European Competition Policy, Exercise for the Parts Covered by Prof. Dr. Freytag

Transcription

1 European Competition Policy, Exercise for the Parts Covered by Prof. Dr. Freytag Sebastian Spiegel LS Wirtschaftspolitik, FSU Jena Winter 2016/17 Exercise European Competition Policy 1

2 Chapter 2 3. BEYOND BASIC IO MODELS Exercise European Competition Policy 2

3 Some More Questions We have learned that the smaller the number of firms in the market the smaller social welfare. But what does this imply in practice? Do we always have to intervene if there are only a few or even only one firm in the market? Assumed we know that government should intervene because there are to less firms in the market, what should be done? Break up the incumbent(s)? Regulate the incumbent(s)? Enable or even subsidize entry? Exercise European Competition Policy 3

4 ...but when are there monopolists? 1. Do Rosenbrauerei (Rosen Pils), Braugold (Angerbräu Pils), Vereinsbrauerei Apolda (Glocken Pils) and so on compete or are they all monopolists and thus have to be regulated? Or is there even perfect competition between the different breweries? 2. There is only one Bäcker Meyer producing this wonderful Brezeln. So this is a socially harmful monopolist? 3. There is one well-known online auction platform (ebay) with virtually no competitors. Is this a monopolist we have to break up? 4. There is only one producer of Mercedes-Benz cars and an MB car is not the same as an Audi, Ford or BMW. Shall we allow other firms to produce MB cars as well (e.g. by forced licensing)? Or shouldn t we care because the car market is a fine oligopoly? Exercise European Competition Policy 4

5 A Bit More General What do you think is the proper theoretical description of competition in 1. the beer market? 2. bakery market (if there are unique Brezeln )? 3. market for online auctions? 4. market for (new) cars? Exercise European Competition Policy 5

6 Important Issues Market analysis should take into account more than the number of firms: heterogeneous products: monopolistic competition and oligopoly with differentiated products. contestability of markets sunk costs, subadditivity, network effects and path dependency series of temporary monopolies The nirvana fallacy (see Demsetz 1969). The different concepts of competition and competition policy (see e.g. Weiss 1979, Posner 1979, Nelson 1979) Exercise European Competition Policy 6

7 Heterogeneous Products Exercise European Competition Policy 7

8 Path Dependency David (1985): Clio and the Economics of QWERTY Arthur (1989): Competing Technologies, Increasing Returns, and Lock-In by Historical Events increasing returns (economics of scale) specific investments (includes learning effects) compatibility effects: network effects, complementaries, economics of scope Positive feedback effects can lead to the selection and persistence of an standard, technology etc. Coordination failure: The Economics of Horses, Penguins, and Lemmings (Farrell & Saloner 1987) Expectations play a crucial role here! Question of control/ownership, see e.g. sponsored versus unsponsored networks/standards. Exercise European Competition Policy 8

9 The Nirvana Fallacy The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing imperfect institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements. (Demsetz 1969) Applied to competition policy this means: Compare alternative real market situations! Exercise European Competition Policy 9

10 A More Dynamic View The current market shares may be of little relevance if there is strong innovation competition. The current dominating market position of a firm (or several firms) can be fragile in dynamically terms. Interpret this as contestable markets in a dynamic (innovative) sense. Under Schumpeterian competition there may be a series of temporary monopolies that are dynamically competitive. Especially if there is a tendency towards natural monopolies. Important: Schumpeterian creative destruction widens the definition of the relevant market : dynamic competition over similar or same market(s): Apple vs. Microsoft; Yahoo vs. Google; railways vs. intercity buses dynamic competition over more differentiated markets: Radio vs. Television; Google vs. Facebook Exercise European Competition Policy 10

11 Determinants of market outcome the number of firms/ consumers in the market the strategic variable (competition in price or in quantities) the timing of decision (first-mover advantage) possible asymmetries (e.g. cost asymmetries) degree of product differentiation possibilities for potential competition absence of barriers to entry (e.g. licenses) absence of barriers to exit (sunk costs) expected profit situation existence of network-effects and/or path dependency dynamic effects ( temporary monopoly) subadditivity in the cost function fixed cost degression economies of Scale or Scope learning effects (dynamic) Exercise European Competition Policy 11

12 TAKE HOME TASKS Exercise European Competition Policy 12

13 Question 11: - IO Models Compare those types of markets. number of firms in the market number of consumer s in the market strategic interdepen dence free entry (and exit) positive econ. profits (long-run) Perfect Competition Monopolistic Competition Oligopoly with Homogeneo us Goods Oligopoly with Heterogene ous Goods Monopoly Monopsony Exercise European Competition Policy 13

14 Question 12: - Monopolistic Competition Choose the correct answer: If a certain market is characterized as perfect competitive or monopolistic depends on: a) the existence of barriers to entry b) the degree of product differentiation c) the possibility of firms to cooperate with each other d) a and b are correct e) all answers are correct Source: Hamilton, Jonathan and Valerie Suslow (2005): Übungen zur Mikroökonomie,, Chapter 12.4, Task 25. Exercise European Competition Policy 14

15 Question 13: - Market types In which type of market the following firms act? Fill in the table on the next slide and explain your decision. Stadtbäckerei Jena (bakery), Deutsche Bank, Mircosoft, Goggle, Facebook, Deutsche Bahn-Regio (a sub firm of Deutsche Bahn which is engaged in public transfer over middle range), McDonalds in Jena, Thalia in Jena (bookstore) Put also the following cases into the table: A bakery in a village with 600 inhabitants; a furniture shop in a city with inhabitants; a furniture shop in a village with 1000 inhabitants; a bank on the Salomon islands Exercise European Competition Policy 15

16 Monopoly Oligopoly with homogeneous Oligopoly with heterogeneous Perfect Competition Monopolistic Competition Exercise European Competition Policy 16

17 Question 14: - policy reactions Imagine the following situations and answer these questions: How could we describe the market? What is the underlying problem? Should competition policy react to this situation? a) A little village of 300 persons has only one bakery. b) After Apple has introduced the I-Phone it was the only existing smartphone for a certain time. c) Before 2013 Germany has only 4 big electricity firms. These firms have been the owners of the electricity networks too. d) The Deutsche Post AG is/was the only firm with the right to transport standard letters or mails. This was guaranteed by the German Federal Republic. Exercise European Competition Policy 17