Competition Policy - Unit 3 (AQA)

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  • Created on: 22-01-13 19:20
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Economics ­ Competition Policy (18.11.12)
Competition Policy
Imperfect Competition = Productive & Allocative inefficiency in the production of goods
and services
(This need not be so if monopolistic firms are encouraged to be dynamically efficient)
The threat of market contestability and the implementation of UK & EU competition
policy may do much do ensure that firms with substantial market power act in the public's
best interests
Competition Policy = Methods that the UK Government & EU authorities use in order to
make markets more efficient
Four main strands of `Competition Policy' covering:
Restrictive trade practises
Promotion of new competition
The role of the Competition Commission is to investigate monopolies and proposed
mergers that might lead to a monopoly being created
This also involved investigating monopoly power in industries dominated by a few large
firms (oligopolies)
In the UK, 2 Government agencies are responsible for implementing policing concerning
monopolies (Office for Fair Trading & Competition Commission) ­ These agencies are
responsible to the Department for Trade & Industry
Competition Act 1998:
Outlaws the abuse of a dominant market position (40% of market share)
The key objections are productive & allocative inefficiency and restricting output to
generate supernormal profits
It is possible for a monopolist to benefit from economies of scale ­ can be passed on
to the consumer in the form of lower prices (lower than under perfect competition)
It is possible that a firm with monopoly power is more innovative than a perfectly
competitive firm

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The OFT uses a number of indicators relating to market structure, conduct and performance
to monitor the UK economy for evidence of monopoly abuse
Concentration Ratios can provide evidence of monopolies, other indicators include:
Evidence of price discrimination & price leadership
Merger activity
Ratios of advertising expenditure to sales
Profit Margins
The ratio of capital employed to sales turnover
If the OFT suspects a firm to be exploiting a dominant market position and it is against the
public interest the firm is referred to the…read more

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Merger policy falls under the 1990 Competition Act and also the 2002 Enterprise Act
The concern is that takeovers and mergers might create a new monopoly
The OFT surveys merger activity ­ passes on any potential ineligible mergers to the CC
(especially if it is anticipated that it will strengthen a dominant market position)
Restrictive Trade Practices:
They are undertaken by firms to reduce competition in a market.…read more

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Public Ownership vs.…read more

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Advantages & Disadvantages of Privatisation:
Promoting Efficiency:
Key advantage of privatisation from a free-market viewpoint
Profit motive creates incentives to cut costs and increase dynamic efficiency
Employees given shares in company = may lead to greater productivity
Raises Revenue for Government:
Selling former nationalised assets = provides Government with a short-term source
of revenue
Can help to reduce Government spending and the borrowing requirement
Promoting Competition:
Increases competition by breaking up monopolies
Many of the industries nationalised in the 1980s and 1990s has been…read more

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Worse allocation of resources:
Privately run monopolies are `profit-maximising' and so will restrict output to a level
that is neither productively or Allocatively efficient
A state-run organisation could produce at a level which equates to the marginal cost
of production
A privatised monopoly could therefore lead to a loss of economic welfare
Private firms may ignore the externalities of their activities ­ e.g.…read more

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Regulation of Markets:
Involves setting rules & controls that restrict market freedom
External Regulation = Involves an external agency such as the OFT or Competition
Commission setting & enforcing rules & controls
Self-regulation = A group of firms regulate themselves, for example, through a professional
association such as the British Medical Association
Governments can use regulation to correct various forms of market failure e.g.…read more

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Encourages `cherry picking' of the most attractive market areas e.g.…read more


gurpreet sohal

this is amazing i learnt so much 

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