Public Policy to Promote Competition
Categories: Ethics/Morals
Capitalism-driven governments (i.e. pretty much the entire world now, 'cept you, North Korea) generally like to promote market competition. In the same way that the Olympics creates competition, leading to the greatest swimmers, runners, and racewalkers of our time, market competition should lead to innovation. More stuff, better stuff, better for the economy.
Competition is also good for the economy since it encourages firms to cut costs and lower prices, so consumers will buy, buy, buy. On the extreme opposite end of the spectrum, we have monopolies. While firms in a competitive market are incentivized to up their game to survive, monopolies are only incentivized to up their prices...and restrict supply. They make more money that way. And not all monopolies are bad: think busses and utilities, which are “natural monopolies” for a good reason.
The government uses public policy...their discretion and power...to promote competition where they see fit. As firms get bigger and bigger, globbing up together via mergers, antitrust laws are coming up more and more often. Antitrust laws are laws designed to promote competition and prevent price setting, collusion, and monopolies.
Public policy is where discretion comes in. For instance, the natural monopolies aren’t things the government wants to break up. Instead of looking to antitrust laws and measures, the government regulates natural monopolies. They want to make sure prices aren’t too high, supply is high enough, and quality isn’t cut from a lack of competition.
Now, back to our regular programming: racewalkers FTW!
Related or Semi-related Video
Econ: What is Perfect Competition?3 Views
And finance Allah shmoop What is perfect competition people It's
true in the real world and nothing's perfect and markets
are no exception Perfect competition is a hypothetical market structure
one where no firms are undercutting each other and consumers
never get ripped off While perfect competition doesn't exist in
the real world it's a useful bar to compare other
market structures to something like Oleg Op Elise monopolies monopolistic
competition and other things of similar ilk There are five
key ingredients in the perfect competition Punch bowl one There's
no differentiation in goods and services I all firms they're
selling the same stuff within one market For instance in
order for the lemonade market on Maple Street to be
in perfect competition Jill Joe and Sammy would all be
selling the exact same kind of lemonade Same amount of
lemons sugar and water in each same colored cup In
reality though Jill's differentiated her product by making it raspberry
lemonade Joe has added extra sugar for the sweet tooth
crowd and Sami is playing the organic card when there's
differentiation in products that makes competition imperfectly Since firms air
signalling to customers why their specific product is preferable to
the other a similar ones This commonly seen type of
imperfect market structure a market selling differentiated products is called
monopolistic competition Okay too in perfect competition all firms are
priced takers That is when firms are priced takers they
are at the mercy of the price set by the
market in the Maple Street lemonade market While that would
mean Jill Joe and Sami's identical lemonades would all sell
for the same amount it's called one dollars Exactly If
Joe tried to raise the price of his lemonade to
a dollar and a quarter consumers would leave him entirely
and just go by Jill or Se Mi's lemonade instead
which would put Joe while pretty much out of it
Remember they're all selling the exact same stuff in a
perfectly competitive market In reality Joe is charging a dollar
and a quarter And while he's still in business Jos
clientele are willing to pay that extra quarter for that
extra sugar high And Sami's organic crowd followers are loyal
right his lemonades even more expensive than Jos at two
dollars But it sells just fine because Sami's consumers only
wanna buy organic will Jail still gets her fair share
of customers too because well there's a niche market for
raspberry lemonade These kiddos are all making their own prices
with their differentiated lemonade rather than being at the mercy
of the markets deemed price right total pure price takers
Next up Three buyers know all of the details on
products and prices in perfectly competitive markets That's how buyers
enforce perfect competition They'LL put anyone out of business by
not buying from them if they confined the same product
for a better deal elsewhere Think about how Joe would
run himself out of business if he was selling the
same lemonade as the others at a higher price Right
Remember that Well in the real world buyers don't have
perfect information We have what marketers tell us on they
may or may not be over selling their wares G
What marketer doesn't lie to you And we have things
like online reviews you know many of which are fake
And then we have recommendations from friends and we have
yelp We can comparison shop products and their prices In
reality Thank you Internet With all the technology we have
nowadays well it's given us access toe wave or information
than ever before And it's also given us access to
more products and services than ever before right Okay so
moving on number four In a market with perfect competition
there are no barriers to enter and no barriers to
exit the market In the lemonade market Any kid could
open up a lemonade stand with essentially no startup costs
And if the market was too competitive while any kid
would close their lemonade stand without worrying about trying to
stick it out you know since they already had bought
all their lemonade making paraphernalia When markets are easy to
enter and exit keeps firms as price takers they're at
the mercy of the market If the lemonade kids air
you know business owners created in Olongapo Lee deciding to
collude on price wealth new lemonade stands would pop up
and an undercut their plan Like for example if Jill
Joe and Sammy all agreed to sell their identical lemonade
at Buck fifty instead of buck wealth and new kids
on the block Jake Jordan and Sarah might all open
their own lemonade stands being competitors charging one dollars per
drink instead of that buck Fifty Guess what Well then
Jill Joe and Sammy would then either have to lower
their prices back to a dollar or they go out
of business Right Number five There are only small firms
and perfectly competitive markets Definitely no oligopolies monopolies or uh
well Amazon which would mean Jill Joe and Sammy all
have a small share of the regular old lemonade market
There's no dominant player in the real world Firms are
incentivized to grow since it usually means they can benefit
from increasing returns to scale making more with less So
for example in the real world Jill's Raspberry Lemonade is
able to sell at a lower price because she owns
about half of the lemonade market on Maple Street But
in actuality Jill ran Jeannie's raspberry lemonade stand out of
business because while Jill was selling her raspberry lemonade at
a lower price than Jamie could afford Teo make hers
You know like how Wal Mart Target Costco and other
big corporations ran their smaller mom and pop shop competitors
out of business When there are a few firms or
one big one in a market it's typically when they
become old apples or monopolies which makes them Franks makers
instead of price takers right So to recap perfect competition
is hypothetical market structure where one there's no differentiation in
products to firms are priced takers not makers Buyers have
complete information There are no barriers to enter or exit
the market as a seller And five all firms are
small and modest Commodity markets like grain and oil are
the closest things we have in real life too Perfect
competition There's not too much differentiation happening there and buyer
information is more complete in those markets than in most
We can use the concept of perfect competition to analyze
what's happening in imperfectly competitive markets And you know the
rationale behind all that while perfect competition sounds great for
consumers since it prevents price setting by firms of the
real world isn't all that bad Differentiation is great We
wouldn't have Coke and Pepsi and rotten Apple otherwise and
economies of scale can make prices even lower than before
A world with complete information would be also nice but
sometimes life hands you lemons and well you've got to
know how to squeeze the juice out of them So
good luck with that