Flashcards
Chapter 18: Competitive policy
Cards in this deck (10)
- 1Policies toward monopolies1. Using laws to increase competition
2. Public ownership
3. Direct regulation of price - 2Competition laws- Laws that promote competition by regulating the behaviour of firms with market power
- Makes it illegal for a firm to use its market power to restrict or harm competition
- To raise social welfare, government must measure and compare the social benefit from synergies (joint production) with the social costs of reduced competition - 3Public ownership- Turning private monopolies into public, government-run enterprises
- Usually for natural monopolies (telephone, gas, electricity, rail etc.)
- Problem: government may not have incentives to minimise costs while private firms do - 4Direct price regulation- Impose marginal cost pricing: P = MC
- Problem: may result in loss to firm, so may need subsidy - 5Public policy towards oligopolies- Cooperation is better for oligopolists but causes deadweight losses for society, so policymakers often regulate their behaviour through competition laws
- Competition and Consumer Act (2010)
makes it illegal for corporations to make a contract/arrangement that would substantially lessen competition e.g. laws that break up cartels and collusive behaviour, laws that prevent mergers that create a monopoly
- Illegal for firms to agree to increase prices, reduce production or divide up a market - 6Controversies over competition policy- If poorly designed, they can harm rather than help competition
- Some business practices that appear to reduce competition may have legitimate business purposes - 7Resale price maintenance- When a wholesaler requires that its retailers do not sell its products to their customers below a specified retail price
- Some argue it has no incentive to discourage competition among retailers
- Has a legitimate purpose - prevents customers from taking advantage of a store’s customer service and then buying a product at a discount retailer that does not provide this service - 8Predatory pricing- When a firm sells its product at an artificially low price in order to drive out an efficient competitor and reduce long-run competition
- Some argue it is not a profitable business strategy - if ‘predator’ suffers more than the ‘prey’, then using predatory pricing to harm competition makes no sense
- Has a legitimate purpose e.g. discounting campaigns - 9Tying- When a firm will only sell customers one product if they also buy another product
- Viewed as a form of price discrimination
- Some argue it attempts to increase market power by tying a product with low demand to one with high demand
- Others argue that simply bundling two goods together cannot increase market power, so has no effect on competition - 10Transparent pricing- Laws that require firms to make their prices more clear e.g. requirement to report prices to a regulator
- Some argue it makes it easier for firms to collude
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- Business/Economics (ECC1000: Principles of Microeconomics) Flashcards on Chapter 18: Competitive policy, created by Melina Mackey on 31/05/2018.
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- Melina Mackey
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