Chapter 18 Industrial policy and competition policy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 18.2 Industrial policy and Competition Policy  Competition policy – aims to enhance economic efficiency by promoting or safeguarding competition between firms.  Industrial policy – aims to offset externalities that affect production decisions by firms 18.3 Industrial policy  Inventions and the patent system – designed to provide a sufficient incentive for invention without suppressing competition for ever  Research and Development (R&D) – the social return on risky projects may exceed the private return  Dynamic change – coping with sunset and sunrise industries 18.4 Consumer surplus D Q P Quantity P r i c e Consider the demand curve D and suppose price is at P with quantity demanded being Q. P represents the value placed on the good by the marginal consumer so D can be seen to represent marginal social benefit With all consumers paying the same price P for the good, the triangle APC represents consumer surplus – benefit received by consumers in excess of the amount they need to pay. A C 18.5 Producer surplus D LAC = LMC Quantity P r i c e Q P Producer surplus is the excess of total revenue over total costs – as shown by the rectangle. 18.6 Consumer surplus is the area of the big green triangle. The social cost of monopoly: comparing perfect competition and monopoly D LAC = LMC Q c P c Quantity P r i c e For simplicity, suppose as industry with horizontal long-run average and marginal costs. Under perfect competition, long-run equilibrium would be with industry output Q c selling at price P c . 18.7 and the red triangle shows the welfare loss – the social cost of monopoly The monopoly receives producer surplus (profit) of the blue rectangle. Consumer surplus is now the smaller green triangle. The social cost of monopoly: comparing perfect competition and monopoly D LAC = LMC Q c P c Quantity P r i c e MR Q m P m If taken over by a monopolist, profit maximization is at the lower output Q m and higher price P m . 18.8 must be balanced against the gains from efficiency (the pink rectangle). In comparing the two situations, the loss of consumer surplus under monopoly (the red triangle) Perfect competition and monopoly under differing cost conditions D Quantity P r i c e Suppose that monopoly enjoys lower cost conditions than under perfect competition Q c P c LRSS pc Under perfect competition equilibrium is at P c , Q c . LAC = LMC MR P m Q m Compared with P m , Q m under monopoly 18.9 Counting the cost of monopoly  The size of the social cost of monopoly is difficult to evaluate – in part it depends upon the elasticity of demand – which influences the size of the ‘red triangle’ of welfare loss  Furthermore, firms may use up resources to defend their monopoly position – implying that costs are higher than under perfect competition – there may also be X-inefficiency under monopoly  if incentives to be cost-efficient are lower in the absence of competition. 18.10 Competition law in the UK  The Competition Commission (formerly the Monopolies and Mergers Commission) is the body responsible for administering competition policy in the UK.  A company can be referred to the Commission if it supplies more than 25% of the total market for a good – or where there is collusion between firms  The Commission is charged to investigate whether or not the monopoly acts against the public interest. [...]... between firms at different stages of production in the same industry – conglomerate mergers a way for firms to diversify into a new activity 18. 11 M&A Size may enable: – economies of scale – competition on a global scale The late 1990s saw record levels of M&A activity 18. 12 . Chapter 18 Industrial policy and competition policy David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 6th Edition, McGraw-Hill, 2000 Power Point presentation by Peter Smith 18. 2 Industrial. they need to pay. A C 18. 5 Producer surplus D LAC = LMC Quantity P r i c e Q P Producer surplus is the excess of total revenue over total costs – as shown by the rectangle. 18. 6 Consumer surplus. projects may exceed the private return  Dynamic change – coping with sunset and sunrise industries 18. 4 Consumer surplus D Q P Quantity P r i c e Consider the demand curve D and suppose price is