To what extent do you agree that government intervention to promote competition and
contestability through deregulation is justified?
Deregulation is the reduction of laws and conditions firms have to comply with. For example,
health and safety legislation or quality standards. This will decrease the fixed costs for firms as
they do not have to pay for measures to comply with regulation.
Deregulation may be used to promote contestability as strict regulation can act as a cost of
production and a barrier to entry, as more money is needed to start up a business. For example,
in New Zealand a program of deregulation has meant it now only takes one day to start a
business, or two if you are starting one whilst registering a property. Contestability is the threat
of new entrants and competition. If costs are reduced firms need less funding to create their
own business.Therefore,by decreasing barriers to entry through a reduction in regulation
contestability is improved.
However, you could argue some markets need regulation to maintain contestability as
incumbent firms may attempt to raise barriers to entry themselves. For example this could be
done using patent and other ownership rights limiting access to the market and reducing
contestability. An example of this would be, in 2013 in India, pharmaceutical company Novartis
lost a court case in which it was trying to gain a new patent for its leukaemia drug. The firm had
edited the composition of the drug slightly,and argued it therefore, needed a new patent, a tactic
known as ‘evergreening’. This would lengthen their monopoly over the production of the drug,
decreasing contestability as no other firms were allowed to produce it. Therefore, deregulation is
not justified as incumbent firms need to be regulated to stop them increasing barriers to entry
themselves.
Competition is determined by the number of firms in a market. Deregulation allows for increased
competition as firms costs are reduced and profit is increased. This means small firms have
more profit to grow and invest in new production methods, increasing dynamic efficiency and
allowing smaller firms to grow and increase competition by potentially stealing consumers from
the larger incumbent firms.
However, the Competition and Markets Authority (CMA) may need to regulate markets to
prevent a significant lessening of competition. This could be done by forcing firms to sell off
parts of their production or by preventing mergers. For example, the CMA did not allow a
merger between Sainsbury’s and Asda as it was deemed the merged firm would have too much
market power. Therefore, deregulation is not justified as it allows firms already in the market to
use their lower costs due to economies of scale or large market share to manipulate prices and
decrease competition.
In conclusion, deregulation is justified when decreasing barriers to entry as it decreases costs
for new firms and encourage contestability. However, regulation may needed to prevent larger
incumbent firms from abusing their own market power to decrease competition and increases
barriers to entry themselves.
contestability through deregulation is justified?
Deregulation is the reduction of laws and conditions firms have to comply with. For example,
health and safety legislation or quality standards. This will decrease the fixed costs for firms as
they do not have to pay for measures to comply with regulation.
Deregulation may be used to promote contestability as strict regulation can act as a cost of
production and a barrier to entry, as more money is needed to start up a business. For example,
in New Zealand a program of deregulation has meant it now only takes one day to start a
business, or two if you are starting one whilst registering a property. Contestability is the threat
of new entrants and competition. If costs are reduced firms need less funding to create their
own business.Therefore,by decreasing barriers to entry through a reduction in regulation
contestability is improved.
However, you could argue some markets need regulation to maintain contestability as
incumbent firms may attempt to raise barriers to entry themselves. For example this could be
done using patent and other ownership rights limiting access to the market and reducing
contestability. An example of this would be, in 2013 in India, pharmaceutical company Novartis
lost a court case in which it was trying to gain a new patent for its leukaemia drug. The firm had
edited the composition of the drug slightly,and argued it therefore, needed a new patent, a tactic
known as ‘evergreening’. This would lengthen their monopoly over the production of the drug,
decreasing contestability as no other firms were allowed to produce it. Therefore, deregulation is
not justified as incumbent firms need to be regulated to stop them increasing barriers to entry
themselves.
Competition is determined by the number of firms in a market. Deregulation allows for increased
competition as firms costs are reduced and profit is increased. This means small firms have
more profit to grow and invest in new production methods, increasing dynamic efficiency and
allowing smaller firms to grow and increase competition by potentially stealing consumers from
the larger incumbent firms.
However, the Competition and Markets Authority (CMA) may need to regulate markets to
prevent a significant lessening of competition. This could be done by forcing firms to sell off
parts of their production or by preventing mergers. For example, the CMA did not allow a
merger between Sainsbury’s and Asda as it was deemed the merged firm would have too much
market power. Therefore, deregulation is not justified as it allows firms already in the market to
use their lower costs due to economies of scale or large market share to manipulate prices and
decrease competition.
In conclusion, deregulation is justified when decreasing barriers to entry as it decreases costs
for new firms and encourage contestability. However, regulation may needed to prevent larger
incumbent firms from abusing their own market power to decrease competition and increases
barriers to entry themselves.
