Why regulation is neededA2 Economics and Business

Unit 4B

By Mrs Hilton for revisionstation

Lesson Objectives

• To be able to identify a cartel• To be able to discuss collusion• To be able to discuss restrictive trade practices

and effects on prices and competition• To be able to discuss the issue of natural

monopolies• To be able to answer past paper questions

based on the topic area

Starter

• If you owned a website that sold hippy gear and your two main rivals were your friends – would you get together to make sure you all charged the same price. Would this be against UK trading laws?

Competition Commission

• This is mentioned in the spec but has since closed down• It is now known as the competition and markets authority• From their website:• We work to promote competition for the benefit of

consumers, both within and outside the UK. Our aim is to make markets work well for consumers, businesses and the economy.

• We acquired our powers on 1 April 2014 when we took over many of the functions of the Competition Commission (CC) and the Office of Fair Trading (OFT).

Cartels

• An association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition.

• Example: the Columbian drug cartels

Video

• A cartel is a formal, explicit agreement among competing firms. It is a formal organisation of producers and manufacturers that agree to fix prices, marketing, and production.

• Cartels usually occur in an oligopolistic industry, where the number of sellers is small (usually because barriers to entry, most notably start-up costs, are high) and the products being traded are usually commodities.

• Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these.

• The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition.

Where cartels occurCartels can occur in almost any industry and can involve goods or services at the manufacturing, distribution or retail level. Some sectors may be more susceptible to cartels than others because of their structure or the way in which they operate.

For example, a cartel may be more likely to exist in an industry where:• there are few competitors • the products have similar characteristics (which leaves little scope for competition on quality or service)• communication channels between competitors are already established (eg, trade associations), and • the industry is suffering from excess capacity or there is general recession.

Example – price fixing

• German brewers also fined for price fixing – video bbc

Example – Debeers Diamond cartel

Protected food names – quality or cartel?

Collusion (collusive oligopoly)

• Competitive rivals may seek to reduce uncertainty by colluding to either fix a price, a level of output or allocate customers

• By forming a cartel agreement all parties in the oligopoly can achieve a better outcome in terms of maximising their profits

• This is bad news for the consumer who may then have limited choice or higher prices. This is why they are illegal and laws are there to protect the consumer.

Collusion

• Collusion is an agreement between two or more parties, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair market advantage.

• It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities.

• Law: competition Act 1998• Any collusion reported would be investigated by the CMA• Example article here: Glass producers cartel

Restrictive trade practices• Some agreements may restrict competition and will be

investigated by the CMA• Restrictive Trade Practises Act 1976 prevents agreements

affecting goods and services. The CMA must be notified of all arrangements, not just formal written agreements, made by two or more parties in business who accept specified restrictions on their freedom to compete. Details are then entered in a public register. Businesses must disclose any agreements on:

• prices or charges• terms or conditions of business• geographical areas of business (dividing up the country)• the quantities or types of goods to be produced

Natural monopolies• A natural monopoly is a distinct type of monopoly that may

arise when there are extremely high fixed costs of distribution, such as exist when large-scale infrastructure is required to ensure supply. Examples of infrastructure include cables and grids for electricity supply, pipelines for gas and water supply, and networks for rail and underground.

• In the case of natural monopolies, trying to increase competition by encouraging new entrants into the market creates a potential loss of efficiency. The efficiency loss to society would exist if the new entrant had to duplicate all the fixed factors - that is, the infrastructure.

• It may be more efficient to allow only one firm to supply to the market because allowing competition would mean a wasteful duplication of resources.

• Good example is tap water supplier / gas / electricity

Natural monopoly – bbc video

Sample question 1

How marks are awarded for Q1 [30]

Level Mark awarded

1 1-3 Knowledge

2 4-6 Application

3 7-16 Analysis

4 17-30 Evaluation

Hint: look at the trend in ITV and Channel 4 viewing figures

Answer question 1 Knowledge of competition commission (Now the CMA)• Cable and Satellite offer more programmes. • Kangaroo would have too many adverts. Reduction in cost to licence payer. • Improved competition means more choice. • Cable and satellite could offer more online. • BBC should not be involved in any commercial venture. Consumers seem happy to pay for Pay TV. • All consortium members have their own VoD service. • The block is unlikely to have any impact on competition in any case. According to Evidence E and F, ITV and Channel 4 are losing market share rapidly and pose no threat to competition. • The public are being denied a useful service which wouldn’t have an additional cost. • Consortium members all have a public service remit. On the other hand, • Monopoly power is rarely in the public interest e.g. more competition in the market usually results in more choice and lower prices for the consumer.

Sample question 2

[2]

Answer question 2

Knowledge up to 2 marks: A definition of restrictive practice e.g. “a trade practice which has or may have the effect of preventing, discounting or restricting competition in any manner” or equivalent demonstrating understanding = 2 marks.

Sample question 3

• [9]

Answer question 3

Sample question 4

• [4]

Answer question 4

Revision Video – collusion and cartels

Revision video – trade restrictions