4.
2 MARKET
POWER AND
MARKET
FA I LU R E
Can you put these examples of privatisation in order?
• British Gas
• Water companies
• Northern Rock
• Regional electricity companies
• BBC broadcast
• Thomas Cook
• Royal Mail
• Trustee Savings Bank
4.2.2 BUSINESS REGULATION
4.2.2 BUSINESS REGUL ATION
In this topic you will learn about
Promoting competition through:
preventing anti-competitive practices
controlling mergers and takeovers
Privatisation
Regulating natural monopolies
Protecting consumers
The work of the Competition and Markets Authority
Impact of EU competition policy
Employee protection
PROMOTING COMPETITION
Competition policy seeks to improve the competitive nature of markets
It seeks to alleviate market failure in order to protect the interests of
consumers (consumer welfare) and society as a whole
This can be achieved by:
Curtailing monopoly power and protecting competitive markets
Restricting mergers and prohibiting cartels
Improving the way in which markets work e.g. providing greater information
Creating fairness in markets for both firms and consumers so that firms don’t
abuse their dominant market position but are able to make acceptable profits
that will drive innovation and increases in productivity
Increasing productive, allocative, static and dynamic efficiency
Contestable market theory should be used
to illustrate competition policy.
THE BENEFITS OF
COMPETITION POLICY
There are a number of benefits that lead to competition policy being
successful:
Lower price: Increase competition leads to a shift of the supply curve to the right
leading to a fall in market price
Improved quality: In order to maintain a customer base within a competitive market
firms will strive to provide better quality products and customer service or risk losing
market share
Increased choice: Competition creates an increased range of products which will lead
to an improved allocation of resources as firms are more likely to produce products
that a variety of customers will wish to buy
Innovation: Both productive and allocative efficiency will occur as firms invest in R&D
and continually look to improve production processes to lower costs over time and
develop new products
This will benefit society as a whole as these new products and processes lead to
improvements e.g. technical change that can be used across markets
Competitive advantage: Internal UK and EU competition will lead to leaner, more
efficient firms that have a better understanding of the requirements of the consumer.
This will help EU firms compete in a global market e.g. against US, Chinese and Indian
firms
PREVENTING ANTI-COMPETITIVE
PRACTICES
Anti-competitive practices are those that reduce
competition in markets
These might include pricing strategies such as limit
pricing and price fixing
They also include:
Dumping of stock in markets at a loss in order to
destroy competition
Bundling products together so that consumers have to
buy accessories that they don’t want
Striking exclusivity deals so that buyers can only
purchase from the contracted supplier
CONTROLLING MERGERS AND
TAKEOVERS
Arguments for intervention Arguments against intervention
Mergers and
takeovers are Protect jobs Competitiveness
regulated in order • potential restructuring • Survival of fittest
to ensure • moving abroad
competition in
• closing UK plants
markets.
This will help
Protect the consumer Foreign direct investment (FDI)
counter • exploitation – monopoly power • creates jobs
monopoly power. • greater choice
Economic environment Strategic interests
• protect jobs • e.g. defence
• support UK owned industries
• GDP
British ownership Can other countries do a better
• International pride job?
• Loss of identity
• Protect IP
PRIVATIS ATION
Privatisation is the
transference of assets
Arguments for privatisation include:
from the government
to privately owned Greater productive efficiency as profit maximisation leads firms to
businesses.
cut average costs
The UK has seen a
range of firms Innovation is more likely as firms strive to increase profits and
privatised since the
market share by meeting customer needs. This leads to dynamic
1970s.
efficiency
Allocative efficiency occurs as market forces ensure that goods and
services are produced to meet the needs of the consumer
This leads to greater choice and lower prices as firms compete
supernormal profits away
Increased competition rather than government monopoly leads to
greater economic efficiency
Government revenue increases by selling off state assets and
expenditure falls as they no longer incur costs for the industry
REGULATING NATURAL MONOPOLIES
A monopoly exists where
there is only one firm in
A natural monopoly occurs when there is only one producer in an
the market. However, industry. Barriers to entry are so high that without business
the Government refer to
any company that has at
regulation the consumer would face considerable exploitation
least 25% market share
as having monopoly This provides the monopolist with market power leading to higher
powers.
prices and abnormal profits
Market power is the
ability of a firm to set
price above marginal
There will be allocative inefficiency and a misallocation of resources
cost.
Therefore, a monopoly is an example of market failure
Monopolies can exploit consumers by charging high prices.
Therefore, monopolies are regulated in order to protect the
customer.
How important is water? Could monopolies in the water industry
use their power to exploit the customer? Should governments
play a role in regulating monopolies?
PROTECTING CONSUMERS
Consumer protection laws protect the consumer from
firms with regards the quality of goods or services sold
Big businesses are more powerful than individual
consumers, therefore the legislation attempts to stop the
consumer from being exploited
Do consumers need
protecting from This is becoming increasing important because of:
aggressive
fundraisers? More technologically advanced products
Pressurised selling techniques
Increased globalisation
PROTECTING CONSUMERS
Consumer protection laws include:
Sale of Goods Act
Goods must be:
As described
Fit for purpose
Of merchantable quality
Trade Descriptions Act
Goods must be:
Fully as described i.e. descriptions can not be in any way
misleading
Consumer Protection Act
Businesses are:
Liable for any costs occurred as a result of faulty or
damaged products
Prices quoted must be correct and not misleading
THE COMPETITION AND MARKETS
AUTHORITY
The Competition and Markets Authority was set
up in 2014 to promote competition for the benefit
The CMA
of consumers
Other bodies used to
It takes over powers from the Office of Fair Trading
improve competition (OFT) and the Competition Commission
include the
Consumer Protection
Partnership, the UK It investigates mergers and markets where there is
Competition
Network and the seen to be monopoly power
European
Commission. It looks into anti-competitive practices that lead to
exploitation of consumers
Read more about the CMA here.
IMPACT OF EU COMPETITION POLICY
EU legislation and competition policy impacts on markets
The European Commission seeks to restrict anti-competitive behaviour
within EU countries and with its trading partners
EU and Apple
EU competition
policy
EU and Google
EMPLOYEE PROTECTION
Safeguarding employees’ rights in the workplace
Individual labour law guarantees certain rights for individual
employees:
• Equal Pay Act – both sexes should be treated equally at work
• Sex Discrimination Act – this outlawed discrimination based on gender
for recruitment, promotion, training or dismissal
• Race Relations Act – illegal to discriminate based on colour
What is a • Disability Discrimination Act – illegal to discriminate against disable
living wage? people and made provision to assist the employment of disabled people
• Working Time Regulations – employees cannot be forced to work more
than 48 hours a week
• National Minimum Wage Act – a minimum hourly wage rate introduced
across the UK
EMPLOYEE PROTECTION
Safeguarding employees’ rights in the workplace
Collective labour law guarantees certain rights, and places
certain restrictions, on groups of employees e.g. trade unions:
• Employment Act – ‘Secondary picketing’ outlawed
• Trade Union Act – a secret ballot required before strike action
• Employment Act – outlawed closed shops (where all workers
belong to a single union)
• Trade Union Reform Act – unions must give employees at
least 7 days notice of industrial action
• Employment Relations Act – right to recognition of a union in
the workplace if 50% belong to a union
4.2.2 BUSINESS REGUL ATION
In this topic you have learnt about
Promoting competition through:
preventing anti-competitive practices
controlling mergers and takeovers
Privatisation
Regulating natural monopolies
Protecting consumers
The work of the Competition and Markets Authority
Impact of EU competition policy
Employee protection
