Topic 11: Competition Policy

Question 1

What legislation deals with competition?

Answer 1

Competition and Consumer Act: previously known as the Trade Practices Act (1974), it covers a wide variety of issues relating to market competition:

• the establishment and workings of the main statutory bodies: the Australian Competition and Consumer Commission (ACCC), the National Competition Council, the Australian Competition Tribunal, the Australian Energy Regulator
• firm behaviour covered by the Act: access to services, restrictive trade practices, resale price maintenance, industry codes and standards
• penalties and liabilities arising from uncompetitive behaviours

Question 2

How does the govt use the competition act by trying to make monopoly-type markets more competitive?

Answer 2

​has the power (through the ACCC) to disallow proposed mergers and acquisitions, on the grounds that the new larger firm would stifle competition;

• has the power to punish firms that engage in anti-competitive behaviour;
• however, sometimes a merger or takeover’s main goal is to reduce costs through economies of scale, and not to stifle competition. – It can be difficult, though, for the ACCC to ascertain when a merger is for ‘good’ reasons (lowering costs), or for ‘bad’ reasons (anti-competitive behaviour).

Question 3

How does the govt use the competition act by regulating the behaviour of existing monopoly markets

Answer 3

• common in natural monopolies: one firm can supply the entire market at a lower average cost than two or more firms could e.g. gas, electricity, water, internet
• these economies of scale arise largely because of infrastructure requirements i.e. only need ONE gas pipeline, or electricity line, going into your home. Competition for this infrastructure is inefficient
• because it supplies the entire market, the minimum efficient scale is never reached and so the LAC and MC curves are always downward sloping and never intersect
• because LAC always downward-sloping, MC curve always lies below the LAC curve (i.e. doesn’t cut at minimum point)
• if unregulated, monopolist will set price and quantity where MR = MC, this is inefficient, as MB (Price) > MC (good is under-allocated)
• an increasingly common policy towards natural monopolies is to allow competition in the marketing of the utility, but keep the infrastructure in public hands (or heavily regulated private industry)
• therefore, firms can compete for consumers’ business by offering to deliver the good at the lowest possible price, essentially leasing the pipeline off the natural monopoly e.g. gas and power markets in the Eastern states

Question 4

What are the general policies towards regulation of monopolies?

Answer 4

1. Marginal cost pricing
   
   • govt regulates to ensure output is where P=MC
   • benefits: allocatively efficient; maximises consumer surplus
   • disadvantages: firm making a loss, and so needs to be subsidised by govt (i.e. paid for by us anyway).
2. Average cost pricing

• govt regulates to ensure output is where P=LAC.
• benefits: no subsidy needed, as firm earns normal profit
• disadvantages: not allocatively efficient (MB > MC); consumers pay higher price, and output less (PAC, QAC).

1. Two-part pricing

Question 5

How does the govt use competition policy by turning some private monopolies into public entities (and vice versa)?

Answer 5

• again often an issue with natural monopolies
• governments face a dilemma:
  
  • private owners have an incentive to lower costs in order to increase profits (which is desirable), but also has an incentive to charge higher prices (to raise profits), which is not desirable
  • if in public hands, managers may have little incentive to lower costs, but also little incentive to raise prices (because they have no profit motive), sometimes, regulation on pricing can ensure that private monopolies focus more on the cost issues. if that proves too difficult, it may be better to have the monopoly run by the government
• over the past 20 years, the government has also divested itself of ownership of certain key enterprises e.g. QANTAS, telecom (telstra), commonwealth bank
• these have largely been in markets where the government enterprise already had private firm competition. owning a business in these cases makes little sense, because there is a conflict of interest i.e. the government is both umpire and player in the game!

Question 6

economics is pro-market not pro-business - discuss in terms of interest groups as well

Answer 6

• a lack of competition leads to higher prices, and deadweight losses – society is often worse off. Competitive markets, because of the competition, lead to the most efficient outcomes.
• but from a business perspective, monopolies are beneficial with positive economic profits, market power etc.
• John Hicks:“the best of all monopoly profits is a quiet life.”
• governments can sometimes get ‘captured’ by interest groups, and how that can affect the efficient operations of markets. – regulations should ensure a level playing field and maximise total economic surplus (greatest net benefit to society)
• sometimes, closeted industries like this can be disrupted not through government relaxing their previous restrictions, but from new and innovative businesses e.g. uber
• taxi example highlights the fact that what is good for society is not always enacted by governments
• governments should be about improving economic welfare for the greater good of society, not narrow interest groups
• this is why it is important to look carefully at government economic policies – are they promoting competition and a ‘level playing field’, or are they protecting a narrow interest group?

Question 7

Describe the WA taxi industry

Answer 7

• the government restricts the number of licenses it issues for taxis, highly regulated industry means perfectly inelastic supply
• stated rationale is to have some control over who drives the cars, to avoid having dodgy, violent taxi drivers on our streets;
• effect is to limit the number of taxis who can operate at any one time;
• the Economic Regulation Authority (ERA) in WA recently released recommendations for the restrictions on the number of licenses to be lifted – consumers would be an estimated $70 mill/year better off, losers would be those who owned the previously valuable licenses

Question 8

What would be the effect of deregulation on the WA taxi industry?

Answer 8

• effect of deregulation can be seen using not an exact representation of perfect competition: lots of firms (drivers), homogeneous product (simple transport from one place to another), low barriers to entry (a car)
• assume normal profits currently being earned by individual drivers in the market
• then government introduces unlimited licenses, at a zero price. Effect is to reduce the ATC [note: not the MC, as the drivers have to pay a fixed fee for its use]
• short-term: drivers should be better off, as same output (journeys), but lower costs. Positive profits earned [P0 – ATC 1] x q0.
• economic profits will increase the demand for licenses (i.e. entry). Over time, we’d expect the market supply to shift to the right (S1); this will lower prices (to P1). Overall market journeys will rise considerably to Q1.
• therefore, by removing restrictions on the quantity of licence plates, we would expect to see cheaper taxi fares for consumers, and more drivers (however, those drivers will still only earn zero economic profits in the long run) the size of the consumer surplus will increase with the price decrease from P0 to P1