The aims and shape of competition policy

Overview

Competition policy, abuse of a dominant position and difficult to judge whether a price is excessive.

What you need to know

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Questions from this subtopic

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.

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