Title: Chapter 18 Industrial policy and competition policy
1Chapter 18Industrial policy and competition
policy
- David Begg, Stanley Fischer and Rudiger
Dornbusch, Economics, - 6th Edition, McGraw-Hill, 2000
- Power Point presentation by Peter Smith
2Industrial 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
3Industrial 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
4Consumer 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
5Producer surplus
Producer surplus is the excess of total
revenue over total costs
Price
P
LAC LMC
D
Quantity
Q
6The 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.
7The social cost of monopolycomparing perfect
competition and monopoly
8Perfect competition and monopoly under differing
cost conditions
Suppose that monopoly enjoys lower
cost conditions than under perfect competition
Price
D
Quantity
9Counting 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.
10Competition 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.
11Mergers 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
12MA
- Size may enable
- economies of scale
- competition on a global scale
- The late 1990s saw record levels of MA activity.