Monopoly, Merger and Cartel -- Three Key Issues in Competition

1. Monopoly, Merger and Cartel -- Three Key Issues in Competition Hu, Tzu-Shun Senior Specialist, Taiwan FTC Phnom Penh, Cambodia 10 March 2006

2. Market Structure Highly Competitive High Degree of Market Power Oligopoly Supermarkets Banks Electrical Goods Perfect Competition Farming Stocks Currencies Monopoly Gas Water Electricity Tele- communications Monopolistic Competition Restaurants Small Builders Solicitors

3. 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 …

4. Money! Money! Monopoly! Monopoly!

5. Question 1 Monopoly and Competition: Which One is better? Diverging views: • The libertarian view • Theinnovator view

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

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

8. Joseph A. Schumpeter(1883-1950) The innovator view: Monopoly leads to innovation

9. 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

10. 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

11. 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

12. 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

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

14. 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

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

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. 1. Excessive pricing 2. Predatory pricing selling at below cost for the purpose of driving out competitors 3. Refusals to deal 4. Price discriminationa practice where by a firm charges different customers or classes of customers different prices for the same good for reasons unrelated to costs 5. Exclusive dealingrequiring a retailer or distributor not to sell products competing with the supplier's products 6. Tie-ins 7. Third line forcingrequiring purchasers of one product to purchase other products from named suppliers 8. Territorial restrictionsthe retailer or distributor may not resell outside of a defined territory 9. Customer restrictionsthe retailer or distributor may only deal with specified customers 10. Resale price maintenanceminimum price at which the product may be resold to customers Types of Misuse of Market Power(Abuse of A Dominant Position)

18. Question 2 • 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

19. Types of Merger Internal Growth Horizontal Merger Growth of Firms Vertical Merger External Growth (Merger) Conglomerate

20. Horizontal Merger：two competitors combine Primary Mobile Manufacturers Secondary New Mobile Manufacturer Tertiary

21. Vertical Merger：one company acquires a supplier/customer Vertical Merger Backwards – acquisition takes place towards the source Primary Secondary Manufacturer Tertiary Retail Stores

22. Primary Dairy Farming Co-operative Vertical Merger Forwards – acquisition takes place towards the market Cheese Processing Plant Secondary Tertiary

23. Conglomerate ：two firms from different industries combine

24. Motives Cost Savings External growth may be cheaper than internal growth – acquiring an underperforming or young firm may represent a cost effective method of growth Managerial Rewards External growth may satisfy managerial objectives – power, influence, status Shareholder Value Improve the value of the overall business for shareholders Asset Stripping Selling off valuable parts of the business Economies of Scale(Scope) The advantages of large scale production that lead to lower unit costs Why should mergers occur?

25. 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

26. 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

27. P Cost-saving Deadweight Loss P2 B AC1 P1 A AC2 AR Q2 Q1 Quantity

28. Merger control • Criterion Economic Benefit>Competition Restraint (cost-saving) ( deadweight loss)

29. “What shall I do about it? They say this is no concerted practice but their way to greet each other!“

30. “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)

31. 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.

32. Types of Concerted Action Horizontal Agreement (Cartel, Collusion) Price Fixing Hard Bid Rigging Core Market Division Cartel Concerted Action Vertical Agreement Tying Exclusive dealing Resale Price Maintenance (RPM)

33. 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 How Horizontal Agreements May Benefit/Harm Competition

34. 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”. Harm 1. Eliminating competition through “foreclosure”. 2. Raising barriers to entry or “raising rivals’ cost.’ 3. Creating distributors’ or manufacturers’ cartels. How Vertical Agreements May Benefit/Harm Competition

35. Exemption • unifying the specifications or models of goods for the purpose of reducing costs, improving quality, or increasing efficiency; • joint research and development on goods or markets for the purpose of upgrading technology, improving quality, reducing costs, or increasing efficiency; • each developing a separate and specialized area for the purpose of rationalizing operations; • entering into agreements concerning solely the competition in foreign markets for the purpose of securing or promoting exports;

36. 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.

37. 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.

38. 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).