Industrial Policy: Competition Policy A2 Economics
Aims and Objectives Aim • To understand industrial policies concerning monopolies. Objectives • To investigate the monopolistic supermarket market. • To suggest competition policies. • Analyse OFT reports into the supermarket market. • Evaluate four means of curbing monopoly power.
Starter • Define and distinguish between interventionist government policies and free market government policies. • Which economist advocated and originated demand side policies? • Define complex monopoly. • Define scale monopoly.
Investigating Competition • Group Task • Present Back
Investigating Monopolies Other indicators include: • Evidence of price discrimination and price leadership. • Merger activity. • Ratios of advertising expenditure to sales. (Barrier to Entry). • Profit Margins • Ratio of capital employed to sales. (Barrier to Entry). • Evidence of collusive practice.
Evidence 1: The price of own brand sliced white bread, 4 pints of milk, 6 value eggs across five supermarkets. (mysupermarket.com. Dec 2010). • Evidence 2: Recent Mergers and Acquisitions. List of Defunct Supermarkets, which have merged or been bought out by a supermarket in the last 30 years. • Evidence 3: Sales Figures 2010 of largest five supermarkets and advertising expenditure 2010. (Annual Reports & The Guardian Online). • Evidence 4: Net Profit Margins of UK’s Largest five supermarkets. • Evidence 5: Market Share of Supermarkets 2010.
Group Task Now that you have analysed each piece of evidence from the OFT, it is your job to present your findings to the Competition Commission Directors. You should produce a summary of your analysis, and provide a judgement on whether or not you feel there is ‘Monopolistic Behaviour (both scale and complex monopoly existing in the market) existing in the supermarket industry’. You should justify your evaluation of the analysis with facts and figures.
Supermarkets Report • http://www.youtube.com/watch?v=E2FME2Hnu88
OFT Investigation Article • Discussion • Findings • Actions
CC Approaches to Monopolies • Brainstorm in groups what could be done to improve competition in monopolistic markets. Consider: • Market Structure • Prices • Tax • Nationalisation • Privatisation • Deregulation
CC Approaches to Monopolies • Monopoly Busting • Use of Price Controls • Taxing Monopoly Profits • Rate of Return Regulation • Nationalisation of Monopolies • Privatisation of Monopolies • Deregulation and removal of barriers to entry.
1. ‘Monopoly Busting’ • Free market economists believe that economic efficiency and consumer sovereignty can only be achieved near perfect comp. • Monopolies bad and impossible to justify. • Policy of breaking up monopolies. • Never done in UK, but power exists with government.
2. Use of Price Controls • Restrict the freedom of UK firms to set their own prices. • Previously used to control inflation, rather than control monopoly abuse. • Eg. BT had to keep price rises below the rate of inflation.
3. Taxing Monopoly Profits • Taxing of monopoly profit to punish firms for making excessive profit. • Discourages monopolistic behaviour, only if the tax is large enough to do so.
4. Rate of Return Regulation • Maximum rates of return on capital employed • Firms fined if they set prices too high and earn excessive rates of return. • Aim of increasing productive efficiency. • This type of intervention has the unintended consequence of encouraging firms to raise costs (knowing they are protected by barriers to entry). • Rather than cut prices, to comply with the return on capital regulation.
Plenary • Discuss the good points and bad points of each monopoly policy: • Monopoly Busting • Use of Price controls • Taxing Monopoly Profits • Rate of Return Regulation
5. Nationalisation • Previous governments regard monopoly problems as a result of private ownership and the pursuit of private profit. • Monopolies nationalised. • Once in public ownership the monopolies are assumed to act in public interest.
6. Privatisation • Some governments argue that state monopolies are inefficient and resistant to change. • Belief by monopoly that they will always be bailed out by government. • Conservative view that monopoly abuse occurs in state monopolies because firms are run in the interest of a feather-bedded workforce.