFCOM deal with the communications industry and are in charge of ensuring fair play within it.

Monopoly prevention

Monopolies formed through mergers or agreements can often be inefficient.
This is because they restrict quantity and agree to raise price to a level that isn't allocatively efficient.
These are examples of anti-competitive strategies that governments want to avoid.
Governments can prevent monopolies forming by blocking mergers. The UK government investigates all mergers which will result in a firm having greater than 25% market share (a legal monopoly).

Regulation

The power of these monopolies can be reduced by regulation.
E.g. the introduction of a price ceiling by the government restricts the amount firms can raise their prices. Reducing the potential losses in efficiency.
- The price ceiling could be either: inflation minus real price, or inflation minus real price plus investment.
- Both of these are effective.
Alternatively, the government could tax excessive profits, or set performance targets for monopolies.

M&A policy

The CMA is also responsible for monitoring merger and acquisition (M&A) activity in the UK.
In the UK, any firm who looks to merge with or acquire other firms in their market which leads to them then having 25%+ market share will be considered and maybe investigated by the CMA.
The CMA decides whether the transaction would lead to a lack of competition in that market and so excessive monopoly power.
If they believe it will lead to excessive monopoly power, they can block the deal.

Other CMA powers

The CMA can force the break up of firms which have become too powerful in a market.
If they believe a firm is abusing its monopoly power it can force the firm to split or sell some of its assets to increase competition.
It is rare to break up firms which have gained power through internal growth.

Why Do Governments Encourage Competition?

Governments encourage competition because it leads to lower prices, higher quality goods and services and improvements in technology - all of which leads to an increase in welfare.

Lower prices

If there is competition in the production of goods and services, it means firms have to make their products more attractive to consumers than their competitors in order to sell them.
One way they can do this is to lower the price. Lower prices results in households being able to afford to consume more leading to improved welfare.

Higher quality

Firms don't just compete over price. Consumers will choose goods which are higher quality because they bring them more utility and improved welfare.

Technological advances

Another way firms can make their goods stand out against their competitors is to develop and use more advanced technology.
Firms' investment in technology leads to positive spill over effects as the technology is shared through an economy.
Each technological breakthrough pushes society further forward and again leads to improved welfare.

Example: benefits of competition

The market for video games illustrates the benefits of competition.
There are a few major firms in the market but they are fiercely competitive among each other and in fending off potential new comers.
Competition in this market regulates the price, if prices are too high then consumers would switch products.
Video game producers know they have to create high quality games to be successful.
The technology in gaming has developed rapidly over the last 20 years with positive spill overs.