Competition Policy

my name's Michael Waterson.

I'm an emeritus professor of economics at the University of Warrick,

And, uh,

I'm going to be talking about competition policy and regulation in this module.

So in terms of competition policy, I'll talk about why competition is important.

What happens if there's a monopoly, which is the opposite extreme?

What policies are in place to deal with Monopoly,

whether there are different policies across countries,

whether there are problems with competition policy

and that will complete the first module in this session.

Then,

in the second one, I'm going to be talking about economic regulation,

deregulation and privatisation.

I'm talking about why, from an economic point of view,

certain industries might be regulated for competition purposes.

I'll talk about the challenge post Second World War History of regulation.

I'll talk about the era of privatisation and deregulation,

and then lastly,

I'll talk about competition for the market rather than in the market.

So

in terms of competition policy,

I'm going to start with some background and possibly from your point of view,

revision.

So remember that under competition

firms, that's perfect competition firms will price down to marginal cost.

That is, if it's worthwhile selling anyone,

anything to someone for anything above its marginal cost of production.

The firm will be winning or a firm will be willing to do that.

So that happens in competition.

Whereas in Monopoly,

the monopolist will realise that because the demand curve is downward, sloping,

that every extra unit of output produced reduces the extra revenue,

the marginal revenue that it receives.

And so the monopolist will want to maximise its

profits by setting marginal revenue equals marginal cost.

Um,

so then it will set the price at what point where the marginal revenue crosses

the marginal cost curve the quantity where the

marginal revenue crosses the marginal cost curve.

And as a result of that, the price is high,

the quantity is reduced

and there will be a welfare loss

the welfare losses that some people will be willing to

pay more than it costs to produce the good.

But they don't get the product because they are in that region of the demand

curve between marginal cost and the point at

which the monopoly is willing to supply.

And there is also, of course, a transfer from the, uh, consumers to the firm.

So that's one aspect The other aspect,

which we can't illustrate so easily in a diagram,

is that there is less snow or less incentive to become

efficient if you're a monopolist because you have the whole market.

And a famous economist and Nobel Prize winning economist,

Sir John Hicks said,

the best of all monopoly profits is a quiet life.

Just to explain what would happen if we have monopolies,

I'll give an illustration of a monopoly of some time ago.

Essentially in the 18th and 19th centuries,

the British East India company essentially had a monopoly on

salt in many parts of India under colonial rule.

Uh, and salt is something that's vital to people in hot countries,

particularly actually vegetarians who many Indians are, uh,

and poor people were priced out of the market at various points in time.

It's a long and complex history which I won't go into,

but that lead in the 19th century to some riots.

So that's one aspect illustrating a potential problem with Monopoly.

Another problem, which is a different problem,

is that in many industries in the past, when they were allowed,

cartels have led to high prices, a lack of productivity and so on.

And just to illustrate on that,

a classic example would be transatlantic airlines before deregulation.

So what happened is all these airlines, British Airways, etcetera, uh,

charge the same prices for airline flights across the Atlantic

and they competed on trivial things like I mean,

it seems funny now.

It seems odd now, but they competed on trivial things,

like how attractive the stewardesses were

and what sort of sandwiches were served.

It's a,

you know, So they didn't compete at all on on pricing,

but they merely to try to distinguish themselves slightly in trivial areas.

So those are two examples of potential problems with Monopoly.

So the question then is, well, obviously, what can be done about it?

Well, in fact, what was done about it first happened in the United States.

Um and, um, the standard oil company in the United States in the period 18 70 to 1911.

Um, John Rockefeller and various associates, um, gradually bought up, um,

and controlled the bulk of oil producing, refining and marketing in the US,

combining all this into a trust, as they called it,

leading to high prices

and various other problems.

Well, there was, uh, an act passed by the United States Senate.

The Sherman Antitrust Act, named after a Senator Sherman in 18 90.

This was the first competition policy instrument in the world,

and this

prohibited trusts.

Uh,

and it was used against standard oil in 1911

and essentially broke it up into several pieces.

Um, the Sherman Act is still used.

In fact, it was used in the 19 nineties against Microsoft.

So it's not not something that's long lost in the past

and then, gradually, other countries developed competition policy,

essentially in Britain. It started shortly after the Second World War

and in other European countries at various times since then.

Um, so what's competition policy aimed at?

Well, it's saying that three things, essentially monopolization.

That's not. It's not aimed at having a monopoly itself

because you might have a monopoly, for example,

because you have a vastly superior product.

But it's creating a monopoly, like in the standard oil case,

or abusing the possession of one

um so that, uh, if you to have a monopoly is not an offence,

but to abuse the possession of one or deliberately create one is an offence.

The second area

in which competition policy deals with

is cartels like the transatlantic airlines.

I told you about

groups of firms acting together to set prices

or conditions of sale or other similar things.

Talk about examples of that in just a moment

and the in the UK The competition in 1998 covers these.

The third area is mergers

to monopolise situations, and this is covered by a different act.

The Enterprise Act 2002.

Now essentially, um, all Western countries,

that is all Western European countries and many others Australian, New Zealand,

etcetera, etcetera, uh, have very similar laws to tackle these issues.

Um, the European acts are enshrined in articles one,

oh one and one oh two of the Treaty for the Foundation of the European Union.

Uh, and essentially,

these have gradually developed to be very

similar in structure across most countries.

The competition laws.

It's obviously differs in detail,

but it's very similar across most countries because

partly because firms and multinational in structures,

so

it doesn't make much sense to have a law in

Britain that's very different from the law in Europe.

If, for example, a company trades both in Britain and in Europe.

I mean in detail. It might be different, but

it would tend to be quite similar across countries,

what's not covered or only covered.

Two US limited extent is things that happen across a wide variety of countries.

So, for example, the OPEC cartel or the oil producers cartel is not covered by

these laws because many of those countries

are not fully involved in competition policy.

But

if you think of an example of a European country company,

then it would be covered by British competition law in much

the same way as it would buy European competition law.