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Chapter 18 Industrial policy and competition policy

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Title: Chapter 18 Industrial policy and competition policy


1
Chapter 18Industrial policy and competition
policy
  • David Begg, Stanley Fischer and Rudiger
    Dornbusch, Economics,
  • 6th Edition, McGraw-Hill, 2000
  • Power Point presentation by Peter Smith

2
Industrial policy andCompetition Policy
  • Competition policy
  • aims to enhance economic efficiency by promoting
    or safeguarding competition between firms.
  • Industrial policy
  • aims to offset externalities that affect
    production decisions by firms

3
Industrial policy
  • Inventions and the patent system
  • designed to provide a sufficient incentive for
    invention without suppressing competition for
    ever
  • Research and Development (RD)
  • the social return on risky projects may exceed
    the private return
  • Dynamic change
  • coping with sunset and sunrise industries

4
Consumer surplus
Consider the demand curve D and suppose price is
at P with quantity demanded being Q.
Price
P represents the value placed on the good by the
marginal consumer
P
so D can be seen to represent marginal social
benefit
D
Quantity
Q
5
Producer surplus
Producer surplus is the excess of total
revenue over total costs
Price
P
LAC LMC
D
Quantity
Q
6
The social cost of monopolycomparing perfect
competition and monopoly
For simplicity, suppose as industry with
horizontal long-run average and marginal costs.
Under perfect competition, long-run equilibrium
would be with industry output Qc selling at price
Pc.
7
The social cost of monopolycomparing perfect
competition and monopoly
8
Perfect competition and monopoly under differing
cost conditions
Suppose that monopoly enjoys lower
cost conditions than under perfect competition
Price
D
Quantity
9
Counting the cost of monopoly
  • The size of the social cost of monopoly is
    difficult to evaluate
  • in part it depends upon the elasticity of demand
  • which influences the size of the red triangle
    of welfare loss
  • Furthermore, firms may use up resources to defend
    their monopoly position
  • implying that costs are higher than under perfect
    competition
  • there may also be X-inefficiency under monopoly
  • if incentives to be cost-efficient are lower in
    the absence of competition.

10
Competition law in the UK
  • The Competition Commission (formerly the
    Monopolies and Mergers Commission) is the body
    responsible for administering competition policy
    in the UK.
  • A company can be referred to the Commission if it
    supplies more than 25 of the total market for a
    good
  • or where there is collusion between firms
  • The Commission is charged to investigate whether
    or not the monopoly acts against the public
    interest.

11
Mergers and acquisitions
  • Firms can grow through merger and acquisition
    (MA) activity
  • horizontal mergers
  • mergers between firms at the same stage of
    production in the same industry
  • vertical mergers
  • mergers between firms at different stages of
    production in the same industry
  • conglomerate mergers
  • a way for firms to diversify into a new activity

12
MA
  • Size may enable
  • economies of scale
  • competition on a global scale
  • The late 1990s saw record levels of MA activity.
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