4.2 Market Power And Market Failure

4.2.1 Implications Of Market Failure On Consumers

- Consumers facing increased prices will see their disposable incomes fall and also standards of living - A consumer may not have the range of choice as there may be a lack of innovation in non - competitive markets

4.2.1 Examples Of Restrictive Practices

- Forcing retailers not to stock a competitor's products - Refusing to supply retailers who discount products - Suppliers forcing retailers not to discount prices

4.2.3 The Costs Of Regulation

- Government expenditure will be required to create and run the regulatory bodies. This has an opportunity cost to the taxpayer. - Regulation will impose compliance costs on certain businesses. - This means that some businesses may suffer from reduced profitability - This may reduce their ability to invest and grow in the future - Compliance to consumer protection legislation may cause increased costs being passed on to the consumer

4.2.1 Implications Of Market Failure On Business

- If businesses don't face strong domestic competition they do not become as efficient as they could be - This makes them less competitive in international markets leading to a lack of exports - Competitive domestic markets often lead to a high level of innovation which can be very profitable and lead to success in export markets.

4.2.2 Ways Of Promoting Competition

- Laws and regulations prohibit cartels and collusion, which entails anti competitive agreements that try to reduce competition - Many restrictive practices are prevented for example market sharing - Mergers and takeovers that are likely to give the combined business over 25% of the market share are carefully investigated and they may not be allowed to go ahead with the merger even tho it is already agreed. - Some public companies have been privatised to face competition making them become more efficient. For example the Royal Mail

4.2.1 Implications Of Market Failure On The Government

- The government's wants to create economic growth, however this is often slowed by market failure. This will have an impact on international competitiveness - It is hard for governments to control and regulate market power - Future growth is based on new businesses entering the market and being able to grow. This can also be slowed by market failure

4.2.3 The Benefits Of Regulation

- Without regulation markets will be less efficient and show signs of market failure - Regulation helps to remove market imperfections and correct market failure - Competition encourages more innovation which leads to economic growth by the increased efficiency - Regulation protects both consumers and employees

4.2.1 Power In The Labour Market.

A trade union or professional body can restrict the supply of labour to a particular industry or profession. They can also negotiate levels higher than the free market level, forcing the costs of production to increase hence higher prices for consumers. Monopsony employers can pay below free market wages because workers have nowhere else to go and find employment. An example of this would be public sector nurses and teachers.

4.2.1 Collusion

Collusion is similar to the operations of a cartel however there are no formal agreements required and it can take place between individuals and just two businesses.

4.2.2 Protecting Consumers

Consumers usually don't have market power. Suppliers of consumer products have many ways of giving misleading information to customers. For example inappropriate labelling, pricing strategies can obscure the true cost of the product. Regulators aim to make sure that companies don't exploit people with their monopoly power by charging excessive prices.

4.2.1 Example Of Monopsony Power

For example many small booksellers have gone out of business as they cannot buy and hence sell books as cheaply as Amazon.

4.2.1 Market Failure

Market failure occurs when there is an inefficient allocation of resources. Some resources may be wasted, for example a firm is not producing as they could do and hence consumers lose out. During perfect competition the consumer has the power and firms respond. However when a firm starts to achieve a degree of monopoly power they can cause market failure. This could be by making prices higher than they need to be, resulting in the reduction of real incomes.

4.2.1 Natural Monopolies

Natural monopolies exist when they are considered to be the most efficient form of market structure. For example the national grid. The capital costs of infrastructure are also high for these sorts of system that a monopoly makes sense. There is no competition so natural monopolies also have no incentive to become more efficient and innovate. They can also use their monopoly power against public interests.

4.2.1 Cartel Agreements (Output Levels)

Output levels can be fixed to restrict supply and hence drive up the price level.

4.2.1 Cartel Agreements (Prices)

Prices may be fixed at a higher level than a competitive market would reach, or businesses may simply agree to not reduce prices or compete.

4.2.2 Role Of The CMA

The CMA is responsible for: - Investigating mergers which could restrict competition - Conducting market studies and investigations where competition might be weak - Investigating where there may be anti - competitive agreements - Enforcing consumer protection legislation - Penalties of up to 5% of turnover may be imposed on businesses that fail to comply with CMA requirements

4.2.1 Characteristics Of Monopsony Power

The buyer is large enough to drive down the cost of the inputs thus lowering the costs of production. This may seem good at first, however it doesn't take into account suppliers who may have to pay their workers low wages as a result. Monopsony power can translate into monopoly power if it allows a firm to gain a competitive advantage due to lower costs.

4.2.1 Explicit Collusion

This involves two or more businesses discussing their plans and following a joint strategy.

4.2.1 Market Power

This is the ability of a producer to exert some level of power of the market. This could be through restricting output, creating barriers to entry and setting prices.

4.2.1 Tacit Agreement

This is when firms don't communicate and keep their prices at roughly the same level so that they don't compete on price.

4.2.1 Restrictive Practices

This may include any action a business will take to limit competition. For example entering a market sharing agreement.

4.2.1 Cartel Agreements (Market Sharing)

This may involve dividing up the market so that each member of the cartel has their own area, where others to not intrude and compete.

4.2.1 Cartel Agreements (Preferential Supply)

This means restricting the number of customers and outlets they will supply, again increasing the price level.

4.2.1 Cartel Agreements (Bid Rigging)

This means when they take in turns to pretend they have won businesses contracts and offering it to the lowest bidder rather than the highest, this means they can charge much higher prices than if they were all competing genuinely to win the same contracts.

4.2.1 Monopsony Power

This occurs when the buyer has power over the sellers. It is the opposite of monopoly power, where the seller has power over the buyer. Supermarkets have some monopsony power.

4.2.1 Cartels

A cartel is any agreement within a group of businesses to reduce competition, avoiding competing with each other. The agreement is usually a secret. The purpose of cartels is to increase prices and not compete with each other. As a result they directly affect the purchasers of their goods and services and reduce their real incomes and spending power.

4.2.2 Natural Monopoly

A natural monopoly occurs when the most efficient scale of production is a monopoly because more than one producer or supplier would involve wasteful duplication of resources.

4.2.2 Regulating Natural Monopolies

A regulatory body is a public authority or government agency responsible over exercising autonomous control over a sphere of business. Regulators of natural monopolies were set up to ensure that natural monopolies don't exploit customer by overcharging and also that they are making efforts to keep their costs of production down. Regulators work closely with the companies they are appointed to monitor, to make sure they are providing a good service at a reasonable price.