ECW3830

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ECW3830
Competition and Regulation
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Unit Coordinator
Dr Gennadi KAZAKEVITCH Berwick campus, Room
129. Phone [phone]. Fax [phone]
Office contact hours Tuesday 4-5 PM.
E-mail Gennadi.Kazakevitch_at_monash.edu.au
http//www-personal.buseco.monash.edu.au/gennadik
/gkazwww.htm
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DE and Off-Shore Adviser
Ms Svetlana Maslyuk School of Business and
Economics, Gippsland, Faculty of Business and
EconomicsEmail Svetlana.Maslyuk_at_buseco.monash.ed
u.auPhone 61 3 990 26676
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Lecture 1Lecture 1Unit InformationTopic
1 The Rationale for Competition Policy and
Regulation
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Unit Information

• Aims
• Assessment
• Assignments
• Examination
• Reading
• Structure

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Aims On completion of the unit students should
be able to

• Explain the basis for competition and rationale
  for regulation
• Explain the rationale for, and merits of,
  different theories of regulation
• Explain the arguments for and against
  privatisation
• Understand the main features of National
  Competition Policy in Australia, including its
  impact on segments of society such as rural
  Australia.
• Explain the benefits and costs of mergers in big
  business
• Critically evaluate attempts to increase
  competition in particular industries. Particular
  industries we shall consider will be aviation,
  electricity and telecommunications where there
  are ongoing reforms
• Understand the basis for regulating the
  professions.

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Assessment
Essay work of approximately 3000 words - 30 3
hours written examination - 70
To pass the unit you must (a) complete all the
required work, and (b) obtain an overall grade of
at lease 50 of the total marks, and (c) obtain
at least a 50 grade for the examination.
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Assignment

• Essay. About 3000 words. Due at 5 PM on 17 April
  2007.
• Consider the regulation of one the following
  industries of the Australian economy or of any
  country of your choice
• Transport (railways or airlines)
• Telecommunications
• Power generation and distribution
• Healthcare
• Pharmaceutical products or
• Any other industry of your choice.
• Outline the key elements of the industry
  regulation
• What kind of market structure is there in the
  industry?
• Why regulation is necessary?
• Who regulates?
• What is regulated?
• Optional What kind of restructuring/deregulation/
  privatisation have happened recently (if any)?

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Criteria of assessment
Assignment

• Relevancy to the question
• Understanding of the topic
• Evidence of wide reading
• Ability to research the topic, to put forward and
  logically support a point of view
• Ability to right clearly and logically
• Technical skills of academic writing
  presentation, referencing, grammar, etc.

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Examination

• Three hours
• 4 concise essay style questions based on the
  topics of the unit.
• (Please note, review questions discussed in
  tutorials are essential)
• and
• 1 research question
• You will be informed on the research later in
  the semester.

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Reading

• There is no text in this unit.
• The Unit Book contains the essential reading for
  each topic.
• All the essential as well as supplementary
  reading is available from the following link on
  the WEB at
• http//www.lib.monash.edu.au/resourcelists/e/ecw38
  30.html
• My site for this unit is at
• http//www-personal.buseco.monash.edu.au/gennadik
  /ecw3830/ecw3830.html
• It is mirrored on MUSO.

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Structure
Week 7 Hilmer report and industry restructuring
Week 5-6 Regulating monopolies and access to
essential facilities
Week 8 Liberalisation in aviation
Week 4 Theories and practice of privatisation
Competition and Regulation
Week 9 Structural reform and regulation in
electricity
Week 3 Deregulation rationales and experiences
Week 10 Competition and regulation in
telecommunications
Week 2 Theories of regulation
Week 11 Mergers, Cartels and restrictive
practices
Week 1 Rationale for competition policy and
regulation
Week 12 - Research topic. Regulation,
deregulation and privatisation in small open
economies
Week 13 Revision
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Week 1 Rationale for competition policy and
regulation
Competition
Key definitions
Regulation
Deregulation
Privatisation
Economic efficiency
Pareto or allocative efficiency
Productive efficiency
Economic efficiency vs other objectives
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Week 2. Theories of regulation
Reasons for regulation
What is regulated
Types of economic regulation
Entry and capacity control
Price controls and monopoly regulation
Theories of regulation
Public interest theories
Private interest theories
Does regulation promote efficiency?
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Weeks 3 Deregulation Rationales and Experiences
Economic regulation of potentially competitive
industries- banks, airlines, transport
Removing regulation to promote competition
The international experience of deregulation
Problems with deregulation - are deregulated
markets competitive?
Assessing the performance of deregulated
industries
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Weeks 4 Theories and practice of Privatisation
The worldwide trend to privatisation
Performance of public enterprises
The broader privatisation agenda
Privatisation, corporatisation and market power
the role of regulation
Has privatisation improved performance?
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Week 5-6 Regulating Monopolies and Access to
Essential Facilities
The theory of natural monopoly (revision of
microeconomics)
Traditional approaches to monopoly regulation
Problems
Incentive regulation
Solutions
Price cap regulation
Final product
Regulatory tasks
Access
Australian Experience
International Experience
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Week 7 The Hilmer Report and Industry
Restructuring
The Hilmer Report- key recommendations
Reforms to competition policy
Restructuring industries to promote competition)
rail
Examples
telecommunication
electricity
Vertical Separation
Restructuring natural monopolies
Horizontal separation
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Week 8 Liberalisation in Aviation
Regulation
Domestic airlines
Deregulation
Regulation
International airlines
Deregulation
Towards open skies
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Week 9 Structural Reform and Regulation in
Electricity
Corporatisation
Stages of the reform
Vertical separation
Horizontal separation
Privatisation
How electricity regulation works
Generation sector
Access regulation and competition
Retail sector
Making the electricity market work better
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Week 10 Competition and Regulation in
Telecommunications
Natural monopoly and competition in
telecommunications
Regulation of monopoly areas
Access to Telstras essential facilities
Vertical separation of Telstra- an option?
How effective is competition in
telecommunications?
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Week 11 Mergers, Cartels and Restrictive Practices
Making competition work better through trade
practices legislation
Collusion and cartels
The effects of mergers
Merger policy in Australia
Making competition policy more effective
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Week 12 Regulation, deregulation and
Privatisation in Small Open Economies
Research topic. Details will be given during
week 7 or 8
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Structure
Week 7 Hilmer report and industry restructuring
Week 5-6 Regulating monopolies and access to
essential facilities
Week 8 Liberalisation in aviation
Week 4 Theories and practice of privatisation
Competition and Regulation
Week 9 Structural reform and regulation in
electricity
Week 3 Deregulation rationales and experiences
Week 10 Competition and regulation in
telecommunications
Week 2 Theories of regulation
Week 11 Mergers, Cartels and restrictive
practices
Week 1 Rationale for competition policy and
regulation
Week 12 - Research topic. Regulation,
deregulation and privatisation in small open
economies
Week 13 Revision
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Week 1 Rationale for competition policy and
regulation
Competition
Key definitions
Regulation
Deregulation
Privatisation
Economic efficiency
Pareto or allocative efficiency
Productive efficiency
Economic efficiency vs other objectives
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Essential Reading
Rationale for competition policy and regulation

• Stephen King, The Economics of National
  Competition Policy, Law in Context, (2002)
  20(1) 1-28 at pp. 2-9 (Reading Materials, Item
  1)
• Provides a general theoretic introduction into
  the subject matters this unit is concerned with
• Introduces the key concepts of economic
  efficiency regulation, deregulation and
  privatisation from the Australian economic policy
  perspective.
• J Church and R Ware, (2000) Industrial
  Organization A Strategic Approach, Mc Graw Hill,
  Ch 2 and pp145-148 (Reading Materials, Item 2)
• Gives a general theoretical introduction into the
  economics of market power, using analytical tools
  you know from microeconomics

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Rationale for competition policy and regulation
Key definitions and concepts
Competition
Competition (Economics and business context)
Merriam-Webster The effort of two or more
parties acting independently to secure the
business of a third party by offering the most
favorable terms."
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Rationale for competition policy and regulation
Key definitions and concepts
Competition

• Seen as the pillar of capitalism
• May stimulate innovation,
• Encourage efficiency,
• Drive down prices,
• No system of resource allocation is more
  efficient than pure competition
• Causes commercial firms to develop new products,
  services, and technologies.
• Gives consumers greater selection and better
  products.
• The greater selection typically causes lower
  prices for the products compared to what the
  price would be if there was no competition
  (monopoly) or little competition (oligopoly).

Is it all that good about competition?
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Rationale for competition policy and regulation
Key definitions and concepts
Competition

• Seen as the pillar of capitalism
• May stimulate innovation,
• Encourage efficiency,
• Drive down prices,
• No system of resource allocation is more
  efficient than pure competition
• Causes commercial firms to develop new products,
  services, and technologies.
• Gives consumers greater selection and better
  products.
• The greater selection typically causes lower
  prices for the products compared to what the
  price would be if there was no competition
  (monopoly) or little competition (oligopoly).

Is it all that good about competition?
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Rationale for competition policy and regulation
Key definitions and concepts
Competition
Market failure a term used to describe a
situation in which markets do not efficiently
produce and/or allocate goods and services
Is it all that good about competition?
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Rationale for competition policy and regulation
Key definitions and concepts
Competition

• Market failure
• Natural monopoly
• Where monopoly not competition is more efficient
• Socially undesirable effects
• Fast food
• Violent movies
• Too fast cars
• Environmentally undesirable effects
• Cheep fertilisers
• Greenhouse effect
• Imperfect information
• I know I am ill, but only doctor know what is
  wrong with me

Is it all that good about competition?
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Rationale for competition policy and regulation
Key definitions and concepts
Regulation
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Rationale for competition policy and regulation
Key definitions and concepts
Regulation
Product market, consumers
Product
A Firm
Capital
Labour
Labour market
Capital market
Material of financial flows
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Rationale for competition policy and regulation
Key definitions and concepts
Regulation
Product market, consumers
Product
Price
A Firm
Wage rate
Capital
Labour
Price, Interest rate
Labour market
Capital market
Material of financial flows
Market information
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Rationale for competition policy and regulation
Key definitions and concepts
Regulation
Tax rates Tariffs Retail trade regulation
Product market, consumers
Product
Price
Tax rates tariffs, barriers to entry Product
quality and safy
A Firm
A regulator
Official Interest rates
Wage rate
Capital
Labour
Price, Interest rate
Tax rates workplace relations regulation
Labour market
Capital market
Material of financial flows
Market information
Regulator's (official ) control signals
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Rationale for competition policy and regulation
Key definitions and concepts
Regulation
The concept includes
Who regulates - Regulating institutions
(governmental bodies)
Instruments for regulation - Direct control or
financial inducement
Affected interest groups - consumers or
subgroups of them producers or subgroups of
them employees and subcontractors to the
industry producers and consumers of substitute
or complementary goods persons and/or
institutions on whom the industry has external
effect (suppliers, providers, etc) those,
involved in regulatory process (politicians,
lobbyists, etc)
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Rationale for competition policy and regulation
Key definitions and concepts
Regulation
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Rationale for competition policy and regulation
Key definitions and concepts
Regulation
What do governments regulate
Structure, conduct an performance of the industry
Consumer safety, property rights
Foreign investment and foreign interest
involvement in national economy
Is it all that good about regulation?
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Rationale for competition policy and regulation
Key definitions and concepts
Deregulation
Theories of regulation
Why regulation does not always work as intended
A regulation is efficient if the overall social
and/or economic effect of regulation exceeds the
costs of regulation Otherwise deregulation
Week 2
Is it all that good about regulation?
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Rationale for competition policy and regulation
Key definitions and concepts
Deregulation
Deregulation is the process by which governments
remove, reduce, or simplify restrictions on
business and individuals in order to (in theory)
encourage the efficient operation of markets.
Rational for deregulation fewer and simpler
regulations will lead to a raised level of
competitiveness, therefore higher productivity,
more efficiency and lower prices overall
Weeks 3 Deregulation Rationales and Experiences
What is efficiency? later on in this lecture
When and why deregulation is not enough? -
privatisation
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Rationale for competition policy and regulation
Key definitions and concepts
Privatisation
Privatisation is the transfer of property or
responsibility from the public sector
(government) to the private sector (business)
Weeks 4 Theories and practice of Privatisation
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Rationale for competition policy and regulation
Economic efficiency
Productive efficiency

• Productive efficiency is when the economy is
  working on its production possibility frontier
  (PPF).
• This is when production of one good is achieved
  at the at the lowest cost possible, given given
  the production of the other good(s).
• Equivalently, it is the highest possible output
  of one good, given the production level of the
  other good(s).
• In long-run equilibrium for a perfectly
  competitive markets, this is where average cost
  is at the lowest point on the Average Cost curve.

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Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
The Pareto Principle Welfare is at maximum when
no change in the way resources are used of goods
and services are distributed can make anybody
better off without reducing welfare at least of
one person
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Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
The Pareto Principle is fulfilled if

• For each pair of goods and any pair of consumers
  MRSxy(Consumer
  A) MRSxy(Consumer B) MRSxy(Consumer C)
• MRSxyPx/Py
• MRTSKLPK/PL,and
• all producers operate at PMC

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Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
and if

• No public goods (the market mechanism can't
  determine the amount to be produced)
• No externalities
• No declining cost industries

The regulation is necessary to compensate
non-fulfillment of the Pareto efficiency
assumptions
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Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
Market power in non-perfectly competitive market
structures results in inefficiencies
Revise the theory of market power Item 2 in the
reader
Non-perfect competition
Monopoly
Monopolistic competition
Oligopoly
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Basic Assumptions
Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
Monopoly

• One firm in industry
• Profit-maximiser
• Faces market supply curve
• One product
• No close substitutes
• Price-maker
• No restrictions on resources

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Profit-maximising - and traditional criticism of
the monopoly
Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
Monopoly
P, Cost
MC

• Produces the quantity maximising profit
• Operates at a price above marginal revenue
• Makes economic profit
• Restricts information
• Imposes barriers to entry (controlling markets,
  inputs and/or lobbying the government)
• Produce less than if it was a perfectly
  competitive market and charges a higher price

AC
P
P
D
MR
Q
Q
Q
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Basic Assumptions
Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
Monopolistic competition

• numerous participants (many buyers and sellers
  all of whom are small)
• profit maximising producers
• heterogeneity of product (each producer sell
  something (at least little bit) different)
• freedom of entry and exit
• perfect information

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Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
Monopolistic competition
P, Cost
MC
P, Cost
MC
D
MR
Q
Q
Short-run quantity, price and economic profit
Long-run equilibrium same costs, lower demand and
excess capacity
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Rationale for competition policy and regulation
Economic efficiency
Pareto or allocative efficiency
Oligopoly

• An oligopolistic industry is composed of a few
  firms selling identical or similar products in
  the same market
• Each firm carefully watches decisions of
  competitors and often plans anti-strategies they
• either ignore each other
• or form cartels
• or a price leader appears, causing monopolistic
  price formation
• Elements of non-profit maximisation appear. A
  sales- revenue producers more than a profit
  maximiser and charges a lower price.

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Rationale for competition policy and regulation
Economic efficiency vs other objectives
Another reason for regulation economic
efficiency can be seen as contradicting certain
objectives

• Provision of public goods
• Health
• Education
• Social security
• National security
• Access to essential facilities
• Consumer safety
• Environment conservation
• National heritage conservation, etc

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Revision questions for the next weektutorial
Rationale for competition policy and regulation

• Be prepared to discuss the concept of market
  power based on Church Ware Chapter 2 (Reeding 2
  in the Unit Book).
• Prepare your examples of regulatory practices,
  bodies and measures.
• Why governments regulate particular industries
  examples.
• Express your point of view on the problem
  Deregulation or better regulation