Competition Law 431
UWC LLB
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Economics?
“It is easy to train an economist; just train a parrot to
say Demand and Supply” - Thomas Carlyle
Study of markets, and the different actors in markets
Suppliers, producers and consumers
Try to determine why people do what they do
Aspects of behavioural science
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Demand
Demand
the amount of products required in a market at every
price level
Curve slopes downward:
Why?
Exceptions?
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Demand
Downward sloping demand
P1
D (Demand)
0 Q Q1
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Demand
Increase in demand
P1
D1 D2
0 Q Q1 Q2
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Demand
Reduction in demand
P1
D2 D1
0 Q2 Q1
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Factors that determine demand
Taste
Prices of substitutes
Income of consumers
Distinguish movement along the demand curve and
movement of the demand curve
Change in price of product vis a vis inherent change
affecting product market
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Supply
Supply is determined by cost to the producer
Generally upward slope
Fixed initial cost creates a kink
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Supply
Upward-sloping supply
S (supply) =MC (marginal cost)
P
P1
0 Q1
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Supply
Reduction in supply
S2
S1
P2
P
P1
0 Q1
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Supply
Increase in supply
S1 S2
P
P1
0 Q1 Q2
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Supply
In determining supply, cost of product is deciding
factor
Types of costs
Different concepts of cost in accounting and economics
Marginal cost (MC)
Average cost (AC)
Total cost (TC)
Fixed cost and variable cost (FC) and (VC)
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Supply
Different costs
MC = S
C ATC
AVC
AFC
0 Output
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Competitive market: individual firm
Requirements for a competitive market:
Large number of small suppliers and purchasers and
sellers who sell and buy small amounts relative to total
market output
Homogeneous product
No barriers to entry
Perfect information about prices
Firms try to maximize profits
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Competitive market: individual firm
Individual firm is a price taker
The firm produces where marginal cost equals
marginal revenue
Marginal revenue determined by demand and because
the firm is a price taker this is reflected by the market
price
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Competitive market: individual firms
Output decision
MC
P P=MR (Marginal Revenue) = D
0 Q2 Q1 Q3
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Competitive Market : individual firms
The firm only has control over its quantity and
produces Q1
Will not produce more or less than it is able to sell
When does the firm make a profit?
When at the quantity it produces marginal revenue
exceeds average cost
Similarly the firm makes a loss if average cost exceeds
marginal revenue if it produces at the point where
MC=P
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Competitive Markets : individual firms
Profit MC
ATC
P P=MR
P1
0 Q
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Competitive market: individual firms
In the short-term the firm must decide whether to
continue or close down even if it produces at point
MC=P
Distinguish closing down from exiting the market
Firm must at least earn its variable cost. If not it will
close down
If the same or more it will continue
In the short-term it will continue even if fixed cost is not
covered
In the long-term it will exit the market unless total cost
is covered
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Competitive Markets: individual firms
Loss but not closing down S
ATC
P1
AVC
P P=MR
P2
0 Q
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Competitive Markets: individual firms
Long-term point of supply
MC
ATC
P P=MR
0 Q
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Competitive Markets: individual firms
In the long-term firms produce as efficiently as
possible that is where P=MC=ATC. Mathematically
this will always be at the lowest point on the average
cost curve. It can be said that a competitive market is
productively efficient
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Competitive market: entire market
Market supply in the short-term
Just add up the supply of all the individual firms in the
market
In the short-term firms cannot enter and exit the market
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Competitive Markets: entire markets
Short-term
S
0 Q
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Competitive markets: entire market
In the long-term the number of firms are not fixed.
Firms exit and enter depending on whether they make a
profit
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Competitive Markets: entire markets
Long-term
P1 S
0 Q1
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Competitive markets: entire market
When will the long-term supply curve not be
horizontal?
Inputs may become more expensive for all firms as
output rises
New firms may be able to produce only at higher cost
(thusfar we have assumed that all firms have the same
cost structures)
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Competitive markets: entire market
The consumer and producer surplus will be optimal in
a competitive market? :
Consumer surplus is the amount by which the amounts
which consumers are prepared to pay for a product
exceeds their cost
Producer surplus is the amount by which the amounts
received by a producer exceed the cost of producing
them
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Competitive market: entire market
Market is allocatively efficient: the market produces
products up to the point where the cost of producing
them equals the value that consumers place on them
The competitive market is best at allocating resources
effectively
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Competitive market: entire market
N
Consumer Surplus
MC
Pc X
M Producer Surplus
0 Qc D
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Monopolistic market
Market has only one firm that supplies the entire
market and barriers to entry make entry into the
market by other firms impossible
What are these barriers to entry?
Control of a resource
Government
Natural monopolies
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Monopolistic market
The monopolist is a price maker and not a price taker.
His output decisions will also affect the price received
Actions of the monopolist is restricted by the limits of
demand
How does one determine the revenue of a monopolist
and how does it change as output increases?
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Monopolistic market
Marginal revenue
MC
0 MR D
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Monopolistic market
How does the monopolist determine its price:
Like any firm which maximizes profit it produces the
quanitity where MR=MC
But it determines price with reference to the demand
The quantity produced will be less and the price will be
higher than in a competitive market
Therefore, the quantity produced by the monopolist
will be less and the price will be higher than in a
competitive market
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Monopolistic market v Competitive market
Y MC
Pm
Pc X
Z
0 Qm MR Qc D
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Monopolistic market v Competitive market
But what are the consequences for society if a market
is monopolistic?
Effect specifically relates to surpluses in the
marketplace…
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Monopolistic market v Competitive market
How does consumer and producer surplus in a
monopolistic market differ from competitive
market?
Consumer surplus is reduced
Part of the surplus goes to the producers
This is not by itself to the detriment of the economy
There is also a dead-weight loss which is a complete loss
to the economy
Monopolistic market is allocatively inefficient
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5. Monopolistic market v Competitive
market
N
Y MC
Pm
Pc X
Z
0 Qm MR Qc D
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Monopolistic market v Competitive market
Dead-weight loss
Y MC
Pm
Pc X
Z
0 Qm MR Qc D
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Monopolistic market v Competitive market
It was shown earlier that a competitive market will in
the long-term produce efficiently, that is no economic
profit will be made by firms in the market
If firms make a profit new firms will enter
If firms make a loss there will be exit from the market
Ultimately P=MC=ATC
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Monopolistic market v Competitive market
In a monopolistic market, market forces will not force
the monopolist to produce at this point
A competitive market is therefore productively
efficient by design while a monopolistic market will
only be so by accident
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Monopolistic competition
In a market with monopolistic competition:
Large number of firms
No barriers to entry
But firms have some market power because of
differentiation
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Monopolistic competition
Short-term:profit
MC
ATC
Z
Pmc
X Y D
MR
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Monopolistic competition
Long-term
MC
ATC
Z
Pmc
D
MR
0 Qmc
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Monopsonies
What happens in the case of a buying market where
there is only one buyer
Ability to influence supply, because monopsonist is only
determinant of demand
Competition authorities generally loathe to prosecute
results in lower prices, but may have other side-effects
Allocative inefficiency…
Can create false scarcity
Possible to be a monopsonist in one market,
monopolist in another…
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Oligopolies
Oligopolies…
Large firms with market power
more than one!
Firms cannot make decisions without taking other
firms into regard
Difficult to predict how firms will react…
Three models of oligopoly behaviour
Cournot, Betrand, Stackelberg models
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Cournot Model
Asssumptions:
Two firms
constant/similar MC
competition strategy determines output of the
firms
Firms operate on guesses, but cannot change after
decision made
Supply/production is fixed for period
Can lead to over- or under-supply by a firm…
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Bertrand Model
Assumption
Supply is adaptable, no market constraints
Price is the basis of competitive strategy
Less focused on supply, rather look at projected profit
margin
Price generally tends to be on the lower side…
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Stackelberg Model
Concept of price leadership and its impact…
Argues that one firm, if able to move first, has inherent
ability to predict other firm’s behaviour
other firms would simply respond to produce optimal
output at optimal price
first firm would still take other firms into account…
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Dynamic Efficiency
Relatively new concept
Productive & allocative efficiency models are static,
presumes constant technology
research shown that greatest factor in econ growth is
innovation
When will market be more innovative?
Is competitive market better than monopoly?
Generally, larger firms have greater innovation
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Dynamic Efficiency
Important to look at all aspects, both size and
competition
must take into account that there are various
forms of innovation
Innovation may be restricted by barriers in a
market
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Deadweight losses
Theoretical loss
Is it really such a problem?
Posner & Hovenkamp: Beware of dangers of ‘rent
seeking’
Costs to society which firms spend to try
become/maintain monopolies…
Lobbying/marketing/false innovation, etc.
Concept of welfare losses
NB: Always remember that there are costs and losses to
even the competitive process…
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Relationship with competition law?
Tries to ensure dynamic, allocative and productive
efficiency throughout competitive process
Will not address mere existence of monopolies, greater
focus on process by which firms become/maintain
monopolies
Developed into goal & aim of promoting efficiency
Not original intention
In US: To prohibit power imbalances
In EU: Market integration
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Relationship with competition law?
In SA, we focus on promoting efficiency, but also
have equitable goals to promote
E.g. employment
economic & historical disadvantages
small business protection
In SA, all goals are looked at
Especially when dealing with mergers
with the rest, mostly efficiency…
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Thank you
Adapted from notes compiled by Prof P Sutherland
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