Aspects of UK and EU Competition Policy

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

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



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

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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

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f sto

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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.



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

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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



June 2016

Competition Policy - Monopoly and Oligopoly in Focus

Aspects of UK and EU Competition Policy

Economy & Finance

Transcript of Aspects of UK and EU Competition Policy