1 monopoly, merger and cartel -- three key issues in competition hu, tzu-shun senior specialist,...
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Monopoly, Merger and Cartel -- Three Key Issues in Competition
Hu, Tzu-Shun
Senior Specialist, Taiwan FTC
Phnom Penh, Cambodia
10 March 2006
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Market StructureHighly Competitive High Degree of Market Power
Perfect CompetitionFarmingStocksCurrencies
Monopolistic CompetitionRestaurantsSmall BuildersSolicitors
OligopolySupermarketsBanksElectrical Goods
MonopolyGas WaterElectricityTele-communications
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Give me answers , please.
Which market structure(s) do you prefer?why?
Well, different people have different answers: if your are consumers, you prefer… if you are …
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Money! Money!Monopoly!
Monopoly!
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Monopoly and Competition: Which One is better?
Diverging views:
The libertarian view The innovator view
Question 1
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The libertarian view:
Adam Smith(1723-1790)
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Milton Friedman
the anonymous free market is a guarantee for political freedom
government interference brings us on the road to serfdom
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Joseph A. Schumpeter (1883-1950)
Joseph A. Schumpeter (1883-1950)
The innovator view:
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Why should there be anything wrongwith monopoly?
The performance of large firms with respect to R&D is much better than those of small firms
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Price
L(S)MC
Output
L(S)AVC
L(S)ATC
Shut down
CE
q3 q2
Competition
q1
Short run profits
Long run equilibrium
min LAC
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Long-run equilibrium
1. Pareto efficiency (P = MC)
2. Productive efficiency
3. Allocative efficiency
Given a set of alternative allocations and a set of individuals, a movement from one alternative allocation to another that can make at least one individual better off, without making any other individual worse off
Given a set of alternative allocations and a set of individuals, a movement from one alternative allocation to another that can make at least one individual better off, without making any other individual worse off
Min LAC
Minimum efficiency scale
Min LAC
Minimum efficiency scale
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BA
Quantity
AR
MR
MC
Pm
QC
PC
Qm
C
Lost Consumer Surplus
Deadweight Loss
Because of the higherprice,
consumers loseA+B and producer gains A-C.
Income transferP
Monopoly
Social welfare =Consumers’ surplus + producers’ surplus
Social welfare = public interest
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Disadvantages
1. Higher price, lower production
2. Deadweight loss ( P > MC)
3. Rent seeking
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P
Quantity
MR
AR
MC
Q*
P*
Rent seeking
The social costs of monopoly are unfortunately often much higher than the DWL.
Every producer has an incentive to establish a monopoly.
He is willing to spend the monopoly profits (at least some of it) to bring him in that position.
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Advantages
1. Economies of scale (or scope)
2. Ability of innovation
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A firm may be monopolist (dominant) for several reasons:
1.The firm may have an exclusive licence.
2.The firm is natural monopoly.
3.The firm has operated more efficiency than its competitors.
Note:
1.monopoly (dominance) is not per se illegal.
2.competition authority will be concerned only if the firm misuses its market power to deter entry of potential competitors or to substantially lessen competition
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1. Excessive pricing2. Predatory pricing selling at below
cost for the purpose of driving out competitors
3. Refusals to deal 4. Price discrimination a practice wh
ere by a firm charges different customers or classes of customers different prices for the same good for reasons unrelated to costs
5. Exclusive dealing requiring a retailer or distributor not to sell products competing with the supplier's products
6. Tie-ins 7. Third line forcing requiring
purchasers of one product to purchase other products from named suppliers
8. Territorial restrictions the retailer or distributor may not resell outside of a defined territory
9. Customer restrictions the retailer or distributor may only deal with specified customers
10. Resale price maintenance minimum price at which the product may be resold to customers
Types of Misuse of Market Power(Abuse of A Dominant Position)
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Do you want to your enterprise is as large as Microsoft?
Yes, but how can I let my enterprise grow up? Internal Growth External Growth
Question 2
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Growth of Firms
Internal Growth
External Growth (Merger)
Vertical Merger
Horizontal Merger
Conglomerate
Types of Merger
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Horizontal Merger : two competitors combine
Primary
Secondary
Tertiary
New Mobile Manufacturer
Mobile Manufacturers
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Vertical Merger : one company acquires a supplier/customer
Primary
Secondary
Tertiary Retail Stores
Manufacturer
Vertical Merger Backwards – acquisition takes place towards the source
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Primary
Secondary
Tertiary
Dairy Farming Co-operative
Cheese Processing Plant
Vertical Merger Forwards – acquisition takes place towards the market
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Conglomerate : two firms from different industries combine
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Why should mergers occur?
Motives
Cost SavingsExternal growth may be cheaper
than internal growth – acquiring
an underperforming or young
firm may represent a cost
effective method of growth
Managerial RewardsExternal growth may satisfy
managerial objectives – power,
influence, status
Shareholder ValueImprove the value of the overall
business for shareholders
Asset StrippingSelling off valuable parts of the
business
Economies of Scale(Scope)The advantages of large scale
production that lead to lower unit
costs
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Efficiency
Improve technical, productive or
allocative efficiency
Synergy
The whole is more efficient than the sum
of the parts (2 + 2 = 5!)
Risk Bearing– Diversification to spread risks
Control of Markets-- Gain some form of monopoly
power– Control supply– Secure outlets
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Competition restraint Horizontal -- might directly reduce competition significantly ( lessen the number of firms, increase market power, and may make conspiracy)
Vertical -- possibility of cut-off supply to the competitors
Conglomerate -- deep pockets, internal cross-subsidization, may facilitate predatory pricing
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BA
Quantity
AR
P2
Q1
P1
Q2
Cost-saving
Deadweight Loss
P
AC1
AC2
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Merger control
Criterion
Economic Benefit > Competition Restraint
(cost-saving) ( deadweight loss)
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“What shall I do about it? They say this is no concerted practice but their way to greet each other!“
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“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
Adam Smith, The Wealth of Nations
(1776)
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Why Investigate Concerted Action:The Monopoly Problem
A monopolist creates artificial scarcity of its product by producing less and selling it at a higher price than if it faced competition.
Firms, by entering into horizontal or vertical agreements, may be able to collectively exercise monopoly power, thereby doing the same harm to competition and consumers as a monopolist.
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Concerted Action
Horizontal Agreement(Cartel, Collusion)
Vertical Agreement
Types of Concerted Action
Price Fixing HardBid Rigging CoreMarket Division Cartel
TyingExclusive dealingResale Price Maintenance(RPM)
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How Horizontal Agreements May Benefit/Harm Competition
Benefit
1. Economies of Scale
2. Economies of Scope
3. Sharing or spreading of
risk.
Harm
1. International Cartels
-- DRAM Cartel
-- Graphite Electrodes
Cartel
-- Lysine Cartel
-- Vitamins Cartel
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How Vertical Agreements May Benefit/Harm Competition
Benefit 1. Lowering transaction costs. 2. Assuring a steady supply of key input. 3. Eliminating negative externalities. 4. Getting around another company’s exercise of market power. 5. Preventing “free riding”.
Harm1. Eliminating competition
through “foreclosure”.
2. Raising barriers to entry
or “raising rivals’ cost.’
3. Creating distributors’ or
manufacturers’ cartels.
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Exemption1. unifying the specifications or models of goods for the
purpose of reducing costs, improving quality, or increasing efficiency;
2. joint research and development on goods or markets for the purpose of upgrading technology, improving quality, reducing costs, or increasing efficiency;
3. each developing a separate and specialized area for the purpose of rationalizing operations;
4. entering into agreements concerning solely the competition in foreign markets for the purpose of securing or promoting exports;
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5. joint acts in regards to the importation of foreign goods for the purpose of strengthening trade;
6. joint acts limiting the quantity of production and sales, equipment, or prices for the purpose of meeting the demand orderly, while in economic downturn, the market price of products is lower than the average production costs so that the enterprises in a particular industry have difficulty to maintain their business or encounter a situation of overproduction; or
7. joint acts for the purpose of improving operational efficiency or strengthening the competitiveness of small-medium enterprises.
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New Policies for Cartels
The Need for International Cooperation Bilateral Agreements • Arrange Comparable economies • Imbalance of interest if large with small economy Regional Integration
FTA negotiations in many regions; some involve common competition rules as a longer-term objective.
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Leniency Program : To encourage a member of a cartel to confess and implicate its co-conspirators with first-hand, direct“insider” evidence about their clandestine meetings and communications, an enforcement agency may promise a smaller fine, shorter sentence, less restrictive order, or complete amnesty (immunity).