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 mar