Competition Policy & Collusion (Competition Policy - PC to Monopoly focus)

Question 1

How to solve price wars (2)

Answer 1

M&A

COLLUSION

Question 2

Competition authority vs industry regulators

Answer 2

CA checks lawfulness of firms activities (one off)

Industry regulators have more continuous extensive role e.g firms prices, investment and product

Question 3

3 examples of detrimental actions of firms

Answer 3

Collusion
Anti-competitive mergers
Exclusionary behaviour

Question 4

2 reasons for mergers

Answer 4

Unilateral effect: Exercise market power to increase prices (if merger creates monopoly)

Create conditions and scope for collusion (to affect prices again)

Question 5

3rd: Exclusionary behaviour

Answer 5

Practices that prevent entry or drive competition out

(as we prevent entry by limit pricing, entry deterrence (capacity), fudenberg investment k1
and drive competition out by predatory pricing)

Question 6

Why is exclusionary behaviour challenging for competition authorities to assess

Answer 6

As a firms practice can benefit consumers but also give monopolistic advantage to the firm e.g predatory pricing lowers prices (good for consumers) but anti-competitive, bad for other firms.

Question 7

Main aim of competition policy

Answer 7

Maximise Welfare (CS+PS)

Question 8

So since all CA cares about is total surplus (WELFARE, both CS and PS), why do they care if an increase in price increases PS but reduces CS?

b) when is total surplus largest

Answer 8

As the gain in PS doesn’t fully compensate the fall in CS. (allocative inefficiency!)

b) under perfect competition P=MC

Question 9

So competition policy for welfare main purpose

Other reasons for competition policy (5)

Answer 9

SMEs
Market integration (price discrimination)
Fairness/equity or other social reasons (small v large)
Political and environmental
Trade

Question 10

Market power

Answer 10

The ability of a firm to charge over MC

Question 11

What inefficiency is caused by market power

Answer 11

Allocative inefficiency - Welfare loss as firms engage in unproductive activities to gain market power

(i.e lower output but higher prices means suboptimal distribution)

Question 12

How does allocative ineffiicency/market power reduce static welfare

Answer 12

As P>MC, so PS gain, and as mentioned, increase in PS does not fully compensate loss in CS

Question 13

Draw welfare loss (DWL) from operating a monopoly in comparison to perfect comp

(pg8)

Question 14

I worked out how to find DWL (on pg 8), using inverse demand fucntion P = a -bQ, we get
DWL = 1/2 [(a-c)/4b]²

How does deadweight loss vary with elasticity?

B) how to show it mathmatically

Answer 14

like in public!
More elastic = larger DWL (so when price rise to monopoly price, lose more demand.

And recall, the simultaneous rise in PS, doesnt fully compensate the loss in CS! So DWL

b) differentiate DWL with respect to b

Question 15

When can welfare loss be underestimated, what is this known as?

b) draw additional DWL be on the diagram pg9

Answer 15

If firms rent seek! i.e use productive resources to gain market power rather than using them in production.

i.e producers gains rent and extracted surplus, and use their profits in order to maintain their monopoly position. (RENT SEEKING COSTLY)

however since remain a monopoly, they lose incentive to improve (no threat of comp), so become inefficient (X inefficiency) so true cost of monopoly is higher. (drawn on diagram).

b) draw a higher true cost c, which corresponds to a higher price.

Question 16

So firm rent seek and spend to maintain market power opposed to production process.

Costs rise for them as become X-inefficient as no incentive to improve. What does Posner argue additional cost is equal to

Answer 16

Additional cost is equal to monopoly profits, since it is what they have and willing and able to spend

Question 17

What inefficiency does rent-seeking create

Answer 17

Productive inefficiency - they operate less efficiency compared to perfect competition (higher price lower quantity, do not produce on lowest point of AC curve)

Question 18

Why are monopolies by nature productively inefficient (2)

Answer 18

Managers have less incentive to exert effort (no real competition creates X-inefficency)

No selection process (no survival of fittest so allows inefficient monoplies to continue to operate)

Question 19

So what do we need for a collusive outcome (2)

Answer 19

To be able to detect deviation from collusive price (since without detection, firms could cheat and undercut and steal market share)

Punishment