Monopoly Regulation and Competition Policies Flashcards
(16 cards)
Monopoly regulation/competition policy
to promote competition make markets work better and to improve the efficiency and competitiveness of the economy
when to intervene into market
public interest is harmed due to monopoly or oligopoly market abuses,for example
when markets are highly concentrated with dominance from one or a few firms leading to outcomes against the public interest, perhaps in the form of higher than marginal cost prices and lower than socially optimum quantities
collusive oligiopoly with anti trust behaviour and cartel agreements. Such behaviour can exist in highly concentrated oligopolstiic markets where firms agree to fix prices
in matural monopolies with high fixed costs and economies of scale. makees sense form firm to exploit and supply entire market. there is rational for regu;ation to promote socilaly fesirable outcomes in a naturall monopoly diagram.
aims of intervention
prevent excess pricing-where monopolies exploit consumers by charging prices in excess reduicng consumer surplus
ensure quantity and quality of provision is high.–monopolies can produce at an output below socially desirable levels rising consumer choice.
promote technological advancements. monopolies can make snp but provits not reinvest back into company, as profits may be given to share holders.
to promote competition–liberalsiing concentrated markets. this could takee the form of privatisation, deregulation or trade liberalisation all of which encourage competition
monopoly regulation :Price Regulation
price regulation-the intention of price regulation is to cap prices of monoplists at allocativ eefficnet levels in the market acting as a price ceiling. max prices set at competitive price reduing monoploy pricing increasing its quantititees. this increases social welfare in maket which recovers the deadweight losses of both .
R
monopoly regulation: RPI price regulation
One price regulation that could be used is to
cap price increase by rpi inflation rate.
As prices across the economy rise by rpi a
llowing firms to increase prices by the rate of rpi inflation
will allow firms to cover their costs and still make profit if they find cost staving
RPI-X price regulation
RPI-X is more sever where represents a given percentage. IF RPI is 4% and X is 2% this means that firms can only increase prices by 2% which forces effcicency savings to be found
if regulators feel that monpoloies are charging excessively high prices they can pnish firms by setting a high value of X to protect consumers
Privatisation
when state owned assets are sold to the private sector
De-regulation
-removal of legal barriers to entry improving both actual competition and contestability in the industry.
forms of Privatisation P
sale of state owned assets to private sector corporations or individuals.-this can occur via floatation (selling shares on the stock market for instance private meetings with buyers)
Government can contract out services to private sector where the government still controls and monitors output
competitive tendering process can occur where private firms bid to build a project for the government. Winning bid will be the lowest cost and highest quality matching requirements
pros of Privatisation and deregulation
promote outcomes like those attained in competitive market structures. Allocative efficency can be achieved with prices close to or equal to marginal cost. Resources allocated according to consumer demand with consumers getting what they demand at quantity they desire–consumer surplus–as quality and choice increase
privatisation leads to productive efficiency–producion is where mc=ac–all possible eos is exploited–lower ac –increase snp over time—increase market share–lower prise–increase consumer surplus and labour productivity
Privatisation–strong desire to cut costs given level of comp–due to comp–fall in waste–lower prices –increase consumer surplus
privatisation causes strong profit motive–dynmaic eficenccy–snp reivnested to create better technoliges for consumers–technological advances can further fall cost for businesses
revenue for gov- expenditure on key instituions such as schools hospitals whcih means less debt
privatisation cons
Allocative Efficiency: shortcuts could be taken in the production process– reduction in product quality and or safety standards of goods–fall in consumer surplus
Productive Efficiency: loss making goods or services may no longer be produced–profit maximizing firms will cease production in such areas–harming consumer welfare if it is a merit good
X-efficiency-Natural Monopoly: some industries best run by the state E.G: Water supply – competition could produce wasteful duplication of resources
Dynamic Efficency-they may not be –intenese competition which reduces ability to make snp restrcting investment–consumers lose out with limited tecbnology
which reduces dynamic efficiency
worsen misallocation of resources–market failure–profit motive=over-production. Firms ignore external costs in producrtion and produce more untis than sociall disrable
sources of privatization depends on
how contestable the industry becomes–ownership of busienss is less imoortant than the extent to whcih the industry is actually contestable–privatisation without sufficient comp for example:due to high barriers to entry canr esult in monpolies/oligopolies forming–increasng predatory pricing
quality of regulation:regulator can act act as a surrogate consumer–ensuring that comepttive outcomes remain hig-
Nationalisation
pass of taking an industry into public ownership
nationalisation pros
public sectors firms likely to be allocatively efficient focusing on service provision and full social costs/benefits–public sectors work to meet needs and wants so max social welfare(take externalitites in account(no under or over prod thereby increase service quality
Often seen as natural monopolies–high fixed costs–lower ac compared to smaller private firms (large EOS) compared to private provision more wasteful duplication and allocative ineffiecnt(Singapore airlines when state owned exprienced eos due to global scale and able to bulk buy)
more employment opportunites as they dont pursue profit max –increase job security thereby increase icnrease human capital-increase mrp–icnrease productiivty–increase morale-increase work value
Cons of Nationalisation
“Not-for -profit” organisations–lack of SNP–;less innovations–less price falls and less output in |LR(windows in southwark libraries for many years Recommend -public-private partnerships to fund up to date tech to increase CW)
Productively inefficient-lack of competitive pressure and profit motive–unlikely to operate at minimum efficient scale of ac curve
diseconomies of scale–may become too large –increase inefficiency in production process to creep in–Increase AC as increase expansion–increase prices(India railways experienced coordination failure–increase costs)
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