Post on 11-Jan-2017
Competition Policy - Monopoly and
Oligopoly in FocusA2 (Unit 3) Microeconomics
June 2016
Competition Policy - Monopoly and Oligopoly in Focus
What is Competition Policy?• The aims of UK competition policy are to promote
competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union single market.
• Competition policy aims to ensure 1. Technological innovation which promotes dynamic
efficiency in different markets2. Effective price competition between suppliers3. Safeguard and promote the interests of consumers
through increased choice and lower price levels
Examples of Regulators in the UK
Regional Water Monopolies
The UK Competition and Markets Authority
Telecoms & Broadcasting (Media)
Financial Services including the Banks
Rail Regulator – Train Operating Companies
General Energy Markets (including Electricity and Gas)
What do the regulators actually do?1. Monitoring and regulating prices: Regulators aim to ensure
that companies do not exploit their monopoly power by charging excessive prices
2. Standards of customer service: Companies that fail to meet specified service standards can be fined or have their franchise / operating license taken away
3. Opening up markets: E.g. by removing or lowering barriers to entry. This might be achieved by forcing the dominant firm in the industry to allow others to use its infrastructure network. A key task for the regulator is to fix a fair access price for firms wanting to use the infrastructure
4. The “Surrogate Competitor” i.e. attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets.
Types of Anti-Competitive Behaviour
Explicit price fixing and market sharing
agreements
Predatory pricing and limit pricing tactics
Charging excessively high prices using monopoly power
Refusal to deal with a specific supplier
(vertical restraint)
Patent misuse e.g. “pay for delay” for new
generic drugs
Protectionist policies limiting overseas trade
(a barrier to entry)
Examples of Anti-Competitive Behaviour• March 2016: Amazon loses appeal for $400m fine for their
part in anti-competitive pricing of E-books.• Feb 2016: GSK found guilty in a so-called pay-for-delay
case, where it paid several smaller pharmaceutical companies to delay selling their cheaper version of the antidepressant Paxil, also known as Seroxat.
• Aug 2015: Pfizer and a UK company called Flynn Pharma found to have charged “excessive and unfair prices” for an anti-epilepsy drug — phenytoin sodium — inflating the annual NHS drugs bill by tens of millions of pounds.
• April 2015: EU Competition Commission accused Google of illegally abusing its dominance in web search to steer European consumers to its own in-house shopping services.
Monopoly power in retail banking
Lloyds Bank Plc (hq: London)
Barclays Bank Plc (hq: London)
The Royal Bank of Scotland (hq: Edinburgh)
HSBC Bank Plc (hq: London)
Santander UK Plc (hq: London)
Nationwide Building Society (hq: Swindon)
TSB Bank Plc (hq: Edinburgh)
Co-operative bank (hq: Manchester)
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
27%
18%
18%
12%
10%
6%
4.2%
2%
Account market share (per cent)
Concentration Ratio – the leading five banks have 85% of the market
Monopoly power in retail banking
Lloyds Bank Plc (hq: London)
Barclays Bank Plc (hq: London)
The Royal Bank of Scotland (hq: Edinburgh)
HSBC Bank Plc (hq: London)
Santander UK Plc (hq: London)
Nationwide Building Society (hq: Swindon)
TSB Bank Plc (hq: Edinburgh)
Co-operative bank (hq: Manchester)
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
27%
18%
18%
12%
10%
6%
4.2%
2%
Account market share (per cent)
Concentration Ratio – the leading five banks have 85% of the market
Economic Case Against Monopoly
• Here is a good way to remember some of the issues regarding monopoly and economic efficiency ……..
SPEW1. Service - does the lack of competition affect the
quality of service to consumers?2. Prices - how high are prices compared to a
competitive / contestable market3. Efficiency – i.e. productive, allocative and dynamic4. Welfare - what are the overall welfare outcomes? Is
there a net loss of welfare in markets dominated by businesses with monopoly power?
Cost & Price
Output (Q)
Cost & Price
Output (Q)
Perfectly Competitive Market Pure Monopoly Market
S1
D1
P1
P2
Entry of new firms
drives price lower
AC
MC
AC
MC
Monopoly demand
(AR)MR
P1 P1
Q1 Q2
P2
C2
Monopoly Profit
S2
Monopoly power usually results in higher prices + lower output
Economic Case Against Monopoly
Intervention options with monopoly
Intervention Reasoning Evaluation
Tax on monopoly profits
A one-off windfall tax on supernormal profits from monopoly power
Risk of tax avoidance / loss of capital investment spending
Liberalization of markets
Break up monopolies to allow smaller businesses to enter and increased contestability
Smaller businesses may struggle to scale up and compete effectively
Introduce price capping policies
Encourages cost efficiency + increases consumer surplus
Monopolists may find revenues in other ways
Nationalisation Take some monopoly utilities back into public ownership
Possible loss of productive efficiency
Competition Policy - Monopoly and
Oligopoly in FocusA2 (Unit 3) Microeconomics
June 2016
Competition Policy – Scrutiny of Mergers and Takeovers
Merger Investigations by the (UK) CMA• The Competition and Markets Authority has the power to
investigate mergers and takeovers in the UK• They can block an acquisition if they find that the
integration of two businesses will lead to a “significant lessening of competition” in one or more markets at either local, regional or national level
• They have the power to give a merger the go-ahead providing certain conditions are met such as the enlarged firm selling off some of their businesses or assets to protect competitive forces
The Pure Gym / LA Fitness Merger
Merger in the UK Gym Industry
14 August 2015: The CMA has cleared the acquisition by Pure Gym Limited of the LA fitness
business
Pure Gym is a low-cost or ‘budget’ operator that currently operates 98 gyms. LA Fitness is a mid-range operator offering a full pool or ‘wet’ offering alongside classes and the core gym studio. LA Fitness has 43 clubs, 33 of which are inside the M25.
Key issue: Whether horizontal integration is likely to lead to a substantial lessening of competition
Contestability in the Fitness/Gym Sector
0
500
1000
1500
2000
2500
Num
ber o
f ent
erpr
ises
There are over 2,000 fitness facilities (gyms) in the UK. What makes this market contestable?
Merger Investigations by the CMA
17 December 2015: The CMA has cleared
the anticipated merger of Betfair Group plc
and Paddy Power plc
13 October 2015: The CMA has cleared
the acquisition by Sheffield City Taxis Limited of certain
assets and business of Mercury Taxis
(Sheffield) Limited.
19 October 2015: The CMA has accepted undertakings in lieu of
reference for the anticipated acquisition by Muller UK &
Ireland Group LLP of the dairy operations of Dairy Crest
Group plc.
Müller has agreed to sell to Medina Dairy Limited the option to require Müller to process up to 100 million litres of milk each year in Dairy Crest’s Severnside dairy for supply to national grocery retailers. The option is for a period of at least 5 - and up to 8 - years.
Poundland / 99p Store Merger Cleared
2013 2014 20150
100
200
300
400
500
600
700
458
528
588
Num
ber o
f sto
res
Poundland stores in UK & Ireland
25 August 2015: “The CMA has provisionally cleared Poundland Group plc’s anticipated acquisition of 99p Stores Ltd.”
Cineworld / Picturehouse Merger (2013)The conclusion of the inquiry in 2013 into Cineworld’s acquisition of Picturehouse was that there could be a substantial lessening of competition in 3 areas – Aberdeen, Bury St Edmunds and Cambridge. Cineworld and Picturehouse faced limited competition here, so the acquisition could lead to higher prices for local cinema goers. Cineworld was required to sell one of the cinemas it owns in each of these areas to an operator approved by the Competition and Markets Authority. The new operator would be expected to continue running it as a cinema and would need to demonstrate that they had the appropriate expertise and experience. In March 2015, the CMA approved The Light as a suitable purchaser of the cinema in Cambridge which met its criteria.
Competition Policy - Monopoly and
Oligopoly in FocusA2 (Unit 3) Microeconomics
June 2016
Price Capping in Markets
Leading telecommunication operators in Europe by revenue in 2014
Revenue of Leading EU Telecoms Firms
Deutsche Telekom (Germany)Vodafone (UK)
Telefónica (Spain)Orange (France)
BT (UK)Telecom Italia (Italy)
Liberty Global (UK)Telenor (Norway)
Numericable-SFR (France)TeliaSonera (Sweden)
Swisscom (Switzerland)KPN (Netherlands)
Proximus (Belgioum)Turk Telecom (Turkey)
Bouygues Telecom (France)
0 10 20 30 40 50 60 7062.67
54.0950.38
39.4522.68
21.5713.75
12.7411.4411.1
9.638.06
6.054.694.43
Revenue in million euros
Mobile Phone Price Caps in the EU
July 2012 July 2013 July 20140
1
2
3
4
5
6
7
8
9
109
8
6
Pric
e ca
p in
Eur
o ce
nts
July 2012 July 2013 July 20140
10
20
30
40
50
60
70
80
70
45
20
Pric
e ca
p in
Eur
o ce
nts p
er M
B
EU Price caps on text messages (SMS)
EU Price caps on mobile data roaming
After intervention by the EU Competition Commission, from 15 June 2017, those travelling within the EU will be able to use their mobile internet abroad at no extra charge.
Price Capping – High Prices – High Profits
MC
Price and Cost
Output
AC
MR
AR
Profit Max: MC=MR
P1
Q1
C1
Supernormal Profit
Price Capping Reduces Monopoly Profits
MC
Price and Cost
Output
AC
MR
AR
Profit Max: MC=MR
P1
Q1
C1
Supernormal Profit
Capped Price
Q2
C2
Price Capping Regimes in the UK• Price capping is now being phased out as most utility markets
in Britain have become more competitive giving consumers real choice (although few choose to switch)
• Price capping is an alternative to rate-of-return regulation, in which utility businesses are allowed to achieve a given rate of profit on capital.
• In the UK, price capping has been known as "RPI-X". This takes the rate of inflation and subtracts expected efficiency savings (X). So for example, if inflation is 5% and X is 3% then an industry can raise prices on average by only 2% per year
• In the UK water industry, the formula is "RPI - X + K", where K is based on capital investment requirements designed to improve water quality and meet EU water quality standards.
Arguments for Price Capping1. Capping is an appropriate way to curtail the monopoly
power of “natural monopolies” or dominant firms preventing them from making excessive supernormal profits at the expense of consumers
2. Cuts in the real price levels are good for both household and industrial consumers (leading to an increase in consumer surplus and higher real living standards.)
3. Price capping helps to stimulate improvements in productive efficiency because lower average costs are needed to increase a producer’s profits.
4. The price capping system can be a tool for controlling the rate of consumer price inflation in the UK although inflation has been low in recent years.
Arguments against Price Capping1. Price caps have led to large numbers of job losses in the
utility industries2. Setting different price capping regimes for each industry
may distort the working of the price mechanism3. The industry regulator may not enough accurate
information when setting the price caps for future years – this can lead to regulatory failure
4. Capping prices means lower profits which in turn can lead to reduced capital investment by the utility businesses – ultimately consumers suffer if there is under-investment in utility infrastructure for example a lack of investment in water treatment and sewerage facilities
Impact of Price Capping on a Market
To be effective, the cap must be set below the normal profit maximising price
A price cap lowers the monopoly (supernormal) profit made by dominant firms in the market
May stimulate attempts to improve cost efficiency
In theory – it leads to an improvement in allocative efficiency and welfare because prices are lower
But it might also lead to the exit of some businesses from the industry which reduces competition
Key Policies to Increase Contestability• Increasing the contestability of markets is widely regarded as an
important supply-side economic policy in the UK
Deregulation of an industry Open up monopoly networks
Tough rules on predatory pricing International free trade deals
Jean Tirole – Nobel Winner in 2014
Nobel Prize for Economics 2014 Was awarded to…………. Jean Tirole
• Important work on regulation and on competition policy• It is sometimes better to leave monopolies alone and allow them
to work with other firms providing there is sufficient contestability• Always a risk of government failure with regulatory interventions• Sector-based analysis; price caps can work in some markets but not
others
Competition Policy - Monopoly and
Oligopoly in FocusA2 (Unit 3) Microeconomics
June 2016
Competition Policy - Monopoly and Oligopoly in Focus