- In addition to controlling merger activity, the CMA continuously intervenes in markets in order to promote competition & to protect the interests of consumers
Types Of Intervention In Monopoly Markets
Price regulation |
Profit regulation |
- Monopolies aim to produce at the profit maximisation level of output (MC=MR)
- This results in higher prices & limited output in the market
- The CMA uses maximum prices to lower prices & increase output
- One way in which they determine where the maximum price should be is to identify the point of allocative efficiency & set the maximum price there
- This strategy is often used on natural monopolies
- Firms will make less supernormal profit than before
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- The CMA may choose to limit the supernormal profit a monopoly can earn
- They do this by calculating the firms total costs & then adding a percentage of profit to it
- However, it is a very contentious policy as
- Costs are difficult for the CMA to calculate
- Firms often try to inflate their perceived costs so as to make more profit than allowed
- Monopolies have no incentive to lower costs, so if costs are higher than they would be in perfect competition consumers still end up paying higher prices
- Even with this policy in place, natural monopolies seem to post record profits year on year
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Quality standards |
Performance targets |
- One way to maximise profit is to reduce the quality of the raw materials which reduces the quality of the end good/service
- If there are no substitutes then this is a likely outcome
- Regulators can step in to insist that certain quality standards are met
- It can be difficult for them to know what the potential quality of a product is or what standards to impose
- Firms push back on these quality standards as they reduce their supernormal profit
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- Regulators can also set performance targets so as to raise the quality of the service & improve customer satisfaction
- This is often seen in the rail industry where targets are set based on the percentage of trains running on time
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