B300B Policy Chapter 5 By: WASSIM ALWAN. Competition Policy.

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Presentation transcript:

B300B Policy Chapter 5 By: WASSIM ALWAN

Competition Policy

Competition policy: aim to maintain desirable kind of competition in economy. And policy makers need to balance between competition and temporary monopoly. They need to assess whether monopoly operate against public interest, and this process cost time and money

There are two theoretical rationales for competition policy 1) The neo-classical theory: perfect competition is an ideal market structure/ (static competition) it characterized with: large sellers offer identical products cost less-entry and exit for all firms the absence of increasing return to scale all firms earn normal profit that cover their costs

2) The Austrian school approach: Critics to neo-classical theory by Austrian school: neo- classical are unrealistic. Emphasis on the 'process' characteristics of competition Schumpeter: technology is internally determined by firm activity and not given to firm. However, Firm must have financial resources to make research in innovative activities

The uncertainty of future return on innovation makes external sources of finance reluctant to support innovation. Therefore the firm needs to earn high profit to fund their innovations. As a result a monopoly, oligopoly, mergers and entrepreneurial rivalry, become they had the ability to fund innovation activities They can achieve economy of scale by producing large output and reduce average cost and the saving is passed to customers when acquiring cheap prices products.

Types of Merger: Type of merger: Horizontal merger: mergers of firm at the same stage of production process Vertical merger: mergers between firms at different stages of production process. E.g. restricting suppliers of the vertical outlets. Conglomerate mergers: firms mergers across different markets

Disadvantages and imperfection of monopoly: The rate of innovation in the long term would be low because of lack of competition pressure. The market is blocked because of monopoly power. There is no substitute for this product. Setting the prices according to their interest.

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