Usefulness of Competition Policy & Examples
Economics: Edexcel A A Level, topic 6.3.3
The Effectiveness of Competition Policy
Competition policy is generally deemed to be effective at reducing the amount of anti-competitive play that happens in markets.
Needs high quality information
- If the information received is trustworthy, governments can take action and punish anti-competitive behaviour. This will help to improve efficiency and the allocation of resources.
- But this is not possible if not enough information is received, or if the information is unreliable.
- Also, there is an opportunity cost to collecting this information.
- This could be seen as government failure if there is no action resulting from the collation of information.
Deregulation can improve contestability
- Contestability in markets can be improved through deregulation.
- This is because barriers to entry have been lowered.
- This is good for competition in an industry.
Power of the regulator
- For firms' behaviour to be influenced by regulation, the regulator (the CMA in the UK) needs to have sufficient powers and to be well-resourced.
- The CMA's ability to impose large fines and even imprison directors of companies means that firms are likely to think twice before engaging in price-fixing or joining an illegal cartel.
Competition Policy in Action
The Competition and Markets Authority (CMA) have been very active in investigating proposed mergers and potential anti-competitive behaviour by firms. They decide if a merger could lead a firm to have excessive market power.
BT and EE
- The CMA investigated BT's proposed purchase of mobile network EE.
- BT are also involved with telephone and internet services.
- The deal was eventually allowed to go ahead, but only after BT agreed to the CMA's suggestion that they sell off certain parts of their business to make sure that they would not be too powerful in certain markets.
Price capping
- In the UK Utilities industries, the respective regulators set a cap on how much prices can rise year on year based on the rate of inflation and planned levels of investment.
- The government can impose a maximum price on goods and services. This reduces the benefit to firms of constricting output to increase the price.
- Consumers can then access the goods and services at what the government deems a fair price.
Test yourself on Usefulness of Competition Policy & Examples
Which of the following is NOT in the power of the competition regulator?
What type of cost is there for collecting information?
Which of the following is a policy response to possible anti-competitive behaviour in a market?