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Business regulation

Question 1

In 2005 Virgin Atlantic attempted a takeover of BMI (British Midland International Airlines).

  1. What type of integration would this merger be an example of? (2)

  2. Outline the likely benefits of this merger. (6)

  3. Under what circumstances might the Competition Commission or BERR become involved in an airline merger? (8)

  4. What options are available to the Competition Commission in terms of regulating this merger? (4)

  5. Evaluate alternative pricing strategies for a typical airline. (10)

  6. To what extent is the UK air travel market a contestable one? (10)

Question 2

European Cinema Screens

 Odeon            608

UCI                  443

Vue                  406

UCG                 396

Show Case      323

TOTAL           2653

Extract 1

‘…In locations where both circuits operate directly competing cinemas, aligned distributors normally supply films to their aligned circuit but not the other. This practice, by reducing competition for screens among aligned distributors and reducing pressure on the two circuits to compete for films on merit, makes the market less responsive to consumer preferences. We condemned it in our 1983 report, but stopped short of making a recommendation because of the then parlous plight of the industry. The industry is now stronger and we make recommendations intended to bring this practice to an end.

The second practice which we find to be against the public interest concerns minimum exhibition periods. Distributors sometimes insist on lengthy minimum exhibition periods-perhaps four weeks or longer-as a condition of supplying exhibitors with prints of popular films. This practice creates problems particularly for single-screen cinemas or those with few screens, reducing their freedom to respond to consumer demand, and adds to the difficulties faced by independent distributors in getting their films shown. We recommend that minimum exhibition periods should be restricted to a maximum of two weeks on first release and one week subsequently.

Another issue is vertical integration, to which critics of the film industry frequently point as distorting the market and creating barriers to entry, particularly for British films. All the Hollywood studios rely upon their respective affiliates to distribute their films in the UK. Given the state of competition among the studios and in the distribution market generally, we do not object to this practice, which is common worldwide. Four of the seven Hollywood studios also have ownership links with UK exhibitors. We have examined whether these links result in dealings between distributors and exhibitors being other than at arm's length. Our analysis shows a slight degree of preference between vertically linked parties at the margin, but the evidence does not warrant an adverse public interest finding. We suggest nevertheless that certain indicators should be monitored by the Office of Fair Trading so that the matter is kept under review…..’

Monopolies and Mergers Commission 1994 (which was replaced by the Competition Commission )

Extract 2

The UK cinema sector witnessed its biggest shake-up for over a decade on Friday when private equity firm Terra Firma acquired both the Odeon and UCI circuits in one fell swoop.

The resulting estate, valued at approximately £580m and which is estimated to represent 35% of the UK's box office revenues, will almost certainly fall foul of the regulations concerning market share. Previous Commission reports on the exhibition sector set the limit of control of box office share by any single operator at between 25% - 27%.

Odeon investor Robert Tchenguiz and US private equity group Blackstone are also reported to have made the final Odeon bid shortlist, while VUE Entertainment and BC Partners withdrew from the auction for Odeon in the penultimate round of bidding.

Source Pearl & Dean
  1. With reference to the data, describe the type of market structure in this industry. (3)

  2. What type or types of integration has taken place in this industry? (3)

  3. Explain why the practice of price discrimination is likely to be common in cinema ticket pricing? (8)

  4. Examine the likely benefits to Terra Firma of acquiring Odeon and UCI. (12)

  5. To what extent is such an acquisition likely to be against the public interest? (14)

40 marks

Question 3

Multiple choice - select the correct option

The regulator agrees to set the pricing of Water Companies as RPI – X. This means that:

  1. The Regulator expects there to be inflation

  2. Water companies will have to reduce their prices

  3. The Regulator expects efficiency gains to the value of X

  4. X represents expected increases in competition

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