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Competition policy

Competition policy. F583. Aims. In this lesson you will examine competition policy. You will examine why markets may fail and what the government does to correct this failure. You will also examine the reasons why governments may fail. Competition Policy.

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Competition policy

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  1. Competition policy F583

  2. Aims • In this lesson you will examine competition policy. • You will examine why markets may fail and what the government does to correct this failure. • You will also examine the reasons why governments may fail.

  3. Competition Policy • When markets fail to produce efficient outcomes, because of the monopoly power exercised, government intervention is likely. • Competition policy involves government intervention to regulate markets to help them operate more efficiently.

  4. The rationale for competition policy The monopoly equilibrium (Pm;Qm) sees the price forced above marginal cost, creating a misallocation of resources and a deadweight welfare loss. This is in comparison to the perfectly competitive equilibrium (Pc;Qc) Price Remaining Consumer Surplus Pm Supernormal Profits Deadweight welfare loss Pc AC = MC 0 Qm Qc MR AR Output

  5. Public Interest • Cases of merger or takeover are judged on the public interest criterion. • The competition commission can investigate the effects of a merger or takeover that would create a firm with a combined market share of 25%

  6. Public Interest • If found, that the merger would cause a detrimental effect to the public, a recommendation could be made to the government to block the merger. • It is possible for conditions to be attached if the merger or takeover is allowed to proceed.

  7. Example • When Morrison’s took over Safeway, the firm had to sell one store in towns where they would own two outlets.

  8. Implicit Collusion • Cases of implicit collusion in oligopolistic markets can also be investigated by the competition commission to see if they damage public interest, as can a variety of other restrictive practices. • A restrictive practice is defined as a measure taken by a firm to limit competition in its market.

  9. Example • The retailers recommended price (RRP) that has been used in the past by manufactures of electrical goods in an effort to prevent retailers from driving down profit margins by competing on price.

  10. Recent Developments • UK competition policy has been strengthened considerably in recent years. • The 1998 Competition Act created a prohibition of: • Abuse of a dominant position in a market • Anti-competitive agreements.

  11. Recent Developments • The 1998 Competition Act introduced fines up to 10% of turnover for guilty companies. • In 2002, the Enterprise Act introduced prison sentences for company directors found guilty of price fixing.

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