Oligopoly Regulation

8 Key excerpts on "Oligopoly Regulation"

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  Regulating Public Services

  Bridging the Gap between Theory and Practice

  • Emmanuelle Auriol, Claude Crampes, Antonio Estache(Authors)
  • 2021(Publication Date)
  • Cambridge University Press

    (Publisher)

  12 Regulating Multi-Product Oligopolies The demand for regulation has had to evolve with the changes in the global economy since the mid-1980s because new structures and actors have emerged in the markets traditionally served by regulated monopolies. As we discussed in Chapters 1 and 2, in the last thirty to forty years, many countries have adopted structural economic reforms intended to increase competitive options and to reduce the need to regulate. The massive efforts to deregulate were paired with policies designed to increase the relative importance of the private sector across industries traditionally operated by public enterprises. The changes were supposed to achieve efficiency gains to the benefit of consumers and taxpayers. They did not, or at least not as much as initially expected. Improvements in quantity, quality or prices were disappointing for signifi- cant shares of the population, in particular in developing and emerging economies and subsidies to finance investments and sometimes operational expenditures ended up being much higher than promised by the reformers. 1 Moreover, these reforms ended up resulting in high rates of return at low risk levels, as evidenced by the returns earned by investors in infrastructure funds in Australia, Europe or North America. 2 One of the reasons for the high returns is that the reforms often led to a switch from over-regulated public monopolies to under-regulated oligopolistic markets. Competition in the market was not a realistic option if countries were to make the most of increasing returns to scale. And competition across markets or for the markets was a good option conceptually, but in practice it did not reduce the risks of ex post abuses of market power when compared to the monopolistic structure. Regulating these oligopolistic markets often proved to be more complex than regulating a monopoly.

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  Economics For Dummies

  Book + Chapter Quizzes Online

  • Sean Masaki Flynn(Author)
  • 2023(Publication Date)
  • For Dummies

    (Publisher)

  Chapter 7 .) That stands in stark contrast to regulated monopolies, which typically require expensive government bureaucracies to develop and enforce laws and regulations.

  Passage contains an image Chapter 9

  Oligopoly and Monopolistic Competition: Middle Grounds

  IN THIS CHAPTER

  Deciding whether to compete or collude in an oligopoly

  Examining why some collusive pacts work and others don’t

  Regulating firms so they can’t collude

  Using product differentiation to elude perfect competition

  Limiting profits in monopolistic competition

  The two most extreme forms that an industry can take are perfect competition (with many small competitive firms) and monopoly (marked by only one firm and no competition). I cover those cases in Chapters 6 and 8 . This chapter concentrates on two interesting intermediate cases: oligopoly and monopolistic competition.

  An oligopoly is an industry in which there are only a small number of firms — two, three, or a handful. The word itself is Greek for “few sellers.” A diverse group of industries looks like this, including soft drinks and oil production. For instance, Coke and Pepsi dominate the soft drink market, vastly outselling other carbonated beverages. Similarly, just four or five countries produce the majority of the world’s oil.

  Oligopoly industries are interesting because, depending on specific circumstances, the firms can either compete ruthlessly with each other or unite to behave almost exactly like a monopoly would. This means that in some cases, oligopolies can be left alone because competition ensures that they produce socially optimal output levels; in other cases, government regulation may be needed to prevent them from acting like monopolies and behaving in socially undesirable ways.

  The second intermediate case is monopolistic competition, a sort of hybrid between perfect competition and monopoly. The key thing that sets firms in this type of industry apart from firms in a perfectly competitive industry is product differentiation

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  Competition Policy for Small Market Economies

  • Michal S. Gal, Michal S. GAL(Authors)
  • 2009(Publication Date)
  • Harvard University Press

    (Publisher)

  Some of these practices can be justifiable for their pro-competitive effects. The social costs of fa-cilitating practices thus depend on the level of coordination they cre-ate among potential competitors and their offsetting pro-competitive effects. Under market conditions that are omnipresent in small economies, market forces often have limited ability to regulate oligopolies. Ac-cordingly, regulation plays a critical role in reducing their social costs. In the following sections I analyze the competition law tools available to regulate oligopolistic behavior. The sections are organized around the four main types of oligopolistic coordination, suggested earlier. Regulation of Collusive Agreements Despite the inherent instability of collusive agreements, many have proven to be reasonably durable and have imposed substantial costs on consumers. Since the natural conditions in small economies may facilitate collusion among oligopolists, prohibiting collusion is a cen-tral regulatory task for small economies. Prohibitions are generally based on two common elements: some form of meeting of minds among rival market participants, and a restraint of trade. Most jurisdictions require some kind of meeting of minds to estab-lish collusion, such as an agreement or arrangement among market participants. 29 The collusive agreement requirement shifts the focus from the outcome or effect of the collusive conduct to the method of achieving it in order to create a distinction (though sometimes vague) between collusion and mere conscious parallelism. This distinction may result in the inability to prove a cartel, espe-cially in small economies, for in highly concentrated markets both of-fer and acceptance can be crystallized by action alone. Mere parallel conduct is not conclusive evidence of a collusive agreement because firms will also be acting in parallel fashion when they are acting ra-tionally in light of the conditions of the industry that make them interdependent.

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  Economics

  Principles & Policy

  • William Baumol, Alan Blinder, John Solow, , William Baumol, Alan Blinder, John Solow(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Chapter 13 Between Competition and Monopoly 263 In highly developed economies, it is not monopoly, but oligopoly, that is virtually synonymous with “big business.” Any oligopolistic industry includes a group of giant firms, each of which keeps a watchful eye on the actions of the others. Under oligopoly, rivalry among firms takes its most direct and active form. Here, one encounters such actions and reactions as frequent new-product introductions, free samples, and aggres- sive—if not downright nasty—advertising campaigns. A firm’s price decision may elicit cries of pain from its rivals, and firms are often engaged in a continuing battle in which they plan strategies day by day and each major decision induces direct responses by rival firms. Notice that the definition of oligopoly does not mention the degree of product differen- tiation. Some oligopolies sell products that are essentially identical (such as steel plate from different steel manufacturers or chemicals from different chemical producers), whereas others sell products that are quite different in consumers’ eyes (e.g., Apple, Nokia, and Samsung smartphones). Some oligopolistic industries also contain a considerable number of smaller firms (e.g., soft-drink manufacturers), but they are nevertheless considered oli- gopolies because a few large firms carry out the bulk of the industry’s business and smaller participants must follow their larger rivals’ lead to survive at the fringes of the industry. Oligopolistic firms often seek to create unique products—unique, at least, in consumers’ perceptions. To the extent that an oligopolistic firm can create a unique product in terms of features, location, or appeal, it protects itself from the pressures of competition that will force down its prices and eat into its sales.

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  Encyclopedia of Policy Studies, Second Edition

  • Stuart Nagel(Author)
  • 2020(Publication Date)
  • CRC Press

    (Publisher)

  What is regulation? In this chapter regulation should be taken to mean economic regulation, even when that adjective is not included. A well-known text on public policies states, “Regulation is what regulators do” (Shepard and Wilcox, 1979). A definition of that sort is catchy, perhaps, but it aids little in understanding. Shepard and Wilcox do go on to provide some amplification:

  To regulate has at least three definitions. One is tough and unilateral: “to govern or direct according to rule.” Another refers to compromise and smoothing over: “to reduce to order … to regularize.” And another is superficial, perhaps empty: “to make regulation.” Actual regulation varies among these, sometimes strict, sometime strict, sometimes trivial or even a tool of corporate interests.

  The third definition is logically deduced from their statement, “Regulation is what regulators do.” There is, however, nothing to be gained from belaboring this. Something better is needed.

  Lawyers and economists often distinguish antitrust policy, which is intended to maintain competitive conditions in the economy, from regulation. What it is that differentiates these two categories of government action is not made clear. One is just left with the notion that there is a difference between government efforts to maintain competition and regulatory programs, such as regulation of railroads by the Interstate Commerce Commisssion (ICC). In an important sense there is. Antitrust law lays down some basic rules of the economic game— for examples, “Thou shalt not monopolize” and “Thou shalt not collude to restrain trade.” Within this framework of rules, businesses are free to act and to compete or not compete as they choose. Regulation of railroads by the ICC went considerably further, however, and really involved the agency in the management of the railroads. Decisions to raise rates, to abandon service, to issue new securities, and other matters required ICC approval. Control of the railroads, in short, was more intensive and intrusive than antitrust, and ICC judgment could be substituted for railroad judgment.

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  Market Power in EU Antitrust Law

  • Luis Ortiz Blanco(Author)
  • 2011(Publication Date)
  • Hart Publishing

    (Publisher)

  This article attempts to clear them.’ Another prestigious author, Baker (1993) 903, states the ‘oligopoly problem defies solving’. At 908, Baker cites Donald Dewey: ‘antitrust is part theater, and the oligopoly problem is an act that can run for ever’. In the same vein, see Kauper (2008) 751, who considers that the attempts to resolve the problem suggest that there is no direct solution to it. 174 Oligopolistic Interdependence and Dominant Oligopolistic Position about oligopolies as there are economists that have written about them. 6 An added compli- cation is that the terminology used is vague and imprecise, as the reader will unfortunately now discover. 7 In simple terms, an oligopoly can be defined as the existence on the market of a reduced number of competitors. 8 Unlike the situation regarding monopolies or perfect competition, 9 where decision-making on prices, capacity and production is relatively simple (these com- petition variables are givens), in the case of oligopolies each undertaking is capable of affecting prices and the overall dimension of the market, and therefore the profits of its competitors. Because of this, each undertaking must take into account the behaviour of its rivals when deciding the policy that best suits it, and interdependence – particularly the fact that undertakings are totally aware of this – is the most typical feature of oligopolies. This seems to be the most natural thing in the world: all business decisions are interde- pendent, because all business people act with the possible decisions of their competitors in mind. 10 However, the degree of interdependence common to all markets is highly exagger- ated in oligopolies. Thus, it has been said that an oligopoly forces each operator to bear in mind his rivals’ policies when determining his own, without leaving himself open to the possibility that this is interpreted as a ‘tacit agreement’ contrary to the competition rules.

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  Price Theory and Applications

  • Steven Landsburg(Author)
  • 2013(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  For example, regula-tors might be motivated by a desire to redistribute wealth in certain ways, or by a desire to protect consumers from major disasters, or even by a desire to maximize their own power. From such assumptions, one could derive conclusions about when, where, and what types of regulations are most likely to occur. A theory of this sort might also be used to explain why regulations are selectively enforced. For example, radar detectors are legal in 48 states, despite the fact that their only purpose is to facilitate breaking the law. Why are people permitted to 380 CHAPTER 11 Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. purchase the opportunity to violate speed limits with a reduced probability of pun-ishment? Various theories are consistent with this observation. If the goal of regula-tors is to increase economic efficiency, they might want to allow speeding by those whose time is sufficiently valuable. These would be primarily those who find it worthwhile to invest in a radar detector. An alternative theory is that regulators pre-fer not to antagonize the politically powerful and that those who are wealthy enough to want radar detectors are also powerful enough to keep the regulators at bay. Which theory seems more sensible to you? Can you think of other examples that would tend to confirm or refute one of these theories? What alternative theories can you propose? 11.4 Oligopoly An oligopoly is an industry in which the number of firms is sufficiently small that any one firm ’ s actions can affect market conditions.

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  International Regulatory Rivalry in Open Economies: The Impact of Deregulation on the US and UK Financial Markets

  The Impact of Deregulation on the US and UK Financial Markets

  • Doha M. Abdelhamid(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  George Stigler’s (1971) path-breaking article on the ‘Theory of Economic Regulation’ recognizes this asymmetry while focusing on an oligopoly industry which employs ‘effective’ party politics. The industry in question uses state coercive powers in controlling licensure. Driven by their self-interest, politicians and organized producer or occupational constituents exchange objects of utility. In return for an entry restriction or a regulated price, the latter provides votes, money, campaign contributions, and must know enough to vote ‘right’ on election day. Richard A Model of Strategic Regulatory Games 45 Posner (1971) builds on Stigler’s ‘capture theory’ by asserting that an entry restriction is adjoined to a price-discrimination designed to favor industry allies (customers, e.g. small firms or individuals). Moreover, ‘taxation by regulation’ or discriminatory pricing provided to the allies is employed as an indirect, internal or cross-subsidy - because they are less visible to direct taxation, noting that information is not a free good - in exchange for ‘votes.’ In such a case, subsidies create false price signals (below market price) and are covered by averaging its costs on a broader consumer base. The status-quo is protected by the regulators’ incentive to maintain cartel profits of public service industries and thus limit firm entry. Posner’s theoretical framework emphasizes the distributional effects of regulation as a taxation or public finance instrument disregarding the winners’ selection criteria and size constraints relative to other groups. He attempted to overcome this deficiency in his 1974 article by asserting that customers should be concentrated in order to limit cartel industry policing or free-riding (Posner, 1974, pp. 344-6). Posner and Stigler do not really develop a fully-rounded theory of regulation; what they do, rather, is introduce a promising approach that suggests what some of the key variables are to predict regulation.

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