3.6.1a Controlling mergers and monopolies

Controlling Mergers

1. The CMA can investigate a merger that may substantially reduce competition and so harm consumers.
2. A merger is usually reviewed when the combined firm would supply more than 25% of the market or the deal is large by turnover.
3. The CMA can block the merger, clear it, or clear it subject to remedies such as selling off part of the business; it blocked the Sainsbury's and Asda tie-up in 2019 over fears of higher grocery prices, but in 2023 it cleared Microsoft's takeover of Activision Blizzard only after the cloud-gaming rights were restructured.
4. The aim is to protect consumers from the higher prices, lower quality and reduced choice that can follow when market power grows.

Controlling Monopolies

$$Price\; cap=RPI-X$$

1. Under the RPI minus X formula the cap rises with inflation but is cut by X, the efficiency saving the firm is expected to make, so real prices for a water or energy network fall towards competitive levels.
2. The cap also rewards cost cutting, because a firm that beats the X target keeps the extra saving until the cap is next reset; a larger X means a tighter cap and lower permitted prices.
3. Profit regulation is sometimes backed by a windfall tax on excessive profit, but it can weaken the incentive to control costs, since higher costs simply justify higher allowed prices.
4. Quality standards are enforced by regulators such as Ofwat, Ofgem and Ofcom to stop firms cutting service to boost profit.
5. Performance targets set measurable goals, such as train punctuality or reduced water leakage, with fines for missing them, reproducing the pressure a competitive market would place on firms to serve consumers well.

Does price capping a monopoly always help consumers?

1. It holds because a well-set RPI minus X cap forces prices down towards the competitive level, transferring surplus from the firm to consumers and mimicking competitive pressure to cut costs.
2. But regulators face asymmetric information, since the firm knows its true costs and can lobby for a soft X, while a cap set too low starves the network of investment, as debated over UK water companies and sewage.
3. Profit or quality regulation may work better where a hard price cap would blunt investment, and a credible RPI minus X approach can still reward genuine efficiency gains.
4. On balance it depends on how well informed and independent the regulator is: tight, credible regulation helps consumers, but regulatory capture or under-investment can leave them worse off than under a lightly regulated firm.

3.6.1b Promoting competition and protecting agents

Promoting Competition and Contestability

1. The government can promote small businesses through grants, tax breaks, cheaper finance and less red tape, which encourages new firms to enter and raises the number of potential entrants.
2. More potential entrants lowers barriers to entry and raises the contestability of a market, so even a dominant firm must keep prices and profits down to deter entry.
3. Deregulation lets new firms compete where legal barriers once blocked them, as when UK telecoms was opened to competition after British Telecom was privatised in 1984, and when bus and coach services were deregulated in 1986 so new operators could run routes.
4. Competitive tendering uses rival bids for government contracts to drive down cost and improve quality compared with the state providing the service itself, as with local authority refuse collection and non-clinical NHS services such as cleaning and catering.
5. Privatisation is meant to sharpen efficiency and competition through the profit motive, as with British Telecom (1984), British Gas (1986) and the regional water companies (1989), though a state monopoly can simply become a private monopoly, which is why water was placed under a regulator, Ofwat, from the start.
6. The Competition and Markets Authority (CMA) supports this by blocking anti-competitive mergers and fining cartels, for example blocking the proposed Sainsbury's and Asda merger in 2019 to protect competition and consumers.

Protecting Suppliers and Employees

1. The government can restrict the monopsony power of firms that dominate as buyers, protecting suppliers and employees from being squeezed on price or pay.
2. The Groceries Code Adjudicator enforces the Groceries Supply Code of Practice, protecting farmers and suppliers from unfair treatment by the large supermarkets, such as Tesco and Sainsbury's, that buy most of their output.
3. The National Living Wage and employment rights protect workers from powerful employers using monopsony power to pay too little.
4. Nationalisation can safeguard key services, jobs and the public interest and prevent abuse of monopoly power, as argued for the Royal Mail before its 2013 privatisation and for the railways run as British Rail until the 1990s, but it may weaken the profit incentive to control costs and innovate.

Should key industries be nationalised?

1. It holds because natural monopolies such as water and rail avoid wasteful duplication, and public ownership lets the state prioritise the public interest, safety and jobs over short-term profit.
2. But nationalised firms lack the profit incentive and competitive pressure to cut costs, so they can become inefficient and a drain on taxpayers, as critics said of loss-making state industries such as British Steel and British Rail before the 1980s and 1990s privatisations.
3. Privatisation plus tough regulation may capture most of the gains, forcing efficiency while a regulator such as Ofwat or Ofgem caps prices with an $RPI-X$ formula to protect consumers from monopoly pricing.
4. On balance it depends on the industry and the quality of regulation: nationalisation suits genuine natural monopolies with strong public-interest concerns, but in contestable markets private competition usually delivers lower costs and more innovation.