In a market economy, competition plays a central role in ensuring that resources are allocated efficiently, firms innovate, and consumers benefit from lower prices and greater choice. However, markets do not always work perfectly. Left unchecked, firms may attempt to restrict competition through collusion, predatory behaviour, or excessive concentration of market power. To prevent these outcomes, the UK established the Competition and Markets Authority (CMA) in 2014. The CMA is an independent non-ministerial government department responsible for promoting competition and making markets work well for consumers, businesses, and the wider economy. Its role is fundamental in maintaining the conditions for competitive markets and safeguarding consumer welfare.

One of the CMA’s most important responsibilities is to regulate mergers and acquisitions. When two firms propose to merge, the CMA assesses whether the deal could significantly reduce competition, a situation referred to as a substantial lessening of competition. If a merger would create a monopoly or leave too few competitors in the market, the CMA has the authority to block it or impose conditions known as remedies. Remedies might involve requiring one of the firms to sell off part of its business before the merger is allowed to proceed. A high-profile example was the CMA’s decision in 2019 to block the merger of Sainsbury’s and Asda, two of the UK’s largest supermarket chains. The regulator argued that the merger would lead to higher prices, lower quality, and reduced choice for consumers, especially in the grocery and fuel markets. This demonstrates how the CMA acts to preserve consumer welfare by preventing excessive market concentration.

Another major area of the CMA’s work is tackling cartels and other anti-competitive agreements between firms. A cartel occurs when firms collude to fix prices, limit production, or divide up markets between themselves. Such behaviour undermines competition and directly harms consumers by inflating prices and reducing choice. The CMA has wide-ranging powers to investigate cartels, impose fines of up to 10 per cent of a company’s global turnover, and in the most serious cases, pursue criminal prosecution of individuals involved. In 2020, for example, the CMA fined several pharmaceutical companies over £260 million for exploiting their market position to overcharge the NHS for hydrocortisone tablets. This case illustrates the CMA’s role not only in protecting consumers, but also in safeguarding taxpayers and the public sector from excessive costs.

The CMA also acts against the abuse of market dominance by powerful firms. A business with a dominant market share, often defined as controlling more than 40 per cent of a market, must not use this power to restrict competition unfairly. Abuse of dominance may take the form of predatory pricing, where a firm deliberately lowers prices to force rivals out of the market, or refusal to supply essential facilities to competitors. Both practices reduce competition in the long run and risk harming consumers once rivals are eliminated. The CMA can impose significant fines on firms found guilty of abusing market power and can order them to change their conduct to restore fair competition.

Beyond individual cases, the CMA also conducts broader market studies and investigations into entire industries. These investigations allow the regulator to examine whether structural or behavioural issues are causing markets to function poorly. If problems are identified, the CMA may recommend government policy reforms, impose regulations on firms, or launch a more detailed market investigation. For instance, the CMA has investigated the UK energy market amid concerns about high consumer bills and limited switching between suppliers. Such interventions show how the CMA seeks not only to punish anti-competitive behaviour but also to improve the overall functioning of markets for the benefit of households and businesses.

Evaluation of the CMA

Strengths

• Independent from government, meaning its decisions are based on evidence rather than political influence.
  
  

• Strong legal powers to block mergers, fine firms, and prosecute anti-competitive behaviour, which helps deter firms from engaging in collusion or abuse of dominance.
  
  

• Provides high-profile examples such as blocking the Sainsbury’s–Asda merger, which demonstrate clear consumer benefits.
  
  

• Helps improve efficiency and fairness in entire industries through market studies and investigations.
  
  

Weaknesses

• Investigations can be lengthy and complex, which may delay action and allow harm to consumers to continue in the meantime.
  
  

• The CMA’s resources are limited compared to the scale of the economy, meaning some anti-competitive behaviour may go undetected.
  
  

• Globalisation reduces its effectiveness, since multinational firms may operate beyond the CMA’s jurisdiction and can exploit regulatory gaps.
  
  

• Some critics argue that penalties are not always large enough to change firm behaviour, especially for very large corporations.

Forms of Government Intervention for abuse of Market Power

Legislation to Protect Competition

Governments use a range of policies to make markets more competitive and contestable, that is, easier for new firms to enter and challenge existing ones. Increasing competition encourages greater efficiency, innovation, and lower prices, while improving choice and quality for consumers.

Encouragement of Small Firms

Supporting small and medium-sized enterprises (SMEs) helps prevent large firms from dominating markets. Governments may offer grants, tax reliefs, or advisory support to help small firms grow and innovate. In the UK, initiatives such as the British Business Bank and Startup Loans scheme aim to ease access to finance, while local enterprise zones provide reduced business rates and planning support. A diverse base of smaller firms strengthens competition and increases market dynamism.

Deregulation

Deregulation removes unnecessary legal or administrative barriers that restrict entry or raise business costs. For example, reducing licensing requirements or simplifying planning rules can encourage new entrants and lower prices for consumers. However, deregulation must be balanced carefully: excessive relaxation of standards can lead to market failures, such as poor safety or environmental outcomes. In the 1980s and 1990s, the UK government used deregulation to open up industries such as air travel, telecommunications, and bus services to greater competition.

Direct Provision vs Contracting Out

The government can provide goods and services directly through the public sector, or it can contract out their provision to private firms while maintaining oversight. Contracting out, also known as outsourcing, is designed to introduce competitive pressures into public services. For instance, waste collection, cleaning, or catering in public institutions may be delivered by private companies after a competitive tendering process. The aim is to improve efficiency and value for money, though critics argue that excessive outsourcing can reduce service quality and accountability.

Public–Private Partnerships (PPPs)

PPPs involve collaboration between the public and private sectors to finance, build, and operate major infrastructure projects such as hospitals, schools, or transport systems. The private partner typically provides the capital and expertise, while the public sector ensures service delivery and standards. In theory, PPPs combine private-sector efficiency with public oversight, although some projects have been criticised for high long-term costs and poor risk management.

Privatisation

Privatisation refers to transferring ownership of state-run enterprises to the private sector. The UK’s privatisation programme since the 1980s, covering industries such as telecommunications, energy, rail, and water, was intended to increase competition, attract investment, and improve efficiency. By exposing firms to market forces, governments sought to replace bureaucratic control with profit incentives. However, the outcomes have been mixed: while some industries have become more efficient and innovative, others, such as water and rail, remain dominated by private monopolies that require strong regulation to protect consumers.

Leglisaltion for Aquisitions and Mergers

It is possible for firms to takeover (Aquire) or join (Merge) with another firm. There are a number of reasons why firms may takeover or merge with others such as entering new markets, increasing market share or aquiring new assets. However, governments may regulate these to ensure that by acquiring or merging with other firms, the new firm created does not become too large to be able to abuse its newly gained market power.  As mentioned above, if the merger creates a new firm over the % considered a monopoly. 

For example, in 2019, the UKs Competition and Market Authorities (CMA) blocked a merger between the UKs 2nd and 3rd largest supermarkets due to the power this would give to new firm. (Read more here) 

Nationalising/Government Control of Natural Monopolies

Governments may chose to nationalise firms who posses a natural monopoly. By bringing these firms into public ownership, the government is able to set the price of the goods being sold (for example electricity, water and gas prices). In theory, public ownership can help reduce allocative and productive inefficiencies as they are not aiming to profit maximise. However, public ownership may also lead to higher inefficiencies, as political priorities may conflict with the aims of minimising costs. This and the general lack of incentive to be productive efficient may lead to higher prices. On top of this, higher operating costs of nationalised industries leads to higher spending for governments, presenting an oppourtunity cost for spending on goods such as merit goods.

The general trend over the past decades has been to privatise state owned industries as oppose to nationalise, in order to focus on efficiency. 

Regulation of Natural Monopolies

Another option available to governments is to regulate privately owned natural monopolies. For these policies, the natural monopoly remains privately owned, however, the government intervenes to ensure socially desirable outcomes. 

Protecting Suppliers and Employees from Monopsony Power

As we know, monopsony arises when there is a single dominant buyer in a market. This buyer wields significant market power over its suppliers or workers, enabling it to set prices or wages below competitive levels. Monopsony power is common in both product market, for instance, large supermarkets purchasing from small farmers—and labour markets, where a major employer may be the only significant source of work in a region.

The effects of monopsony can include lower prices paid to suppliers, reduced wages and employment, and underinvestment by smaller firms unable to earn a sustainable return. Over time, this weakens market dynamism, discourages innovation, and can create regional inequality where monopsonistic employers dominate local labour markets. Because of these distortions, governments intervene to protect weaker market participants and restore fairer outcomes.

Government Restrictions on Monopsony Power

Regulators such as the Competition and Markets Authority (CMA) investigate and penalise firms that exploit their buyer power. In sectors such as retail and agriculture, large supermarket chains have historically used their dominance to demand lower prices or impose unfavourable contract terms on suppliers. In response, the UK government established the Groceries Code Adjudicator (GCA) in 2013 to enforce the Groceries Supply Code of Practice, which prevents supermarkets from abusing their position, for example, by making retrospective changes to contracts or forcing suppliers to fund promotions. The GCA’s oversight has improved transparency and strengthened supplier confidence in dealing with large retailers.

In labour markets, restrictions on monopsony power are often achieved through minimum wage laws and collective bargaining rights, which limit the extent to which employers can drive down pay. The National Minimum Wage and later the National Living Wage were introduced to ensure that workers receive a basic standard of pay, even in areas with limited employment alternatives. Trade unions also play a role by negotiating on behalf of workers to counterbalance employer power, while employment protection legislation, covering redundancy rights, unfair dismissal, and working conditions, further strengthens employee security.

Nationalisation as a Response to Monopsony Power

In extreme cases where monopsony or market failure leads to persistent inefficiency or exploitation, the government may intervene through nationalisation, taking public ownership of an industry to ensure fair treatment of suppliers and employees. Nationalisation is most common in essential utilities or transport sectors, where a single buyer or employer controls an entire region. Public ownership can help guarantee fair procurement policies, stable employment, and the provision of socially desirable levels of investment. However, nationalisation can also reduce efficiency incentives if state-run enterprises face limited pressure to minimise costs or innovate. Governments therefore face a trade-off between equity and efficiency when deciding whether public ownership is the appropriate remedy.

Impacts of Government Intervention

Government intervention to restrict monopsony power can produce a range of economic and social effects. On the positive side, such policies tend to raise wages, improve supplier incomes, and reduce inequality, helping to sustain smaller businesses and maintain competition in upstream markets. They also enhance social welfare by ensuring that firms do not profit at the expense of workers or producers.

However, intervention carries potential drawbacks. Imposing higher wage floors or stricter contract rules may increase costs for firms, potentially leading to higher consumer prices or reduced employment if firms respond by cutting staff or shifting production abroad. Regulatory bodies can also face difficulties in monitoring compliance due to information asymmetry, as large firms often have greater knowledge of their supply chains and labour conditions. Over-regulation may deter investment or innovation if firms perceive excessive government interference.

The UK water industry provides a clear example of how governments regulate natural monopolies to balance private ownership with public interest. In England and Wales, water and wastewater services are provided by a small number of regional monopoly companies, such as Thames Water, Severn Trent, and United Utilities. Each company operates in a geographically distinct area, and because building multiple overlapping networks of pipes and treatment facilities would be prohibitively expensive and inefficient, competition within the market is impractical. Instead, regulators aim to simulate competition by setting price limits and performance targets that protect consumers while ensuring firms have incentives to invest and operate efficiently.

Water is a classic natural monopoly because it exhibits large economies of scale: the fixed costs of constructing and maintaining infrastructure are extremely high, while the marginal cost of serving an additional household is comparatively small. Duplication of infrastructure would waste resources, so one firm can supply the market at a lower cost than two or more. However, without competition, a private monopoly could exploit its market power by charging excessive prices, under-investing in maintenance, or neglecting service quality. To prevent this, the industry is regulated by Ofwat—the Water Services Regulation Authority—created in 1989 following the privatisation of the regional water authorities under the Thatcher government.

Ofwat’s role is to protect consumers from monopoly abuse while allowing firms to earn a reasonable return on investment. The main instrument it uses is price-cap regulation, which limits how much companies can raise prices each year. The cap is determined by a formula that links allowable price increases to inflation, minus an efficiency factor, often written as CPIH – X. The value of X represents the efficiency gains that Ofwat expects firms to achieve over a regulatory period. If a firm can cut costs faster than expected, it retains the extra profit, providing an incentive to improve productivity. Every five years, Ofwat conducts a price review, which sets both price limits and performance targets. In its most recent major review, PR19, the regulator required firms to reduce average household bills by around 12 per cent in real terms between 2020 and 2025, while also improving service and environmental performance.

Alongside price controls, Ofwat enforces quality and service standards covering water quality, leakage reduction, customer service, and environmental performance. Firms that fail to meet these standards can face penalties, while those that exceed them may receive financial rewards. The intention is to ensure that efficiency is not achieved at the expense of service quality or environmental protection.

In practice, however, the record of the privatised water industry has been increasingly controversial. The most serious scandals have involved environmental pollution and corporate misconduct. Thames Water, the largest operator, has repeatedly faced criticism and regulatory action for discharging untreated sewage into rivers and failing to maintain its wastewater infrastructure. In 2024, the company was found to have released raw sewage for almost 300,000 hours—a sharp increase on the previous year. The following year, Ofwat imposed a record fine of £122.7 million, citing serious breaches of environmental obligations and improper dividend payments to shareholders. At the same time, the company was burdened with more than £19 billion in debt, prompting fears of insolvency and discussions about temporary public control under a Special Administration Regime. The situation exposed fundamental tensions between shareholder profit, debt-financed ownership, and the need for sustainable investment in essential services.

Other firms have been similarly criticised. Southern Water was fined £90 million in 2021 after admitting to deliberately discharging billions of litres of untreated sewage into coastal waters and falsifying data to conceal its actions. Severn Trent and several others have also faced penalties for pollution and wastewater mismanagement, while South West Water faced a major public health incident in 2024 when contamination in Devon caused over a thousand illnesses. These repeated failures have led to accusations that Ofwat has been too lenient and overly reliant on company self-reporting, highlighting the persistent problem of information asymmetry between regulator and firm.

Public anger over these scandals has been intense, particularly as water bills have continued to rise and executives have received large bonuses. In response, the government introduced new measures under the Water (Special Measures) Act, including the power to suspend executive bonuses at firms guilty of serious pollution. By 2025, bonuses had been banned at six major water companies, including Thames Water. Critics argue that these steps are long overdue, while others contend that the problems stem from decades of underinvestment and excessive financial engineering by private owners rather than regulatory weakness alone.

The water industry’s difficulties raise wider questions about how best to regulate natural monopolies that provide essential services. Price-cap regulation has generally succeeded in promoting cost efficiency and attracting private investment, but it has been less successful at ensuring long-term environmental stewardship and financial resilience. The recent scandals reveal how complex the trade-offs can be between profit incentives, public accountability, and environmental responsibility.

Overall, the case of the UK water industry demonstrates both the economic logic of regulating natural monopolies and the practical challenges of doing so effectively. Regulation can mimic some of the pressures of competition, but when information gaps, weak governance, and financial incentives conflict with the public good, even a well-designed system can falter. The growing debate over whether water companies should be more tightly regulated—or even returned to public ownership—shows how essential utilities sit at the intersection of market efficiency, public welfare, and environmental sustainability.