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

1. Competition Policy -
Monopoly and Oligopoly in
Focus
A2 (Unit 3) Microeconomics
June 2016
Competition Policy - Monopoly and Oligopoly in Focus

2. 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 markets
2. Effective price competition between suppliers
3. Safeguard and promote the interests of consumers
through increased choice and lower price levels

3. 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)

4. 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.

5. 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)

6. 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.

7. Monopoly power in retail banking
27%
18%
18%
12%
10%
6%
4.2%
2%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
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)
Account market share (per cent)
Concentration Ratio –
the leading five banks
have 85% of the market

8. Monopoly power in retail banking
27%
18%
18%
12%
10%
6%
4.2%
2%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
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)
Account market share (per cent)
Concentration Ratio –
the leading five banks
have 85% of the market

9. Economic Case Against Monopoly
• Here is a good way to remember some of the issues
regarding monopoly and economic efficiency ……..
SPEW
1. Service - does the lack of competition affect the
quality of service to consumers?
2. Prices - how high are prices compared to a
competitive / contestable market
3. Efficiency – i.e. productive, allocative and dynamic
4. Welfare - what are the overall welfare outcomes? Is
there a net loss of welfare in markets dominated by
businesses with monopoly power?

10. 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

11. 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

12. Competition Policy -
Monopoly and Oligopoly in
Focus
A2 (Unit 3) Microeconomics
June 2016
Competition Policy – Scrutiny of Mergers and Takeovers

13. 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

14. 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

15. Contestability in the Fitness/Gym Sector
0
500
1000
1500
2000
2500
Numberofenterprises
There are over 2,000 fitness
facilities (gyms) in the UK. What
makes this market contestable?

16. 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.

17. Poundland / 99p Store Merger Cleared
458
528
588
0
100
200
300
400
500
600
700
2013 2014 2015
Numberofstores
Poundland stores in UK & Ireland
25 August 2015: “The CMA has provisionally cleared Poundland
Group plc’s anticipated acquisition of 99p Stores Ltd.”

18. 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.

19. Competition Policy -
Monopoly and Oligopoly in
Focus
A2 (Unit 3) Microeconomics
June 2016
Price Capping in Markets

20. Leading telecommunication operators in Europe by revenue in 2014
Revenue of Leading EU Telecoms Firms
62.67
54.09
50.38
39.45
22.68
21.57
13.75
12.74
11.44
11.1
9.63
8.06
6.05
4.69
4.43
0 10 20 30 40 50 60 70
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)
Revenue in million euros

21. Mobile Phone Price Caps in the EU
9
8
6
0
1
2
3
4
5
6
7
8
9
10
July 2012 July 2013 July 2014
PricecapinEurocents
70
45
20
0
10
20
30
40
50
60
70
80
July 2012 July 2013 July 2014
PricecapinEurocentsperMB
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.

22. Price Capping – High Prices – High Profits
MC
Price
and
Cost
Output
AC
MR
AR
Profit Max: MC=MR
P1
Q1
C1
Supernormal Profit

23. 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

24. 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.

25. Arguments for Price Capping
1. 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.

26. Arguments against Price Capping
1. Price caps have led to large numbers of job losses in the
utility industries
2. Setting different price capping regimes for each industry
may distort the working of the price mechanism
3. 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

27. 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

28. 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

29. 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

30. Competition Policy -
Monopoly and Oligopoly in
Focus
A2 (Unit 3) Microeconomics
June 2016
Competition Policy - Monopoly and Oligopoly in Focus