European Competition Policy,
Exercise for the Parts Covered by
Prof. Dr. Freytag
Sebastian Spiegel
LS Wirtschaftspolitik, FSU Jena
Winter 2016/17
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Outline
1. Chapter 1 – Basic idea of Competition Policy
2. Chapter 2 – Markel Analysis with IO-Models
3. Chapter 2 – Beyond Basic IO Models
4. Chapter 3 – Cartels and Critical Behaviour
5. Chapter 4 – Competition and international trade
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Chapter 1
1. BASIC IDEA OF COMPETITION POLICY
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Why do we need competition?
Competition fulfills several functions:
•
Natural function
People want to compete
•
Peace function
Competition as alternative to fighting each other
•
Static efficiency functions
– Productive efficiency: cost efficient production
– Allocative function: Pareto-efficient and welfare maximizing use of resources
– Distributive function: best player gets highest reward
•
Dynamic efficiency functions
– Innovative function: creates incentives to be innovative
– Freedom function: avoids domination of a single player
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Why do we need `competition policy'?
• Is there a need for government interventions?
– Competitors dislike Competition
– Incentives for anti-competitive behaviour
– Incentives for agreements
– Possibility of market failure
• Laissez-faire: let the market work
– No interventions
– Problem: market failure are ignored
• Number of suppliers is often limited
– More easy to organize themselves
– Starting point for most cases of distortions of competition
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Types of Market failure
• Anti-competitive and collusive behaviour
• Natural monopoly
• Externalities
• Public Goods
• Asymmetric Information
– Moral Hazard
– Adverse Selection
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Laissez-faire vs. intervention
• Should there be limits?
– Without limits: replacement of market failure by policy failure
– Governmental goals: e.g. picking winners, infant industry
• Intervention should be based on objectives:
– Establish a competitive order to safeguard competition
– Establish a competitive order to foster economic efficiency and progress
– Providing possibilities for fair competition, includes the prohibition of distortive
practices and the absence of advantages through subsidies
• No clear Borderline between freedom enhancing competition policy
and harmful interventionist industrial policy
• Competition policy has to protect competition not competitors!
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Chapter 2
2. MARKEL ANALYSIS WITH IO-MODELS
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Market Analysis with IO-Models
Market types assuming homogeneous goods:
• Perfect Competition
• Monopoly
• Cournot Oligopoly
• Bertrand Oligopoly
• Stackelberg Oligoply
• Monopsony
Market types assuming heterogeneous goods:
• Monopolistic Competition
• Oligopoly with heterogeneous products
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Properties of perfect competitive markets
Markets characterized by the assumptions of perfect competition have
the following properties:
• Price is equal marginal costs (P = MC)
• Price is equal average costs (P = AC)
• therefore MC = AC
• No firm makes positive economic profits
• No possibility to increase welfare in this industry
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The no profit condition
•
No positive economic profits does not imply zero accounting profits
•
All factors used in production receive their opportunity costs but not
more
•
Opportunity cost are measured with regards to the best alternative use
•
Resulting level of profits is also known as normal profits
economic profits = accounting profits – opportunity costs
In such a situation firms are indifferent between staying in and leaving the
market!
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Benefits of perfect competition
•
Perfect competition is both productive and allocative efficient.
•
Productive efficiency:
– Given set of products is produced to lowest possible cost
– Assumptions: constant technology and input costs
– Occurs because cost inefficient firms have to leave the market
– efficient firms make zero profits inefficient firms faces losses
•
Allocative efficiency:
– Costs of producing the last unit are identical to consumers valuation of the unit
– If MC lower than consumers willingness to pay firms will produce an additional unit
– Perfect competition leads to the welfare maximizing amount of production
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Numeric Example I – Perfect Competition
• Market demand is given with: = 10 − , = ∑ • Cost-function is the same for each firm: = 2
Task:
Please calculate
– Market price
– Market output quantity
– Individual quantity
– Profits
– Consumer surplus
– Welfare
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Solution
1
= 10 − 2
= 2
= ∗ − 2
!
∆
= − 2 =0 → = 2
∆
1
2 = 10 − 2
= 16
= ̅ ; !"# = ̅
16
= ̅ =
16
= 2 − 2 ∗
=0
10 − 2 ∗ 16
= 64
$ = % =
2
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TAKE HOME TASKS
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Question 1: - Perfect Competition
Suppose a perfect competitive market where all firms produce a
homogenous good. Assume the cost function is: C=3q^2+2q+12.
a) Derive both, the marginal and the average cost function and include
them in a price-quantity diagram.
b) Denominate the final market price and the quantity. Could you
explain the concept behind this solution?
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Question 2: - Perfect Competition
Suppose a perfect competitive market where all firms produce a
homogenous good. The inverse demand function is given by = 50 −
( ; ( = ∑ ) and the cost function is = ) .
a) Compute the price and quantities for the market and the single firm.
b) Draw a proper graphic.
c) Compute consumer and producer surplus and social welfare.
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