Competition Policy

What Competition Policy covers

Competition policy is examined in Unit A2 1, Business Economics. It covers the aims and shape of competition policy, breaking up firms and controlling mergers, regulation, regulators and price caps, evaluating regulation and its alternatives, taxation and subsidies as competition remedies, nationalisation, privatisation, and choosing between public and private ownership, banning unfair trading practices and judging competition policy and government failure.

The 9 subtopics

Each one has its own page.

• The aims and shape of competition policyCompetition policy, abuse of a dominant position and difficult to judge whether a price is excessive.Open →
• Breaking up firms and controlling mergersMean to break up a monopolistic business, breaking up a firm described as a structural remedy and competition authorities examine horizontal mergers most closely.Open →
• Regulation, regulators and price capsRegulation as an instrument of competition policy, role and purpose of a regulator and regulators used in industries such as water.Open →
• Evaluating regulation and its alternativesEffect of a price cap on prices, regulators require firms to publish clear and comparable price information and claim that regulation is only ever a second-best solution.Open →
• Taxation and subsidies as competition remediesTaxation be used as a response to market power and subsidising a struggling competitor be self-defeating as a competition policy.Open →
• NationalisationNationalisation regarded as a possible remedy for market power, main arguments in favour of nationalisation and main arguments against nationalisation.Open →
• Privatisation, and choosing between public and private ownershipMain arguments in favour of privatisation, main arguments against privatisation and effect of privatisation on employment in the industry concerned.Open →
• Banning unfair trading practicesUnfair trading practices, governments ban misleading advertising and false price claims and refusal to supply.Open →
• Judging competition policy and government failureHow the effects of intervention on prices should be assessed, how the effects of intervention on employment should be assessed and how the effects of intervention on output should be assessed.Open →

What you need to know

Answer each one before you reveal it.

Take Competition Policy further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Regulation vs Nationalisation

  Regulation: setting rules that a privately owned firm must follow. Nationalisation: taking the firm into public ownership outright.

• A price cap vs A subsidy

  A price cap: a ceiling above which a firm may not charge. A subsidy: a payment that lowers the cost of supplying, used to raise output.

• A merger vs A takeover

  A merger: two firms agreeing to combine into one. A takeover: one firm acquiring control of another, with or without its agreement.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What is competition policy?

   Model answer

   Competition policy is the set of government measures intended to keep markets competitive and to limit the harm caused when they are not. It covers action against agreements between rivals that restrict competition, action against firms that abuse a dominant position, control over mergers that would reduce competition, and the regulation of markets where competition cannot realistically be established.

2. 2

   Why do governments intervene in markets where a few firms hold most of the sales?

   Model answer

   Because where competitive pressure is weak, firms set price above marginal cost, restrict output below the level society would choose, transfer surplus from consumers to shareholders and face little discipline to control their costs or to innovate. Intervention aims to recover the output and the consumer surplus that market power removes.

3. 3

   State the main aims of competition policy.

   Model answer

   To keep prices close to costs so that consumers are not overcharged; to raise output towards the level at which the value of the last unit equals the cost of producing it; to improve productive efficiency by keeping firms under pressure to control costs; to encourage innovation and investment over time; to protect consumers from being misled or exploited where they cannot judge quality or price for themselves; and to keep markets open to new entrants.

4. 4

   Explain why competition policy targets conduct as well as market structure.

   Model answer

   A large market share is not by itself harmful, because it may reflect low costs, a better product or the fact that efficient scale is large relative to demand. What harms consumers is what firms do: fixing prices, sharing markets, refusing rivals access to something they need, or pricing below cost to remove a competitor. Policy therefore prohibits the damaging behaviour while allowing a firm to become large by serving customers well.

5. 5

   Why does competition policy distinguish between agreements among rivals and the conduct of a single dominant firm?

   Model answer

   They cause harm by different routes and call for different remedies. An agreement among rivals removes competition that would otherwise exist, so the remedy is to prohibit and punish the agreement and let normal rivalry resume. A single dominant firm may have become dominant legitimately, so the remedy is not to punish its size but to stop it using that position to exclude competitors or exploit customers.

6. 6

   What is meant by the abuse of a dominant position?

   Model answer

   It is the use of a strong market position to exploit customers or to exclude competitors in ways a firm without that position could not sustain. Examples include charging excessive prices, refusing to supply a competitor with an input it controls, tying the purchase of one product to another, offering rebates that reward buying exclusively, and pricing below cost to drive a rival out.

What is inside Levo

Six ways to work the same material.

Competition Policy revision questions

What does Competition Policy cover in CCEA A-Level Economics?

9 subtopics: the aims and shape of competition policy, breaking up firms and controlling mergers, regulation, regulators and price caps, evaluating regulation and its alternatives, taxation and subsidies as competition remedies, nationalisation, privatisation, and choosing between public and private ownership, banning unfair trading practices and judging competition policy and government failure. Each one has its own page with questions and model answers.

How is Competition Policy organised?

By the CCEA 4410 specification, subtopic by subtopic, so it matches the order you are taught it in.