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Monopoly And Competition : Which One Is Better?

Monopoly And Competition : Which One Is Better?. Hu, Tzu-Shun Senior Specialist, Taiwan FTC Quang Binh, Vietnam 12-13 Jan. 2006. Good to see you again !.

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Monopoly And Competition : Which One Is Better?

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  1. Monopoly And Competition: Which One Is Better? Hu, Tzu-Shun Senior Specialist, Taiwan FTC Quang Binh, Vietnam 12-13 Jan. 2006

  2. Good to see you again ! When I saw you last July & Dec., I did not expect this to happen.

  3. To thank, please. • What do firms do? • Well, they are in it for the money. So what do you think they do? • Rob the consumer? • Play games with their competitors? • Cheat government? • You ought to be careful, but in a sense the answer is: yes!

  4. Diverging views • The libertarian view – static efficiency • The innovator view – dynamic efficiency

  5. The libertarian view: Adam Smith (1723-1790) "Laissez-faire, laissez-passer"

  6. the anonymous free market is a guarantee for political freedom • government interference brings us on the road to serfdom Milton Friedman

  7. Joseph A. Schumpeter(1883-1950) The innovator view: Innovation creates monopoly profit

  8. Friedrich Hayek (1899-1992) Why should there be anything wrong with monopoly? The performance of large firms with respect to R&D is much better than those of small firms

  9. Competition Short run profits Price Long run equilibrium L(S)MC L(S)ATC L(S)AVC CE Shut down min LAC Output q3 q2 q1

  10. 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 • Long-run equilibrium 1.Pareto efficiency(P = MC) 2.Productive efficiency 3. Allocative efficiency Min LAC Minimum efficiency scale

  11. Monopoly P Income transfer Lost Consumer Surplus MC Because of the higher price, consumers lose A+B and producer gains A-C. Deadweight Loss Pm A B PC C AR Social welfare = Consumers’ surplus + producers’ surplus Social welfare = public interest MR Qm QC Quantity

  12. Disadvantages 1. Higher price, lower production 2. Deadweight loss ( P > MC) 3. Rent seeking

  13. 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. Rent seeking P P* MC AR MR Q* Quantity

  14. Advantages 1. Economies of scale (or scope) 2. Ability of innovation

  15. Cost ( $ per unit of output) LAC1 internal diseconomies of scale internal economies of scale Minimum efficient scale Output

  16. 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

  17. How to assess efficiency • Economics cost is hard to measure, TFTC used financial ratio to assess efficiency of businesses: net profit ratio (NPR) operating profit ratio (OPR) operating expense ratio (OER)

  18. net profit after tax NPR = ------------------------- net sales revenue • It provides a good opportunity to compare your company's "return on sales" with the performance of other companies in your industry

  19. operating profit OPR = ---------------------- net sales revenue • The ratio tells you how much profit a company makes for every $1 it generates in revenue

  20. operating expenses OER = ------------------------- net sales revenues A lower percentage is better since that means expenses are low and earnings are big

  21. High profit is from efficiency or abuse of dominance ?

  22. Policy to be Considered Competition policy foremost Industrial Policy assisting

  23. Article 46, FTL Where there is any other law governing the conducts of enterprises in respect of competition, such other law shall govern; provided that it does not conflict with the legislative purposes of this Law.

  24. Article 10, FTL No monopolistic enterprises shall: 1.directly or indirectly prevent any other enterprises from competing by unfair means; 2.improperly set, maintain or change the price for goods or the remuneration for services; 3.make a trading counterpart give preferential treatment without justification; or 4.otherwise abuse its market power

  25. Conclusion Competition is always better than monopoly, only monopoly with efficiency is good.

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