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Summary Competition Policy 2018
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In-depth notes of Competition Policy. Covers themes 1 through 4 for A2.
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Competition Policy Current dispensation started with new Competition Policy of 1998.
Pioneer .
Market enquiries – NB under competition act. Health Market enquiry, Commission is
looking at private sector, and how we all access services. Want to find out if there are
problems with prices, why are premiums constantly increasing. Understand on the
supply side, the three hospital groups, have an oligopoly, leading to higher prices on
supply side.
Also an enquiry into data prices, comparatively we have very high prices.
Commission is interested in the reason for the high prices. Is it because there is an
oligopoly?
Motta – download from SunLearn, theoretical basis for Sections 1, 2, 3 and 4.
Typically long questions in the exam
Test 348 – Theme 1, only 1 long question.
Theme 1: Motta chapter, and Roberts papers, and themes discussed in class in terms of
recent changes and amendment to the bill.
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, Theme 1: Economic Rationale
Motta, Chapter 1: Competition Policy: History, Objectives and the Law
Generally we accept that it is necessary to intervene in the economy with legislation.
What do you want to achieve from an economic perspective though?
Think about microeconomics – perfect world = perfect information and perfect
competition. (MR = MC), this is a textbook ideal and doesn’t exist in a real world, but
it means we can strive towards a ‘perfect world’.
Read the amendment Bill. In 1998 first comprehensive competition act – before this
there was a competition board who were fairly inactive. This was a worldwide
development, and not just in SA. There is a whole section at the beginning that states
that concentration in our economy is a problem (of the amendment act).
Welfare as the objective of competition policy
Economic welfare measures the aggregate welfare (surplus) of different groups in the
economy
Consumer surplus + Producer surplus = total surplus (welfare)
What happens when prices increase?
o Welfare is lowest when the market price = monopoly price, highest when P =
MC
o What happens when price rises?
o Don’t take income distribution into account
o Not only static analysis, also dynamic.
Competing values’ should be considered (i.e values that can’t be accounted for in the
economic model).
o Whose interest is more important:
o Consumers who gain because of lower prices?
o Producers who increase profits?
o Competitors who are forced out of the market?
o EU – aim of creating a single European market
Competition policy should also consider the distribution of income (Roberts)?
Think about different jurisdictions – Motta chapter written from EU perspective.
Second article – speaks about distribution.
What does economics contribute?
Important cases in SA?
o If you sit on a plane – what did the rest pay for their tickets? Is this against the
law?
o Price discrimination – operator is looking at extracting the maximum amount
for themselves – is this wrong / not?
Look at consumer surplus and features of the market and work out whether it is pro-
competitive / anti-competitive and what can be done about this.
Mergers - Forward looking what will a company do with an asset, and what will
happen with prices – will they be able to compete better with other companies.
Abuse case – look backwards.
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, Interplay between law and economics – rule of reason vs per se prohibitions.
Why are cartels so bad? Or monopolies
o In terms of Micro-models, you want price to be perfectly competitive. They are
always bad because the price will always be higher, and will settle at the
cartel level because there is no incentive to lower prices.
There are bad cartels in SA – i.e Construction cartel – 2010 and the firms all came
together and divided the work between themselves, but how do you go about putting
in bids. They decided on a joint profit margin, within the margins.
o Companies accepted liabilities, and are paying the fines now.
Corporate leniency policy – has been successful, you can be a whistle-blower (how
the bread cartel was discovered) and you will be spared from paying the fine like the
other cartels will have to.
Especially for large inputs (i.e cement), they have an impact on our daily living.
There were early cases, and the US has been the leader with ‘anti-trust’ policy.
o US cases: Brown Shoe 1962, FTC v Procter & Gamble 1967
Interesting to think of the history and develop
Chicago school – 1970s / 1980s. They had early policies and during 70s and 80s –
any cartel would be by definition unstable because there is always an incentive to
break away.
o Markets will come to an equilibrium and settle themselves out (no longer the
school of thought).
Industrial Organisation – sophisticated econometrics, economic modelling.
EU: Modernisation – effects based, also in SA.
Competition policy based on micro economics / IO – including financial and
behavioural economics.
Role of economic theory
Interested in the outcome of the market – measure the profitability / structure
persisted overtime, and not the forms for effective competition.
Economic models can aid analysis - but the concept is the level of market power a
firm has, the underlying idea is that if you charge a price that is equal to market cost,
then you have no market power. But if you differentiate price / are a monopolist you
have market power up to a certain point. Then interested to measure the deviation
from the perfect market power.
Market power is a central economic concept – defined in the Act.
o Would a merger give a company more market power than before?
o If there is a merger where two companies merge (one with 60% of cider
market in SA buys another company with 20% of the market), will this be
good or bad? For the consumer - depends on the ability of a consumer to shift
from one good to another.
Two NB factors when looking at competition:
o Competitive price
o Price elasticity
Is there a market for the energy-alcoholic drinks? Depends on the data and the
detail, and the commission will always want the market to be defined as narrowly as
possibly.
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