ECON110 PDF - Market Structures & Competition Policy

The Price Act of 1992 (RA 7581) Lesson 10 Title: An act providing protection to Market Structures consumers by stabilizing the prices of basic nece...

The Price Act of 1992 (RA 7581) Lesson 10 Title: An act providing protection to Market Structures consumers by stabilizing the prices of basic necessities and prime commodities Regulating Monopoly & Oligopoly and by prescribing measures against Monopoly and oligopoly are market undue price increases during emergency structures which are allowed to exist. They situations and like occasions. are only regulated if the public interest so requires – that is, when there is abuse of Sec. 2. It is also a declared policy of the market power. State to provide effective and sufficient The role of the government is to ensure protection to consumers against healthy and fair competition. hoarding, profiteering and cartels with How? respect to the supply, distribution, ○ Command-and-control marketing and pricing of said goods, ○ Market-based intervention especially during periods of calamity, emergency, widespread illegal price Note: manipulation… - Competition in market is good for the consumers Sec. 5: Illegal acts of price manipulation - Competition benefits the poor 1. Hoarding. It is the undue accumulation - Protecting competition leads to economic by a person or combination of persons of competitiveness any basic commodity beyond his or their normal inventory levels. Competition Policy 2. Profiteering. It is the sale or offering for It refers to all laws nad government sale of any basic necessity or prime policies and regulations aimed at fair commodity at a price grossly in excess of competition its true worth. Addresses issues related to 3. Cartel. It is any combination of or 1. Market power: monopolies, agreement between two (2) or more oligopolies and mergers persons engaged in the production, 2. Anti-competitive business & trade manufacture, processing, storage, supply, practices distribution, marketing, sale, or disruption 3. Barriers to entry of any basic necessity or prime commodity 4. Liberalization designed to artificially and 5. Deregulation unreasonably increase or manipulate 6. Privatization its price its price. 7. Consumer protection Downstream Oil Industry Deregulation Example of Competition Law Act of 1998 (RA 8479). An act Philippine Constitution, Art. 186, deregulating the downstream oil industry Sec.19. The State shall regulate or and for other purposes. prohibit monopolies when the public interest so requires. No combinations in (start of Chapter I) restraint of trade or unfair competition shall be allowed. Sec. 2. It shall be the policy of the State to - This is also an antitrust law liberate and deregulate the downstream - See also Art. 186 of the Revised Penal oil industry in order to ensure a truly Code competitive market under a regime of fair prices, adequate, and continuous supply of … Sec.4 (h). Downstream oil industry…shall markets, either by products or by areas, refer to the business of importing, or allocate markets, either by products or exporting, re-exporting, shipping, by areas, in restraint of trade or free transporting, processing, refining, storing, competition, including any contractual distributing, marketing and/or selling crude stipulation which prescribes pricing levels oil, gasoline, liquefied petroleum gas and profit margins; (LPG), kerosene and other petroleum products (b) Predatory pricing which means selling or offering to sell any oil product (start of Chapter II) at a price below the seller's or offeror's average variable cost for the purpose of Sec. 5. Liberation of the Industry. Any destroying competition, eliminating a law to the contrary notwithstanding, any competitor or discouraging a potential person or entity may import or purchase competitor from entering the market: any quantity of crude oil and petroleum Provided, however, That pricing below average products from a foreign or domestic variable cost in order to match the lower price of the source, lease or own and operate competitor and not for the purpose of destroying refineries and other downstream oil competition shall not be deemed predatory pricing. facilities and market such crude oil and For purposes of this provision, "variable cost" as petroleum products either in a generic distinguished from "fixed cost", refers to costs such name or his or its own trade name, or use as utilities or raw materials, which vary as the the same for his or its own requirement… output increases or decreases and "average variable cost" refers to the sum of all variable costs Sec. 7. Promotion of Fair Trade divided by the number of units of outputs. Practices. The Department of Trade and Industry (DTI) and DOE shall take all Philippine Competition Commission measures to promote fair trade and (PCC) – created by the Philippine prevent cartelization, monopolies, Competition Act (R.A. 10667) in 2015 combinations in restraint of trade, and any → promoting competitive markets unfair competition in the Industry as → advancing consumer welfare defined in Article 186 of… Anti-Competitive Agreements Sec. 8. Program to Encourage the Entry – price fixing of New Participants in the Industry. The buyers end up paying higher prices DOE, the Department of Foreign Affairs – sharing markets (DFA) and the DTI shall jointly formulate – bid rigging and establish a program that will promote – limiting production the entry of new participants in the Industry… Regulation in Monopolistic Competition Is monopolistic competition socially (start of Chapter III. Anti-trust Safeguards, undesirable that it has to be regulated? Other Prohibited Acts and Remedies) Probably not. ○ Market power is small in most Sec. 11. Anti-Trust Safeguards. To cases. The demand curve is fairly ensure fair competition and prevent cartels elastic (many substitutes), so the and monopolies in the Industry, the AC will be close to minimum. following acts are hereby prohibited: ○ The market provides product variety will bring gains to (a) Cartelization which means any consumers. agreement, combination or concerted If there will be regulation, it can be to action by refiners, importers and/or protect consumers from, say, deceptive dealers, or their representatives, to fix advertising or wrong information. prices, restrict outputs or divide Lesson 11 Addressing Externalities “Internalizing the externality” – altering Basic Theory incentives or disincentives so that people Economic agents act in the market to take account of the external effects of their obtain their self-interest actions (accountability) If each one knows the rules, play by the ○ Government solutions rules, does his best within the rules, the ○ Private solutions collective outcome is best for society Sometimes, the outcome of our actions Two government approaches (production or consumption) is not best for Command-and-control policies society. In that sense, the market fails. ○ Regulate behavior directly Market-based policies Major Causes of Market Failures ○ Provide incentives and 1. Lack of competition disincentives so that private 2. Externalities persons or firms will choose to 3. Free riders and tragedy of the commons solve the problem on their own 4. Asymmetric information Negative externalities First: Lack of Competition It results in an external cost: the higher With competition, the society is better off supply curve takes into account of the in the long run and to this extent the additional external cost to society. It is market works socially optimal to have less quantity. But some suppliers may use anticompetitive practices by preventing others from competing at all (see oligopoly and monopoly) The role of government: To provide rules for healthy competition — these rules are often referred to as competition laws or anti-trust laws Second: Externalities Externality – spillover effect of one’s actions on Consider motor vehicles (air pollution, the well-being of a bystander traffic etc.) 1. Negative externality: harms others ○ Suppose the government steps in - Smoking, driving automobiles and imposes a “road users’ tax” (pollution and congestion), factory that is equal to the external cost emissions, poor garbage disposal ○ Then prosecutive vehicle users will 2. Positive externality: benefits others take into account this tax into their - Immunization, anti-rabies, quality private cost. The higher price of education, quality healthy services, using a vehicle will decongest the R&D, technology street. Why Market Failures? The market tends to overproduce goods which result in negative externality The market tends to underproduce goods which result in positive externality Positive externalities than what is desirable from the It results in an external benefit: The standpoint of society as a whole higher demand curve takes into account the additional external benefits to society. Public Goods & Free Riders It is socially optimal to have more quantity. Public goods are good that are non-excludable and non-rival Because of the characteristics of public goods, there is little incentive to pay for the use of public goods. So there will be free riders. Common Goods / Resources Common goods and common resources are non-excludable, but there is rivalry in Consider the case of ecotourism. consumption. ○ Suppose the government steps in Because these goods are not privately by providing perks to those who owned and common to all, tragedy of the support environmentally friendly commons tends to result. Common goods parks. are overused or abused. ○ This government subsidy may be able to pay for the external benefit Why Market Failures? to society and more ecotourism It is difficult for private firms to provide parks can be provided. public goods and common goods because ○ Pigovian taxes and subsidies these goods are non-excludable are taxes and subsidies by So public goods tend to be government to take into account underprovided by the market (private the negative and positive sector) externalities ○ Ex.: floodway (LGUs can intervene by taxing residents to raise However!!! Government does not need to be revenue and use it to pay for the involved in every case of externality. system’s construction) Coase theorem: Private parties can Common goods / resources tend to be negotiate on their own and arrive at an over-consumed by the market (private efficient solution. sector) For this to work: ○ Ex.: deepwells (the government 1. Basic rights must be clear can intervene by limiting the 2. No impediments to bargaining: extraction) parties must be willing to discuss without cost (transaction cost). Property Rights 3. Only few people are involved Property right: the ability of the individual to own and exercise control over a scarce Third: Free Riders & Tragedy of the Commons resource The free rider problem and the tragedy of When property rights are not the commons occur when people have well-established, common resource no incentive to pay for a good that they problems as well as externality problems could benefit from for free. arise ○ Free rider: a person who receives the benefit of a good but avoids Fourth: Asymmetric Information paying for it Asymmetric information is the situation ○ Tragedy of the commons: a when the buyer and seller have different parable that illustrates why or imbalance information about the common resources are used more transaction Asymmetric information can affect market - To reduce moral hazard: pricing. 1. How can a car or fire insurance Ex.: Care sale transaction company (principal) ensure that ○ If the seller knows more of the the insurance holder (agent) will be strengths of a car, they have every more careful? incentive to share the information 2. How can employers (principal) to justify why the price is higher ensure that the workers (agents) ○ If the buyer knows about the are doing their responsibilities? weaknesses of that car, they can use this information not to accept 2. Hidden Characteristics the high price ○ One person knows more than another about the characteristics People can exploit information asymmetry to of good he is selling (adverse get better deals. selection cases) Ex.: getting a health insurance ○ A sickly person might not report all ○ “Adverse selection”: it arises when his past illness so that they can get the seller knows more than the a better insurance package buyer about the good being sold ○ A health insurance company may require applicants to undergo a Example 1: The market for used cars screening process or will pool the The seller knows more than the clients (sickly + healthy) together. buyer about the quality of the car being sold. Types of Asymmetric Information Owners of “lemons” are more likely 1. Hidden Actions to put their vehicles up for sale at a ○ One person knows more than low price. another about an action they are Careful buyers are more likely to taking (moral hazard cases) avoid used cars thinking many of these are lemons. ○ “Principal-Agent Problem” If owners of quality used cars are Agent: a person who is performing less likely to get a fair price, they a task on someone else’s behalf may not bother trying to sell in a (e.g. a worker) “used car” park. Principal: the person for whom this action is being performed (e.g. Example 2: Insurance an employer) Buyers of health insurance know more about their health than health ○ “Moral Hazard” insurance companies. When the principal cannot perfectly People with hidden health monitor the agent’s behavior, there problems have more incentive to is a risk (“hazard”) that the agent buy insurance policies. may do something undesirable So the price of health insurance (Ex: “immoral”). policies will tend to be high. Moral hazard: the tendency of a These prices discourage healthy person who is imperfectly people from buying insurance. monitored to engage in undesirable behavior Market Responses to Asymmetric Information Unstable Business Cycle Stable Business Cycle Signaling: action taken by an informed party to reveal private information to an uninformed party 1. How do you signal to the buyer that what you are selling is of good quality? 2. How do you signal to the company you’re applying to that you are Four major schools of thought on the causes of qualified for a job? business cycles: Screening: action taken by an The Keynesians (AD) uninformed party to induce informed The monitorists (constraints CBs; stable) party to reveal private information The real business cycle theorists 1. How do health insurance The Austrians companies screen their customers? Two Dangers in Monetarism 2. How do companies screen job 1. Too much inflation applicants? a. Too much money supply (M) leading to price (P) hikes b. Distorting the allocation of economic resources MODULE 4 2. Too little inflation a. Business cycle downturn Lesson 12 b. Less money in the flow, lowering Phil Survey: Development Aspirations — wages Ambisyon Natin 2040 We aspire for things that give us PH context: oil price change periods observed in happiness, or that improve our well-being. decelerating GDP growth rates Let’s look at this survey of Filipino aspirations Ambisyon Natin 2040 on YouTube Note: Fluctuations in the economy are normal. - Phases of A Business Cycle Stabilization policy is usually countercyclical. - The government normally uses fiscal Phases: and/or monetary policies (yellow arrow) to - Expansion (rise) stabilize or counter the business cycle in - Peak the short (1) to medium (5) term - Recession (fall) - Trough (low point) - And then expansion again…  AD-AS Model Aggregate Demand and Aggregate Supply "In the long run, we are all dead." — John Maynard Keynes Aggregate Demand (AD) Note: Fiscal Policy vs Monetary Policy Keynes’ Law: Demand creates its own supply - Fiscal policy is made by other government - The level of GDP in the economy is agencies/offices (e.g. taxes, etc.); primarily determined by the amount of Monetary policy is made by the country’s total demand central bank (e.g. the three tools) - If the economy produced less than its full potential, it could be because of a lack of Stabilization Policies demand in the economy as a whole that Depending on the economic conditions led to inadequate incentives for firms to and projections, macroeconomic policies produce may be used to stabilize fluctuations - However, demand cannot tell the whole (cycles) macroeconomic story, either. ○ Expansionary policies Fiscal: Gov’t expenditure up and/or Taxes down, Consumption up Monetary: Money Supply up, Interest rates down, Inflation up, Consumption up ○ Contractionary policies (to stabilize inflation: Price down) Fiscal: Gov’t expenditure down, Taxes up, Consumption down Monetary: MS down, Interest rates Aggregate Supply (AS) up, Income down Say’s Law: Supply creates its own demand Macroeconomic Policies - each time a good or service is produced Macroeconomics is the study of aggregate and sold, it generates income that is variables (totality of the economy) earned for someone Macroeconomic policies: - a given value of supply must create an ○ Monetary policy equivalent value of demand somewhere Ex. ⬆ money supply, ⬇ interest else in the economy rate - Say = “Neoclassical economist” increase money supply to reduce - Despite the flaws, this seems to be a good interest rate approximation for the long run ○ Fiscal policy - Productivity growth affects the AS Curve Ex. ⬆ gov’t spending, ⬆ taxes increase taxes to support additional government spending Trade policies like free trade and protected trade (⬆tariff) also affect the aggregate economy Side note: Monetary policies affect three: inflation, unemployment, and exchange rates  - Three Tools of Monetary Policy: ○ Goal: Stable prices Open Market Operations (OMO), ○ Indicator: Low single-digit inflation Interest Rates, rate Reserve Requirements (RRR) Employment ○ Goal: Full employment In a capsule: ○ Indicator: Low single-digit Since Keynes’ law applies more accurately in the unemployment rate short run and Say’s law applies more accurately in the long run, the tradeoffs and connections Economic and financial variable affect the key between the three goals of macroeconomics may macro indicators be different in the short run and the long run. Increase in government spending (expansionary policy) ○ Increases the amount of money in the circulation ○ lowering the discount rate, increasing the purchase of government securities, and reducing the reserve requirement ○ Causes a shift of AD to the right Measuring Income, Output and Expenditures Measuring Aggregate Income “Income = Expenditures = Output” ○ Three major approaches to measure GDP Supply or Demand or production side expenditure side Decrease in money supply Consumption of HH (contractionary policy / tight policy) + Investment ○ Lower money supply means less Agriculture Output + Government credit flow (direct relationship) + Industry Output + Exports ○ raising interest rates, increasing + Services Output – Imports = GDP = GDP bank reserve requirements, and selling government securities Note: GNI = GDP + Net Primary Income ○ Causes a shift of AD to the left (from abroad) GDP = ∑ (Quantity of output x Prices) Lesson 13 Basic Macroeconomic Variables Real Economic Growth Income or Output Growth After 2012, our GDP has been ○ Goal: Steady sustainable real more stable. Less fluctuations growth except for the outlier (events like ○ Indicator: positive real GDP and pandemic) external shock GNI growth rate Prices  L MODULE 5 Lesson 14