Competition policy and economics (the basics)

Question 1

The concept of market power

Answer 1

The ability to reduce output, raise prices, reduce the quality of products, limit available choices, to suppress innovation without fear of a damaging competitive response by other firms

Question 2

Benefits of competition

Answer 2

Basic benefits
- Lower prices
- Greater efficiency
- Better products
- Innovation

Allocative efficiency
- Resources are best allocated in society

Productive efficiency
- A product is produced at the lowest cost

Dynamic efficiency
- Development of innovative products; introduction of new technology to reduce production costs over time

Question 3

Monopolies

Answer 3

Allocative inefficiency
- The monopolist is able to reduce its output and therefor some consumers will be deprived of products

Productive inefficiency
- The monopolist is not constrained by any competitors and will often be less efficient when it comes to lowering its costs

Question 4

Perfect competition

Answer 4

Infinite number of buyers and sellers

Producing identical products

Consumers have perfect information

No barriers to entry

No barriers to exit

No cost for consumers, other than the price of the product

Question 5

What is the desirable level of competition?

Answer 5

Perfect competition
- Not achivable

Monopoly
- Not always bad, since the market will usualley correct itself over time

Workable competition?
- A competitive structure of the market that leads in socially acceptable results

Contestable markets?
- A market where there are no barriers to entry or exit the market; this kind of market structure creates competitive pressure even for monopolies or oligopolies

Effective competition
- A market structure that guarantees that market players face sufficient competitive constraints
- No protection of inefficient competitors

Question 6

What should the goals of competition law be?

Answer 6

Outcome legitimacy
- Protection of consumers; economic efficiency

Process legitimacy
- Protection of the process of competition; economic freedom

Ideal legitimacy
- Internal Market and other public policy objectives (environmental protection, unemployment policy, regional policy)