AQA Specification focus:
‘Examples of real-world applications of such policies should provide contexts in which students can evaluate the use of economic models to explore economic behaviour and further develop their appreciation of the behaviour of firms.’
Real-world cases are essential in evaluating competition policy, allowing students to link theoretical models with practical applications, assess outcomes, and deepen understanding of firm behaviour in diverse markets.
Understanding Real-World Case Application
Competition policy seeks to prevent anti-competitive behaviour, promote efficiency, and protect consumer welfare. Using real-world cases provides context to assess whether theory holds in practice.
Why Cases Matter in Evaluation
They show whether government policy has achieved its intended goals.
They highlight the complexity of firm behaviour beyond simplified models.
They allow comparison between theoretical predictions (e.g. increased efficiency) and actual outcomes (e.g. unintended distortions).
They provide evidence for discussing both costs and benefits of competition policy.
Case Study: Microsoft and Abuse of Market Power
The Microsoft case (2000s) illustrates the risk of monopoly power in software markets.
Monopoly Power: The ability of a firm to influence prices, output, or market conditions significantly without losing market share to competitors.
Microsoft was accused of bundling Internet Explorer with Windows to exclude competitors, reducing contestability. The case demonstrated how regulation sought to restore competition by restricting abusive practices.
Theoretical link: Monopoly models predict reduced efficiency and consumer choice.
Real-world outcome: Intervention promoted competition in the browser market, though enforcement lag reduced effectiveness.
Case Study: Tesco and the UK Grocery Market
In the mid-2000s, the Competition Commission investigated UK supermarkets such as Tesco for predatory pricing and land banking.
Predatory Pricing: Setting prices below cost to drive rivals out of the market before raising them again once competition has been reduced.
Theoretical link: Models show predatory pricing leads to resource misallocation and higher long-run prices.
Real-world outcome: Evidence of land banking raised concerns, but insufficient proof of predatory pricing was found. The inquiry showed how theory may not always fully match reality.
Case Study: BT and Telecoms Regulation
British Telecom (BT) has faced repeated investigations over broadband provision, particularly concerns about access to the network infrastructure.
Theoretical link: Natural monopoly theory explains why regulation may be required when high fixed costs make duplication inefficient.
Real-world outcome: Ofcom enforced separation of BT’s network operations to ensure fair access for competitors. This encouraged investment, competition, and innovation, showing how regulation can align outcomes with consumer welfare.
Evaluating Using Economic Models
Economic models provide frameworks to test predictions against evidence:
Models Commonly Applied
Perfect competition: benchmark for efficiency.
Monopoly: predicts welfare loss due to higher prices and restricted output.
Contestable markets: highlight the role of potential competition in disciplining firms.
Linking to Cases
Microsoft: Monopoly models highlight reduced consumer surplus.
Tesco: Predatory pricing theory used to test whether strategies harmed efficiency.
BT: Natural monopoly theory justified regulatory intervention.
Benefits of Real-World Evaluation
Provides empirical evidence for assessing theory.
Encourages nuanced analysis of market structures.
Highlights differences across industries (technology vs retail vs utilities).
Helps understand long-term consequences, not just short-term effects.
Limitations of Case Studies
Cases may be industry-specific and not universally applicable.
Enforcement often takes years, reducing the clarity of theoretical application.
Outcomes may reflect political and legal factors as much as economic reasoning.
Additional UK and EU Context
Students should also be aware that many cases involve coordination between UK competition policy and EU competition authorities (particularly pre-Brexit). Examples include investigations into Google’s dominance in online advertising.
Key Insights for Students
When evaluating competition policy using real-world cases:
Always identify the theoretical model relevant to the issue.
Assess whether outcomes align with predicted benefits such as efficiency, lower prices, and greater innovation.
Recognise limitations such as time lags, enforcement costs, and unintended effects.
Use multiple industries to show the variety of policy applications.
FAQ
Real-world cases demonstrate how economic models apply to practical scenarios. Examiners value them because they show students can move beyond abstract theory and use evidence.
Cases also allow evaluation of whether predicted outcomes—like lower prices or greater innovation—actually occurred. This helps in providing balanced analysis rather than purely theoretical answers.
A case study is most useful if it:
Involves a clear competition policy intervention (e.g. investigation, regulation, fines).
Links directly to a theoretical model such as monopoly or contestable markets.
Provides measurable outcomes, like changes in prices, innovation, or consumer choice.
Different industries experience competition policy differently.
In technology markets, innovation and intellectual property dominate.
In retail, pricing and consumer choice matter more.
In utilities, natural monopoly theory explains heavy regulation.
These differences mean students should choose cases carefully to match the theory they are applying.
Regulators often struggle with:
Time lags, as investigations may take years to conclude.
Rapid technological change that can outpace regulation.
Balancing consumer welfare with firm incentives to innovate.
Limited resources compared to large multinational firms.
Students should:
Identify the theory or model first (e.g. monopoly).
Introduce the case study briefly with context.
Link the outcome of the case to theoretical predictions.
Use it to strengthen evaluation, showing both benefits and limitations.
Practice Questions
Define monopoly power and explain briefly why the Microsoft case is often used as an example in the context of competition policy. (2 marks)
1 mark for a correct definition of monopoly power (e.g. the ability of a firm to influence prices, output, or conditions without losing significant market share).
1 mark for identifying Microsoft as an example due to bundling practices and restricting competition in the browser market.
Using real-world examples, explain how competition policy seeks to address market failures caused by anti-competitive behaviour. (6 marks)
Up to 2 marks for identifying relevant real-world examples (e.g. Microsoft bundling, Tesco predatory pricing concerns, BT network access regulation).
Up to 2 marks for clear explanation of how competition policy intervenes (e.g. breaking up monopolistic practices, regulating access, investigating predatory pricing).
Up to 2 marks for linking to economic concepts such as restoring efficiency, protecting consumer welfare, or promoting contestability.
