Chapter 6 - Competition Policy & contestable markets

OFT - investigates and refers to CC
1. OFGEM-energy
2. OFWAT - water
3. OFCOM - communication
CC - takes action against OFT referals
1. Compulsory breaking up
2. tax on windfall profits
3. nationalisation
4. regulation
  1. price controls - e.g. RPI-X
  2. Licensing
  3. Rate of return
  4. yardstick
5. Merged from april 2014, call CMA
Monopolies with M.S > 40% investigated by OFT
Mergers - if M.S>25% leads to referral to CC
Restrictive practices
1. Discriminatory prices - "buy more"
2. Resale price maintenance - price to sell at is fixed
3. Full line forcing
4. Refuse to supply
Takeover panel
Competition policy
1. Privatisation
  1. selling local authority assets
  2. Advantages: 1. Promote efficiency 2. Promote competition 3. reduce size of public sector encourage 4. enterprise culture
  3. Disadvantages: 1. Worse allocation of resources 2. ignore externalities 3. Closure of loss making service 4. Short termism
    1. state monopoly become private monopoly e.g. BT
    2. efficiency gains come from firing workers e.g royal mail
  4. should be accompanied by de regulation
2. Nationalisation
  1. Advantages: 1.take externalities into account 2. better management 3. natural monopoly better in public 4. commanding heights 5. Lower costs 6. fairer distribution of resources
  2. Disadvantages: 1. no incentive for efficiency 2. less choice and quality 3. lack of innovation 4. can reduce public spending
3. PFI's
4. Deregulation
  1. makes market more contestanle e.g. BT distribution network
5. licensing
6. internal markets
  1. In favour
    1. poor performers ended
    2. quality driven up
    3. greater efficiency
  2. Against
    1. poor performers deprived of resources needed for improvement
    2. market failure possible.e.g. parents cant choose school because of less info
    3. equitable: new hospital not local
    4. hospital/school has monopoly position
Contestable markets
1. super pi only in short run
2. barriers to entry
  1. level of sunk costs
  2. strategic and innocent
  3. patents
  4. integration
  5. incumbent firms(they have econ of scale)
  6. trade restrictions
  7. Capital costs(use 2nd hand market?)
  8. asymetric info - incumbents know more about industry than new entrant
3. Criticisms of theory
  1. technical knowedge needed not freely available/too high
  2. sunk costs are very high in reality
4. hit and run

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Chapter 6 - Competition Policy & contestable markets

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