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Competition policy and contestable markets

In this chapter we consider the arguments for the government versus private ownership,
the regulation and deregulation of markets along with UK and EU policy
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The threat of market con testability and the
implementation of UK and EU competition policy may do much to ensure firms with
substantial market power act in the public’s best interest
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Current competition policy has four main
strands, covering

Monopolies, Mergers, Restrictive Trade Practises and The promotion of new competition
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Evidence of monopolies - Concentration ratios, Evidence of price discrimination and
price leadership, merger activity, profit margins
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Relatively few are actively investigated, as the threat is sufficient enough to prevent
exploitation etc
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Compulsory break ups, Price controls, taxes on excessive
profits, Nationalisation, Privatisation, Deregulation
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A
merger involves two or more firms joining voluntarily
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Individual firms can use them to reinforce their dominance, whilst groups of
firms working together as ‘complex monopolies ‘ or cartels can use them to strengthen
their agreements and deter competitors
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Refusal to supply particular outlets and
Full line forcing
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This is the essence of the natural monopoly argument
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Privatisation - Promotes efficiency ~ key advantage
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, Raises revenue for government, promotes competition perhaps by
breaking up monopolies, Reducing the size of the public sector less wages, pensions etc
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Disadvantages - Worse allocation of resources , Externalities, closure of loss making
service, short terminism
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External regulation involves an external agency, such as the OFT CC or EC
setting and enforcing rules and controls
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Governments can use regulation to correct various forms of
market failure, for example, the over production of negative externalities such as
environmental pollution
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Regulation is also used to deter abuses of monopoly
power
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Deregulation - involves the removal of governmental controls on market activity
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For example,
access to BT’s distribution infrastructure has been given to competitors in the
telecommunications industry, and markets have been opened up for household energy
supply and mail services
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The concept of
regulatory capture is also an argument in favour of deregulation
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The regulators then act in the industries interest rather
than that of the consumers they are set up to protect
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In order to fully understand both monopoly and oligopoly we must consider the
effect of potential competition, from new entrants to the industry, on the behaviour of
incumbent firms
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Contestable markets are assumed to have free entry to new firms and free
exit for both incumbents and new entrants
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New firms are not prohibited from entry by incumbents
exploiting a huge minimum efficient scale or, for the new entrant, unachievable
economies of scale
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Free exit assumes there’s no
sunk costs and that when it leaves the industry a firm can fully recover all its previous
investment
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Benefits - reduces likelihood of government failure,

Criticisms - Limited application - in practise sunk costs may be extremely high
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Takeovers and Mergers may reduce long - run costs and
create unachievable economies of scale for new entrants
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