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

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

• Hu, Tzu-Shun
• Senior Specialist,
  Taiwan FTC
• Vientiane, Lao PDR
• 7-8 March 2006

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

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• Money! Money!
• Monopoly! Monopoly!

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Question 1

• Monopoly and Competition Which One is better?
• Diverging views
• The libertarian view
• The innovator view

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The libertarian view Adam Smith (1723-1790)
"Laissez-faire, laissez-passer"
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• the anonymous free market is a guarantee for
  political freedom
• government interference brings us on the road to
  serfdom

Milton Friedman
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The innovator view

• Joseph A. Schumpeter (1883-1950)

Monopoly leads to innovation
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Friedrich Hayek (1899-1992)
Why should there be anything wrong with
monopoly? The performance of large firms with
respect to RD is much better than those of small
firms
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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
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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
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Monopoly
P
Income transfer
Lost Consumer Surplus
MC
Because of the higher price, consumers lose AB
and producer gains A-C.
Deadweight Loss
Pm
B
A
PC
C
AR
Social welfare Consumers surplus producers
surplus Social welfare public interest
MR
QC
Qm
Quantity
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• Disadvantages
• 1. Higher price, lower production
• 2. Deadweight loss ( P gt MC)
• 3. Rent seeking

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

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• 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

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Types of Misuse of Market Power(Abuse of A
Dominant Position)

• 1. Excessive pricing
• 2. Predatory pricing selling at below cost for
  the purpose of driving out competitors
• 3. Refusals to deal
• 4. Price discrimination a 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 dealing requiring a retailer or
  distributor not to sell products competing with
  the supplier's products

• 6. Tie-ins
• 7. Third line forcing requiring purchasers of
  one product to purchase other products from named
  suppliers
• 8. Territorial restrictions the retailer or
  distributor may not resell outside of a defined
  territory
• 9. Customer restrictions the retailer or
  distributor may only deal with specified
  customers
• 10. Resale price maintenance minimum price at
  which the product may be resold to customers

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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

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• Types of Merger

Internal Growth
Horizontal Merger
Growth of Firms
Vertical Merger
External Growth (Merger)
Conglomerate
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Horizontal Mergertwo competitors combine
Primary
Mobile Manufacturers
Secondary
New Mobile Manufacturer
Tertiary
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Vertical Mergerone company acquires a
supplier/customer
Vertical Merger Backwards acquisition takes
place towards the source
Primary
Secondary
Manufacturer
Tertiary
Retail Stores
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Primary
Dairy Farming Co-operative
Vertical Merger Forwards acquisition takes
place towards the market
Cheese Processing Plant
Secondary
Tertiary
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Conglomerate two firms from different
industries combine
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Why should mergers occur?

• 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

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• 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

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• 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

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

• Criterion
• Economic Benefit gt Competition Restraint
• (cost-saving) ( deadweight loss)

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

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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)
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Why Investigate Concerted ActionThe 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.

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• 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)
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How Horizontal Agreements May Benefit/Harm
Competition

• 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

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How Vertical Agreements May Benefit/Harm
Competition

• Harm
• 1. Eliminating competition
• through foreclosure.
• 2. Raising barriers to entry
• or raising rivals cost.
• 3. Creating distributors or
• manufacturers cartels.

• Benefit
• 1. Lowering transaction costs.
• 2. Assuring a steady supply
• of key input.
• 3. Eliminating negative
• externalities.
• 4. Getting around another
• companys exercise of
• market power.
• 5. Preventing free riding.

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Exemption

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

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• 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.

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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.

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• Leniency Program To encourage a member of a
  cartel to confess and implicate its
  co-conspirators with first-hand, directinsider
  evidence about their clandestine meetings and
  communications, an enforcement agency may promise
  a smaller fine, shorter sentence, less
  restrictive order, or complete amnesty
  (immunity).