Government intervention to maintain competition in markets

1
Government intervention to maintain competition
in markets
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OR Why does the Government seek to make markets
more contestable?
Why does the Government intervene to maintain
competition?
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Competition Policy
Toughened since 1997
Promote Competition
Protect Consumers
Enhance Efficiency
Assumption is that competition eliminates
x-inefficiency
Better resource allocation vs. Economies of scale
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Competition Policy

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

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PC and Multi-plant Monopoly compared
Big Assumption! No cost difference between the
two market structures
Government Remedy Increase Competition!
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
DAR
MR
O
Quantity
Qm
Qpc
PC firms supply Qpc at price Ppc
Monopolist supplies Qm at price Pm
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Competition Policy

• If this line of reasoning is accepted then
  monopoly is always BAD
• MA leading to higher market concentration always
  leads to allocative inefficiency
• However

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PC and Natural Monopoly compared
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 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
DAR
MR
O
Q
Quantity
Qm
Qpc
PC firms supply Qpc at price Ppc
Monopolist supplies Qm at price Pm
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And finally
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PC and Monopoly compared
A less extreme example
N.B. here, production under the monopoly is less
wasteful in its use of resources in the
production process
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
DAR
MR
O
Qm
Qpc
Q
Quantity
PC firms supply Qpc at price Ppc
Monopolist supplies Qm at price Pm
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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 tooto the producer (profits) rather than to
  consumers (cheaper prices)?

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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

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Plenary
Define the term Competition Policy and explain
why it exists