ECW3830

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ECW3830
Competition and Regulation
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Week 7 Hilmer report and industry restructuring
Week 5-6 Regulating monopolies and access to
essential facilities
Week 8 Liberalisation in aviation
Week 4 Theories and practice of privatisation
Competition and Regulation
Week 9 Structural reform and regulation in
electricity
Week 3 Deregulation rationales and experiences
Week 10 Competition and regulation in
telecommunications
Week 2 Theories of regulation
Week 11 Mergers, Cartels and restrictive
practices
Week 1 Rationale for competition policy and
regulation
Week 13 Revision
Week 12 - Research topic. Regulation,
deregulation and privatisation in small open
economies
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AimsOn completion of this topic students should
be able to
Mergers, Cartels and Restrictive Practices

• Recognise possibilities for mergers, cartels and
  restrictive trade practices as one of the areas
  of market failure
• Apply microeconomic principles to the
  understanding of the mechanisms of mergers and
  cartels
• Know something about regulatory mechanisms
  promoting competition in Australia and overseas
  and
• Be able to judge the efficiency of those
  mechanisms.

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Essential Reading
Mergers, Cartels and Restrictive Practices

• Church and Ware, Ch 23, pp 715-743 (Reading 24)
• Trade Practices Act 1974 http//www.austlii.edu.au
  /au/legis/cth/consol_act/tpa1974149/
• ACCC web site. Mergers and authorising
  anti-competitive conduct http//www.accc.gov.au/c
  ontent/index.phtml/itemId/259496

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Week 11 Mergers, Cartels and Restrictive Practices
Making competition work better through trade
practices legislation
Collusion and cartels
The effects of mergers
Merger policy in Australia
Making competition policy more effective
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Mergers, Cartels and Restrictive Practices
Making competition work better through trade
practices legislation
Reasons for regulation
For allocation purposes
To correct the failure of markets to efficiently
use all resources

• Where the industry structure deviates from a
  perfectly competitive market
• Restricted trade practices
• Cartels, collusions
• Merges, acquisitions

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Mergers, Cartels and Restrictive Practices
Making competition work better through trade
practices legislation
In Australia
Australian Industries Preservation Act 1906

• Basically - antitrust legislation, similar to
  the American
• Reflected developments in monopolisation of that
  time

• Antitrust legislation against
• Supply restriction
• Predatory price cutting
• Using the position of dominance to fix prices or
  other terms of
• trade

Trade Practices Act 1965
Trade Practices Act 1974

• Further development of the 1965 Act
• Collusions
• Boycotts
• Misuse of market power
• Exclusive dealing
• Resale price maintenance
• Anticompetitive price discrimination
• Merges

Improvements of the 1974 Trade Practices Act 1994
To reconsider exemptions To remove distinctions
between goods and services (against collusions
in services
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Mergers, Cartels and Restrictive Practices
Trade Blocs
Collusion and cartels
Cartel - an organisation of suppliers of a
commodity for quantity restriction and/or price
fixing
Collusion - an agreement between otherwise
independent suppliers of a commodity on price
fixing
Collusions and Cartels are explicitely illigal on
many contires
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Mergers, Cartels and Restrictive Practices
Collusion and cartels
Cartel vs competitive market
Dx - market demand Sx - market supply MCx -
individual firms marginal cost MRx - marginal
revenue of cartel E - equilibrium of perfect
competition C - equilibrium of cartel Pe the
price of perfect competition Pc the price of
cartel Qe the quantity of perfect
competition Qc the quantity of cartel

• Cartel fixes quantity at MRxMCx
• and charges a monopoly price
• The participants of quatas agree on the
• allocation of quotas.

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Mergers, Cartels and Restrictive Practices
Collusion and cartels
Cartel vs oligopolistic market
Two companies, a and b, produce a homogenous
product ar different marginal costs. Under
cartel agreement, they set the price at Pcartel,
corresponding to the intersection of MC and MR,
and allocate the output according to their
individual marginal costs. No economy of scale.
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Mergers, Cartels and Restrictive Practices
Collusion and cartels
Cartel

• Cartel fixes quantity at MRxMCx
• and charges a monopoly price
• The participants of quatas agree on the
• allocation of quotas.

Disadvantages of Cartels for Participants Unstabl
e exit is very simple as the structure is not
backed by law Does not allow for economies of
scale or other cost efficiencies Preferred
option merger
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Mergers, Cartels and Restrictive Practices
The effects of mergers
Merger amalgamation of the capital an
operations of two or more companies

• Legal at certain conditions
• Stable due to contractual obligations
• Allows for economy of scale in production and
  other cost efficiencies
• Combined investments in RD
• Marketing
• Logistics
• Etc
• Allow for synergies and risk spreading.
• provide a mechanism by which underperforming
  firms and managers are replaced by better
  performing ones.
• In some cases mergers may also have
  anti-competitive effects by altering the
  structure of markets and therefore the incentives
  for firms to behave in a competitive manner.

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Mergers, Cartels and Restrictive Practices
The effects of mergers
Merger vs cartel

MCa
MCb
SMC
SMCmerger
Pcartel
If there is economy of scale, quantity supplied
to the market cab inrease at a lower price.
Pmerger
D
Qmerger
Qa Qb Qcartel
Quantity
MR
(QaQb)
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Mergers, Cartels and Restrictive Practices
Merger policy in Australia
Regulator

• Regulator ACCC
• Formed in 1995 to administer the Trade Practices
  Act 1974 and other acts.
• Promotes competition and fair trade in the market
  place to benefit consumers, business and the
  community.
• Regulates national infrastructure services.
• Its primary responsibility is to ensure that
  individuals and businesses comply with the
  competition, fair trading and consumer protection
  laws.

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Mergers, Cartels and Restrictive Practices
Merger policy in Australia
Merger Regulation

• Legal framework (Section 50 of the 1974 Act)
• (1) a corporation must not directly or
  indirectly
• (a) acquire shares in the capital of a body
  corporate or
• (b) acquire assets of another person.
• If the acquisition would have the effect, or be
  likely to have the effect, or substantially
  lessening competition in a market.
• (2) a person must not directly or indirectly
• (a) acquire shares in the capital of a body
  corporate or
• (b) acquire assets of another person.
• If the acquisition would have the effect, or be
  likely to have the effect, or substantially
  lessening competition in a market.

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Mergers, Cartels and Restrictive Practices
Merger policy in Australia
Merger Regulation

• ACCC can
• Assess, allow or prohibit merger proposals
• Review mergers
• If challenged defend ACCCs decision in the court
• Does ACCC always make right decisions though?
  Problem of a small open economy

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Mergers, Cartels and Restrictive Practices
Is it possible to make competition policy more
effective?
Problem of industry in a small open economy

• In a small open economy regulation of mergers
  restricting competition within the country
  contradicts promoting international
  competitiveness of the industry
• Maintaining two or more smaller size companies in
  an oligopolistic industry may well keep the scale
  of production below the international optimal
  level
• Allowing merger creates a domestic monopoly
• Recent debate on merger between QANAS and Air New
  Zealand.
• No general solution
• Structured forecast of impact is impossible
• Decision making on case by case basis
• The art of decision making vs the science of
  economics
• Creation of regional economic unions similar to
  EU.

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Revision questions for the next weektutorial
Mergers, Cartels and Restrictive Practices

• Be able to explain why horizontal merges cause
  reduction in competition and increase in prices.
  
• Discuss, in what circumstances might mergers
  which result in a substantial lessening of
  competition in a market be permitted?
• ACCC has recently rejected the proposal of merger
  between QANTAS an Air New Zealand.
• explain what could be a reason for this decision.
  
• Do you agree it was justified?