EJC H2Econs Topic8

© Eunoia Junior College Economics Department 1 How to use this set of lecture notes? 1) BEFORE LECTURES – UNDERSTANDING CONTENT - Reference your notes against your H2 syllabus. Mark out the key concepts so that you know what you MUST know - Read your notes ahead so that you can focus on listening and capturing additional notes during lectures 2) During lectures – APPLYING CONTENT - Bring your hard copy notes along, and use your PLDs to refer to the lecture slides concurrently - Capture additional notes, especially the real-world examples where you can note down how concepts are applied and how economic analysis are developed in varying contexts - You should make use of a notetaking/consolidation tool to take notes during lessons and to consolidate your learning at timely junctures. Examples are MIRO, Notion, Goodnotes, Notability, Microsoft OneNote, KAMI, etc. The choice is yours! 3) After Lectures – TUTORIAL PREPARATION to use content flexibly to show application, analysis and evaluation skills - Revise concepts relevant for the case study and essay questions - Refer to the notes and use it flexibly to prepare your answers to meet question requirements. Pure memorisation will not work as it does not involve deep understanding. - Do share your notes with your friends to multiply learning!

© Eunoia Junior College Economics Department 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 cause of Market Failure 1.1 Types of Policies to Address Market Dominance – how each policy works and its limitations 2. Contestable Markets with Potential Competition, a case of Government Policy of Lowering BTE 2.1 2.2 2.3 2.4 Characteristics Factors Affecting Contestability Implications of a Contestable Market on Societal Welfare Criticisms of Contestable Market Theory CONTENTS

© Eunoia Junior College Economics Department 3 1. Policies to Address Market Dominance, a cause 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: Market Failure, we will use the H-A-L framework to discuss government policies: • How the policy works • Advantages • Limitations 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 4 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 the nature and state of the 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 of the problem? Side effects (Unintended Consequences) 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 5 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 Singapore (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 6 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 the se 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 cap