Topic 8 Policies to Address Market Dominance, Contestability Lecture Notes

© Eunoia Junior College Economics Department 2023 1 Topic 8: 1. Policies to Address Market Dominance 2. Contestability Theme 2.2: Firms and Decisions

© Eunoia Junior College Economics Department 2023 2 Essential Questions 1. What is the role of governments in addressing market dominance, a source of market failure? 2. To what extent do policies address the various negative impacts on economic agents and society? 1. Policies to Address Market Dominance, a source of Market Failure Market dominance refers to a situation in which a market is dominated by one or a few large firms, and it occurs in both the monopoly and oligopoly market structures. These firms have considerable market power; they are not only able to set prices but are also able to act in ways that preserve and enhance their market power. Market dominance is a source of market failure that results in the inefficient allocation of resources. As discussed earlier (under “Impacts), market dominance can bring about many negative impacts on society. Thus, government policies are often required to address these negative impacts. Similar to Topic 5: Governments’ Microeconomic Objectives; Market Failure , we will use the H-A-L framework to discuss government policies: In discussing Advantages and Limitation s, we will use the FIRST framework. Do note that not all elements of the framework can apply to all questions and you will have to choose the one applicable to the g iven context. There might also be advantages and limitations that lie beyond what this framework covers.

© Eunoia Junior College Economics Department 2023 3 FIRST Possible Guiding Questions Remarks Feasibility & Flexibility 1. Why might the policy be easily implemented? What might hinder its implementation? 1. Can the government carry out the policy? 2. Is the policy politically unpopular? 2. Can the policy be easily adjusted/changed according to dynamic conditions? In deciding which relevant point to choose, consider: • Nature of economy/market • State of economy/market Impediments (or lack of) Even if the government can carry out the policy: 1. Is there a lack of information? 2. Are there offsetting factors? 3. Are the conditions for the policy to achieve its objective met? 4. Are the assumptions met? Root cause Is the policy targeted at the root cause f the problem? Side Effects 1. What problems will this policy cause? 2. What are the trade-offs incurred? 3. How does the policy affect different economic agents? Time Period/ Timeliness 1. Is the policy sustainable in the long run? 2. Is there a time lag? [A long -run policy has to be complemented with a short - run policy.]

© Eunoia Junior College Economics Department 2023 4 1.1 Types of Policies to Address Market Dominance There are generally 2 types of policies to address market dominance – policies to prevent/reduce market dominance and policies to address the negative impacts of market dominance. 1.1.1 Policies to prevent/reduce market dominance These policies aim to prevent market dominance from occurring/worsening or to reduce the degree of a market dominance in the market. For example, a government can implement policies to prevent mergers between firms which will worsen monopoly power. Governments could also lower regulatory BTE (such as licencing rules) to encourage more firms to compete in the market. The policy options available are: 1.1.1.1 Legislation: Pro-competition Acts (Anti-trust Laws) Pro-competition acts have been designed in many countries to prevent the formation of monopolies and to curb collusive behaviour of firms. Likewise, a Competition Act was passed in Singapore in the year 2004. Market Dominance - Pro-Competition Acts (Anti-trust Laws) How it works Pro-Competition Acts aim to prohibit monopolisation of a market by any firm. For example, any mergers/acquisitions of firms will have to be approved by the regulatory authority. This can be seen in the recently announced acquisition of Uber’s Southeast Asia’s assets by Grab. These laws also prevent certain monopolistic behaviour, such as price-fixing practices (collusion) and territorial arrangements between firms in the same industry. Note: Not all acquisition and mergers are anti-competitive. Some mergers are pro-competitive (because they positively enhance levels of rivalry). For example, a merger between 2 smaller firms may force the market dominant firm to behave more competitively. For the love of knowledge! The Competition and Consumer Commission of Singa pore (CCCS) is Singapore’s competition authority. The value proposition of C CCS is to provide a robust competition regime that forms the framework to grow a vibrant economy with competitive markets and innovative businesses . This will strengthen the ability of domestic companies to compete in the international market. It will also attract foreign investment to Singapore because companies know that they will compete on a level playing field. The CCCS is tasked to administer and enforce the Competition Act. The three main prohibited activities under the Competition Act are: 1. Agreements, decisions and practices which prevent, restrict or distort competition (anti-competitive agreements) 2. Abuse of dominant position 3. Mergers and acquisitions that substantially lessen competition

© Eunoia Junior College Economics Department 2023 5 1.1.1.2 Lowering Barriers to Entry In certain situations, the government can directly step in to lower barriers to entry and increase competition in the market. Barriers to entry includes both natural and artificial barriers. Advantages Limitations Root cause - It addresses the root cause of the problem, which is the lack of competition, and the conduct that comes along with monopoly power. Impediments • It is often difficult to prove that firms are colluding as a lot of information is required to do so. For example, are prices charged by different firms the same because they are colluding? Or is it because these different firms are facing the same demand and supply considerations? • Large firms (who are the ones most often being regulated) can devote huge amount of resources to come up with ways to go around regulation. • One major issue of regulations is the issue of regulatory capture, where the regulator is captured by the regulated. This could be done via political lobbying by the regulated firms to impose huge pressure on the authorities t o reduce/remove the regulation. Regulatory capture is possible as the dominant firms are large and influential and could be critical to the country’s economic growth and employment. In the news! Coronavirus: Govt cracks down on mask profiteers, retailer Deen Express queried on alleged inflated prices The authorities are cracking down on profiteers, following complaints that some businesses and individuals have been selling face masks for grossly inflated prices amid a surge in demand. The Government’s Price Controller on Thursday (Jan 30) asked a retailer at 313 @ Somerset mall to explain the basis for the selling prices of its masks, giving it until next Monday to respond. A packet of 10 surgical masks usually costs around $5 and 20 N95 masks cost about $40. But the masks sold at the Orchard Road store, Deen Express, are alleged to cost much more. The Ministry of Trade and Industry (MTI) said in a statement that a letter of demand was issued to the retailer and it must provide information such as its cost price and profit margins or face a fine, though it did not state how much the shop had been selling masks for. Deen Express could not be reached for comment. Letters of demand have also been sent to e -commerce platforms Lazada, Carouse