1.8.7 Competition Policy — Practice Questions

Seven original multiple-choice questions on UK competition policy, written to the style and difficulty of AQA Paper 3 Section A.

7 questions AQA A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 1.8.7 Competition Policy revision notes.

1. 1. The main body responsible for competition policy in the UK is the

   Definition in context

   Select one answer

   A Bank of England.

   B Competition and Markets Authority.

   C Office for Budget Responsibility.

   D Office for National Statistics.
   Show model answer

   Answer: B (Competition and Markets Authority.). The Competition and Markets Authority investigates mergers, conducts market studies and enforces competition law against firms behaving anti-competitively. Its powers include blocking mergers, imposing fines and requiring firms to sell parts of their business.

   Why the other options are wrong

   • A — The Bank of England sets monetary policy and supervises financial stability.
   • C — The Office for Budget Responsibility produces independent forecasts and assesses the government against its fiscal targets.
   • D — The Office for National Statistics collects and publishes official economic data.

2. 2. The primary aim of competition policy is to

   Definition in context

   Select one answer

   A Ensure that no firm in any market earns a profit.

   B Guarantee that every industry contains the same number of firms.

   C Maximise the tax revenue collected from large firms.

   D Protect consumers through lower prices and more choice.
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   Answer: D (Protect consumers through lower prices and more choice.). Competition policy exists to serve the consumer interest, usually summarised as lower prices, higher quality and greater choice. It works by preventing anti-competitive behaviour — price fixing, abuse of a dominant position, and mergers that would concentrate a market too far.

   Why the other options are wrong

   • A — Profit is the reward for enterprise and the incentive to innovate. Policy targets profit obtained by suppressing competition, not profit as such.
   • B — There is no target number of firms. What matters is whether the market works for consumers, and a concentrated market can still be contestable.
   • C — Fines raise some revenue, but they are a deterrent rather than a fiscal instrument.

3. 3. Which one of the following would the Competition and Markets Authority be most likely to investigate as anti-competitive behaviour?

   Applied reasoning

   Select one answer

   A A firm cutting its costs by adopting new technology.

   B A firm entering a market and undercutting existing prices.

   C Several firms secretly agreeing to fix the prices they charge.

   D Two firms competing by improving their after-sales service.
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   Answer: C (Several firms secretly agreeing to fix the prices they charge.). Secret price fixing is collusion, and a cartel of this kind is among the most serious breaches of competition law. Colluding firms behave collectively like a monopolist — restricting output and raising price — so consumers pay more and allocative efficiency falls. Penalties are severe, and leniency programmes reward the first cartel member to confess precisely because these agreements are hard to detect.

   Why the other options are wrong

   • A — Adopting cost-saving technology is efficient behaviour that benefits consumers through lower prices.
   • B — A new entrant undercutting incumbents is competition working exactly as intended.
   • D — Competing on service quality is non-price competition, which is a benefit of competition rather than an abuse.

4. 4. A competition authority is considering a merger between two of the four firms in a market. Its main concern will be that the merger would

   Applied reasoning

   Select one answer

   A Allow the merged firm to achieve economies of scale.

   B Increase concentration and raise prices.

   C Increase the number of firms competing in the market.

   D Reduce the merged firm's costs of production.
   Show model answer

   Answer: B (Increase concentration and raise prices.). Reducing four firms to three raises the concentration ratio and leaves the merged firm with greater market power. The likely consequences for consumers are higher prices, less choice and weaker pressure to innovate. That is what a competition authority weighs — against any offsetting gains from scale.

   Why the other options are wrong

   • A — Economies of scale are a genuine argument for a merger, since lower average costs may be passed on. The authority weighs them against the loss of competition.
   • C — A merger reduces the number of independent firms rather than increasing it.
   • D — Lower costs point in the merger's favour. The concern is whether the savings reach consumers or are captured as profit.

5. 5. A regulator requires a dominant firm to sell part of its business to a competitor. The intended effect is to

   Applied reasoning

   Select one answer

   A Increase the firm's market share and its economies of scale.

   B Increase the tax revenue collected from the industry.

   C Guarantee that the industry becomes perfectly competitive.

   D Reduce market concentration and strengthen competitive pressure.
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   Answer: D (Reduce market concentration and strengthen competitive pressure.). Requiring a divestment transfers part of the dominant firm's capacity or customer base to a rival, so concentration falls and the remaining firms face stronger competition. It is one of the most direct structural remedies available, used where behavioural conditions — price caps, undertakings on conduct — would be hard to monitor.

   Why the other options are wrong

   • A — Selling part of the business reduces the firm's share rather than increasing it.
   • B — No revenue is raised. The assets are sold to a competitor, not to the government.
   • C — Perfect competition requires countless firms, homogeneous products and free entry. No remedy can deliver that; the realistic aim is more effective competition.

6. 6. Which one of the following is a valid criticism of competition policy?

   Applied reasoning

   Select one answer

   A Blocking a merger may prevent economies of scale.

   B It always raises the prices consumers pay for goods and services.

   C It prevents firms from competing on price in any market.

   D It removes the incentive for firms to enter new markets.
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   Answer: A (Blocking a merger may prevent economies of scale.). The trade-off is real. A merger that concentrates a market may also allow economies of scale or fund research and development that a smaller firm could not, so blocking it can leave consumers with higher costs and slower innovation. Competition policy also carries substantial administrative costs, relies on information the regulator may not have, and can suffer from regulatory capture.

   Why the other options are wrong

   • B — The purpose and usual effect is to lower prices by strengthening competition.
   • C — Price competition is exactly what the policy is designed to protect. What it prohibits is agreeing not to compete.
   • D — Removing barriers erected by dominant firms makes entry easier, which strengthens the incentive to enter.

7. 7. A competition authority must decide whether to block a merger in an industry with very large economies of scale. The strongest argument for allowing it is that

   Applied reasoning

   Select one answer

   A Concentration ratios are irrelevant where firms are large.

   B Lower average costs may be passed on if entry stays easy.

   C Mergers always increase the amount of consumer choice available.

   D The merged firm would be unable to raise its prices at all.
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   Answer: B (Lower average costs may be passed on if entry stays easy.). Two things have to hold together. Large economies of scale mean a bigger firm genuinely produces at lower average cost — a real gain. But cost savings only reach consumers if the firm still faces pressure to pass them on, and where the market remains contestable the threat of entry supplies that pressure even with few firms trading.
   The evaluation is that the argument collapses if entry barriers are high: the merged firm then keeps the savings as profit and consumers gain nothing. That is exactly the judgement the authority has to make.

   Why the other options are wrong

   • A — Concentration is precisely what the authority examines. Firm size does not make it irrelevant.
   • C — A merger typically reduces the number of independent suppliers and so tends to narrow choice.
   • D — A merged firm with market power can certainly raise prices. Whether it will depends on the competitive and contestable pressure it faces.