REPORTERS:LESL IE ANNE T. GANDIA

CHARLIE MAGNE G. SANTIAGUEL

Competition and Policies Toward Monopolies and Oligopolies,

Privatization and Deregulation

Learning Objectives

1. Understand the nature and significance of competition in a market economy.

2. Distinguish between price takers and price searchers.3. Explain economic inequality and how it contributes to poverty.4. Know the factors that make it difficult for potential

competitors enter a market.5. Describe a “monopolistic market” and distinguish it from the

oligopolistic market.6. Understand the fundamentals of financial management in

public sector enterprises.7. Realize the causes of ineffectiveness, inefficiency and

corruption in public sector enterprises.8. Identify the ways to reform public sector enterprises.9. Know the objectives of privatization and disinvestment in

public sector enterprises.

Competition

As a dynamic process means, rivalry or competitiveness between or among parties to deliver a better deal to buyers in terms of quality, price and product information.

Price Takers

In a price taker market, the firms all produce identical products and each seller is small relative to the total market.

Can sell all their output at the market price, but cannot sell any of their output at a higher price.

In the real world, most firms are not price takers.

Price Searchers

These are firms that face a downward-sloping demand for their product.

The term pure competition refers to a market structure characterized by a larger number of small firms producing a identical product in an industry that permits complete freedom of entry and exit.

Significance of Competition

Competition motivates businesses to produce efficiently, cater to the views of consumers and search for innovative improvements.

Competition puts pressure on producers to operate efficiently and use resources wisely.

A firm in competitive markets has strong incentive to discover and produce goods and services that consumer’s value highly relative to cost.

Makes firms innovative and forward looking.

“ It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”-- Adam Smith

Income Inequality and Poverty

Differences in resource prices and the productivity of individual will cause incomes to vary.

Money income is only one component of economic well-being.

Low-income families are the primary beneficiaries of noncash transfer programs that provide people.

A market economy does not have a central distributing agency that carves up the economic pie and allocates slices to various individuals. Rather each individual produces his or her own slice of the pie.

Income Inequality and Poverty

It is important to recognize that income in a market economy is not like manna from heaven.

When it comes to issues of fairness, some people argue that the process that generates the outcomes is more important than the actual result.

Economic provides insight into both the allocative role and sources of differences in income. It also indicates that it will be costly, in terms of lost output, to redistribute income through taxes and transfers.

Market Entry Barriers

1. Economies of Scale – the fixed costs in an industry are large, bigger firms can generally achieve lower average total per-unit costs than smaller one. Economies of scales and high fixed costs, however, are not a significant barrier to entry.

Market Entry Barriers

2. Control over an essential resource – control over a resource essential to produce a product may also insulate a firm from direct competitors. Barrier to entry like the one has just been described is often temporary but it exists that may be high enough to limit the market to only one seller.

Market Entry Barriers

3. Government licensing – Licensing is a requirement that one obtains permission from the government in order to perform certain business activities or work I various occupations. Legal barriers are the oldest and considered most effective method of protecting a business firm fro potential competitors.

Market Entry Barriers

4. Patents – Most countries have patent laws to give investors a property right to their inventions. A firm that develops a new drug can use patent protection to restrain production by others for 17 years from the time the patent is issued.

Economists criticize high barriers to market entry for the following reasons:

1. The ability of consumers to discipline producers is weakened.

2. The unregulated monopolist or oligopoly group can often gain by restricting output and raising price, and

3. Legal barriers to entry encourage firms to engage in masterful rent-seeking activities.

Four Policy Options

1. Control the structure of the industry to ensure the presence of rival firms.

2. Reduce artificial barrier’s that limit competition.

3. Regulate the price and output of firms in the market.

4. Supply the market with goods produced by a government firm.

Monopoly

“Single seller”Market characterized by

1. A single seller of a well-defined product for which there are no good substitutes, and

2. High barriers to the entry of any other firms into the market for that product.

Oligopoly

“Few sellers”Market characterized by

1. A small number of rival firms2. Interdependence among the sellers because each is

large relative to the size of the market.3. Substantial economies of scale, and4. High entry barriers to the market.

Interdependence among Oligopolistic Firms

Sellers in an oligopolistic industry is small, the supply decisions of one firm will significantly influence the demand, price, and profit of rivals. This adds to the complexity of the firm’s decision making.

Substantial Economies of Scale

In an oligopolistic industry, large-scale production is generally required o achieve minimum per-unit cost. Economies of scale are present, so a small number of large scale firms can produce enough of the product to meet the entire market demand.

Significant Barriers to Entry

As with monopoly, barriers to entry limit the ability of new firms to compete effectively in oligopolistic industries. Except where a market is contestable, economies of scale are probably the most significant entry barrier protecting firms in an oligopolistic industry.

The products of sellers in an oligopolistic industry may be either similar or differentiated.

Price and Output Under Oligopoly

An oligopolist, unlike a monopolist or a price taker, cannot determine the product price that will deliver maximum profit simply by estimating its own costs and the existing market demand.

Financial Management in Public Sector

A public sector enterprise (PSE) is a business undertaking owned, controlled and managed by the state on behalf of and for the benefit of the public at large.

The basic objective of public enterprising is to achieve the strong industrial base and to provide infrastructure for the development of the economy of the country.

The basic objectives of accounting and financial reporting for government units are to provide:

• Financial information useful for making economic, political and social decisions and demonstrating accountability and stewardship.

• Information useful for evaluating managerial and organization’s performance.

• Information useful for planning and budgeting.• Information useful for short-term financial

resources of the public sector unit.

Ineffectiveness, Inefficiency and Corruption

1. Government is not truly profit-oriented.2. Political interference is very high in PSEs.3. Short-tenure managers appointed by

government to manage these units only take steps for short-term gains ignoring long-term implication.

4. Less flexibility in prevalent in PSEs.5. Constant fear of COA queries and

parliamentary questions increase the tendency of “passing the buck” and delaying decisions.

Ways to Reform PSEs

1. De-licensing or deregulation2. Reducing the budget allocation3. Reforming the decision making systems4. Disinvestment or Privatization

Objectives of Disinvestment/Privatization

The major objectives of the disinvestment/privatization can be summarized as follows:1. Revenue collection2. Improvement in efficiency3. Market discipline4. Resources mobilization5. Direct participation of public6. Encourage employee ownership7. Reduction of bureaucratic control

Arguments in Favor of Disinvestment/Privatization Process

1. The basic problem with PSEs is neither the equality of assets nor the skilled manpower, but the overall decision making system. These enterprises would realize true potential only when they are privatized.

2. The disinvestment and privatization process could bring in better corporate governance, transparency, corporate responsibility, exposure to competitive forces, improvement in work environment and so forth.

Arguments in Favor of Disinvestment/Privatization Process

3. The market participation in capital of PSEs through stock exchanges would enable the market to discover the latent worth of PSEs.

4. The loss making PSEs can be successfully revived by asking the strategic partner to infuse fresh capital and by exercising excellent management control over sick PSEs.

Arguments Against Disinvestment/Privatization Process

1. Selling of profit making and dividend paying PSE would result in loss of regular source of income to the government.

2. There would be chances of “asset stripping” by the strategic partner.

3. The government’s policy of disinvestment includes the disposal of both profit making, as well as potentially viable PSEs.