CIMA F3 Syllabus A. Financial policy decisions - Financial strategy- regulatory requirements - Notes ^{2 / 3}

A strategy can be defined as a course of action including the specification of resources required, achieving a specific objective.

Competition regulation

The government can influence a market through regulations

eg using an industry regulator or a competition authority.

Industry regulators

Where a market is not competitive, industry regulatory authorities have the role of ensuring that consumers' interests are not subordinated to those of other stakeholders) such as employees, shareholders and tax authorities.

The main methods used to regulate monopoly industries are as follows.

• Price control

  The regulator agreeing the output prices with the industry. 

  Typically, the price is progressively reduced in real terms each year by setting price increases at a rate below that of inflation.

• Profit control

  The regulator agreeing the maximum profit which the industry can make.

  A typical method is to fix maximum profit at x% of capital employed, but this does not provide any incentive to making more efficient use of assets: the higher the capital employed, the higher the profit.

• Service control

  The regulator agreeing a minimum standard of service the industry should provide customers. 

  For example, for gas companies - the minimum standard of service may be to restore customers supply within a specific time period, following a network interruption.

The regulator will be concerned with:

• Actively promoting competition by encouraging new firms in the industry and preventing unreasonable barriers to entry

• Addressing quality and safety issues and considering the social implications of service provision and pricing

Regulation of takeovers

Competition authorities such as the UK Competition and Markets Authority aim to protect competition with in a market. 

It will make in-depth enquiries into mergers and markets to ensure that one company cannot dominate a market 

Where a potential merger is sufficiently large to warrant an investigation, the competition authority will look at whether the merger will be against the public interest in terms of:

• Effective competition within the industry

• The interests of consumers, purchasers and users of the goods and services of that industry in respect of quality, price and variety

• The reduction of costs and the introduction of new products and techniques