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Government intervention to maintain competition in markets

Government intervention to maintain competition in markets. OR Why does the Government seek to make markets more contestable ?. Why does the Government intervene to maintain competition ?. Toughened since 1997. Competition Policy. Promote Competition. Protect Consumers. Enhance

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Government intervention to maintain competition in markets

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  1. Government intervention to maintain competition in markets

  2. OR Why does the Government seek to make markets more contestable? Why does the Government intervene to maintain competition?

  3. Toughened since 1997 Competition Policy Promote Competition Protect Consumers Enhance Efficiency Assumption is that competition eliminates x-inefficiency Better resource allocation vs. Economies of scale

  4. Competition Policy • At the heart of competition policy is the comparison between Perfect Competition and Monopoly • Draw the two LR equilibrium diagrams

  5. Big Assumption! No cost difference between the two market structures PC Consumer Surplus Government Remedy = Increase Competition! PC and “Multi-plant” Monopoly compared Part of consumer surplus transferred to Monopoly as profits The Monopolist at constant returns to scale can continue to supply with no change in MC Price Deadweight loss = cost on society B Pm Thank You! E LRS (=LMCm) Ppc PC firms prepared to supply any quantity at this price C D=AR MR O Qm Quantity Qpc Monopolist supplies Qm at price Pm PC firms supply Qpc at price Ppc

  6. Competition Policy • If this line of reasoning is accepted then monopoly is always BAD • M&A leading to higher market concentration always leads to allocative inefficiency • However…

  7. What about if the cost structures are NOT the same?? N.B. whilst allocative efficiency is not attained, the monopolist is able to produce more at a cheaper price than under PC PC and “Natural” Monopoly compared PC firms prepared to supply any quantity at this price Price Got this far! LRS Ppc Pm The Natural Monopolist enjoys economies of scale that offer much better cost conditions LMCm D=AR MR O Q* Qpc Qm Quantity PC firms supply Qpc at price Ppc Monopolist supplies Qm at price Pm

  8. And finally…

  9. A less extreme example N.B. here, production under the monopoly is less wasteful in its use of resources in the production process PC and Monopoly compared PC firms prepared to supply any quantity at this price Price Deadweight loss Pm LRS Ppc The Natural Monopolist enjoys economies of scale that offer much better cost conditions LMCm Gain in productive efficiency D=AR MR O Qm Qpc Q* Quantity PC firms supply Qpc at price Ppc Monopolist supplies Qm at price Pm

  10. So… • Is society any better off under monopoly or under perfect competition? • Technically if is bigger than then society is better off • But we should take account of where the benefit goes too…to the producer (profits) rather than to consumers (cheaper prices)?

  11. Other economic considerations for the government… • Contestability • Concentration and collusion • Globalisation • Some Economists believe the government should allow a firm to dominate its domestic market to improve its competitiveness in global markets • ‘national champions’ e.g. airlines

  12. Plenary Define the term “Competition Policy” and explain why it exists

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