L2 - Introduction

Question 1

What is this course about?

Answer 1

industrial organisation (IO): the study of imperfect competition

At the start of 20th century,

• perfect competition: many firms, homogeneous products, free entry/exit
• monopoly: one firm, barriers to entry
• These were deemed inadequate.
  
  • Why? Generally, markets had:
    
    • a) few large firms
    • b) differentiated products
• Firms had some market power → the ability to price above marginal cost
• t Questions for an industrial organisation:
  
  • ● Why are markets structured the way they are?
    
    • How many firms, how big are they? to what extent are their barriers to entry, to what extent are the products in the market differentiated?
  • ● How does the structure affect firms’ behaviour and market performance?
  • ● How does firms’ behaviour affect the structure and market performance?
    
    • mergers? R&D?

Question 2

How do we study IO?

Answer 2

• THE PAST: Structure-conduct-performance (SCP) paradigm
• Largely empirical – for example
  
  • ● regress firm profits across industries on the number of competitors
  • ● negative correlation between them –> firms increase, profits fall
  • ● more competitors, more competitive, better outcome
    
    • Problem: firm profits encourages more # competitors
      
      • Market structure is endogenous, economist previously were assuming the structure of the market affected the conduct, (does conduct actually influence the structure)
• THE PRESENT: New Industrial Organisation
• Develop theories of firm behaviour within industries, and test them empirically
• In imperfect markets: firms optimal strategies depend upon rivals – for example
  
  • ● how much a duopolist produces will depend on how much its rival does
  • ● its rivals output depends on what it produces…
• Theories can be complex: game theory versus decision theory

Question 3

Why do we study IO?

Answer 3

Positive reasons: we want to explain their behaviour

Normative reasons: we want to know whether the outcome is good

• Industrial economics guides policy → what should be regulated/prohibited?
  
  • Competition policy (also known as antitrust policy in the US)
    
    • Aim: to “ensure that competition in the marketplace is not restricted in a way as to reduce economic welfare” (Motta, 2004, p.30)

Question 4

How can firms restrict competition?

Answer 4

There are a number of ways, but to name a few…

• ● Deter entry or force exit
• ● Form agreements with competitors or suppliers
  
  • collusion with higher prices
• ● Merge with competitors
  
  • Less competition usually leads to the price going up

Question 5

What are some of the competition law we have in place at the moment?

Answer 5

European Competition Law: Agency: European Commission

• ● Article 101(81 in TB) : prohibits agreement between firms, unless welfare improving
• ● Article 102 (82 in TB): prohibits abuse of a dominant position
• ● Merger control: prohibits anticompetitive mergers & acquisitions
  
  • ● State aid regulation: regulates ‘aid’ offered by member states to their local firms

UK Competition Law: Agency: Competition & Markets Authority(previously OFT & Competition Commission)

• ● Chapter 1, Chapter 2, Merger control: similar to European Competition Law
• ● Market studies and market investigations

Possible punishments and remedies

• • Fines for firms (EU and UK) & prison sentences for individuals (UK only)
    
    • This is going to change the structure of markets however
• • Behavioural remedies – firms’ behaviour is restricted in a certain way
    
    • set price floor and ceilings
• • Structural remedies – firms must sell off certain assets to change market structure

Question 6

How has Brexit affected Competition policy?

Answer 6

• Blogpost by Bruce Lyons (May 26, 2016) - WIDER READING
  
  • https://competitionpolicy.wordpress.com/2016/05/26/should-markets-be-regulated-in-brussels-orlondon-brexit-and-competition-policy/
• What the UK has gained
  
  • ● No state aid regulation
    
    • UK can now intervene more freely?
  • ● Wider public interest test for mergers
  • ● Criminal offence/jail sentences
• What the UK has lost
  
  • ● Administrative economies of scale
  • ● State aid regulation