CHAPTER 7- COMPETITION AND POLICIES TOWARDS

MONOPOLIES AND OLIGOPOLIES, PRIVATIZATION

AND DEREGULATION

Competition

A dynamic process means rivalry or competitiveness

between or among parties to deliver a better deal to
buyers in terms of quality, price and product
information.

Price Takers
-

The firms all produce identical products and each

seller is small relative to the market.
Can sell all output at the market price, but cannot
sell any of output at a higher price.
Cannot thrive or even survive in a competitive
environment unless they are sensitive to cost.
In the real world, most firms are not price takers.

Price Searchers
-

Firms that face a downward-sloping demand for their

product.
The amount the firms are able to sell is inversely
related to the price they charge.

Pure Competition
-

A market structure characterized by a large number

of small firms producing an identical product in an
industry that permits complete freedom of entry and
exit.
Referred to as Price-Takers Market

Significance of Competition

It motivates businesses to produce efficiently.

It puts pressure on producers to use resources

wisely.
It encourages each firm to minimize its cost of
production.
A firm in competitive markets has a strong incentive
to discover and produce goods and services thats a
customer value highly relative cost
If firms are going to be successful in competitive
markets, they must also be innovative and forward
looking.
In competitive markets, business firms must serve
the interests of consumers.

Income Inequality and Poverty

Economic inequality is present in all societies.
Money Income is only one component of economic
well-being.
Factors Affecting Peoples Economic Welfare (Used
as a yardstick of economic well-being and inequality
prevailing in society)
Leisure
Noncash Transfer Benefits
Nonmonetary advantages and disadvantages
of a job
Expected stability of future income
The distribution of the income is actually a result of
many individual efforts and decisions.
Income in a market economy is something people
produce and earn by providing others with goods
and services they are willing to pay for.
Many people believe that these things, (To acquire
education and training, To Compete in business and
labor markets, Income reflect choices voluntary,
exchange, and productive efforts) rather than the

income distribution patterns that result from them,

are the key elements of economic fairness.
Economics provides insight into both the allocative
role and sources of differences in income.

Economists criticize high barriers to market entry

for the following reason:
1. The ability of consumers to discipline producers is
weakened. Reduced competition results in
allocation inefficiency.
2. The unregulated monopolist or oligopoly group
can often gain by restricting output and raising
price.
3. Legal barriers to entry a encourage firms to
engage in masterful rent-seeking activities.

Market Entry Barriers

What makes it difficult for potential markets to enter a
market?
Four Factors Contribute to this dilemma:
Economies of Scale
- When the fixed costs in an industry are large,
bigger firms can generally achieve lower average
total per-unit costs than smaller one.
- The current incumbent firm becomes the
dominant firm will tend to emerge in the industry
and if the market is a captured market, the costs
advantages resulting from its size will protect it
from potential rivals.
Control Over an Essential Resource
- Resource monopolies are seldom complete
because over time supplies in other parts of the
world may be discovered which could make a
particular country or firm loss its advantage.
Government Licensing and Other Legal Barriers to
Entry
Licensing is a requirement that one obtains
permission from the government in order to perform
certain business activities or work in various
occupations.
Legal Barriers are the oldest and considered most
effective method of protecting a business firm from
potential competitors.
Patents property right to inventions.

What government policies might be used to counteract

the problems that result from high barriers to entry?
Economists suggest at least four policy options:
1. Control the structure of the industry to ensure the
presence of rival firms.
2. Reduce artificial barriers that limit competition.
3. Regulate the price and output of firms in the market.
4. Supply the market with goods produced by a
government firm.
Monopoly Model
Monopoly
-

From two Greek words meaning single seller

A single seller of a well-defined product for which
there are no good substitutes.
High barriers to the entry of any other firms into the
market for the product.

Monopoly Model - help us better understand the operation

of markets dominated by a small numbers of firms.
Oligopoly Model
Oligopoly

Means few sellers

A small number of rival firms
Interdependence among the sellers because each is
large relative to the size of market.
Substantial economies of scale
High entry barriers to the market
A market situation in which a small number of
sellers constitute the entire industry.
Competition among the few

Interdependence among Oligopolistic Firm

- The business decisions of each firm depend on
the policies it expects its major rivals to follow
because those will influence the demand for all
the rivals products.
Substantial Economies of Scale
- In an oligopolistic industry, large-scale production
is generally required to achieve minimum per-unit
cost.
- Economies of scale are present, so small number
of large scale firms can produce enough of the
product to meet the entire market demand.
Significant Barriers to Entry
The presence of high entry barriers is what
distinguishes oligopoly from a competitive pricesearch market.
Price and Output under Oligopoly

Oligopolist cannot determine the product price that

will deliver maximum profit
Economics cannot predict complex interactions
among rivals.

Financial Management in Public Sector

Public Sector Enterprise (PSE)

A business undertaking owned, controlled and

managed by the state on behalf of and for the
benefit of the public at large.

Basic Objectives of Accounting and Financial

Reporting for Government Units are to provide:

Financial information useful for making economic,

political and social decisions and demonstrating
accountability and stewardship.
Information useful for evaluating managerial and
organizations performance.
Information useful for planning and budgeting,
and for predicting the impact of the acquisition
and allocation of resources on the achievement
of operational objectives.
Financial information useful for determining and
predicting the flows balances and requirements
of short-term financial resources of the public
sector unit.

Ineffectiveness, Inefficiency and Corruption

Causes of Ineffectiveness, Inefficiency and Corruption
Found in Private Enterprise and in PSEs
1. Government is not truly profit oriented.
2. Political interference is very high in PSEs
3. Short-tenure managers appointed by government to
manage these units only take steps for short term
gains ignoring long term implication.
4. Less flexibility is prevalent in PSEs
5. Constant fear of COA queries and parliamentary
questions increase the tendency of passing the
back and delaying decisions.
Way to Reform PSEs

1. Delicensing or Deregulation
- Involves adopting a more liberal licensing policy
of private sector.
2. Reducing the Budget Allocation
- PSEs are informed of self-sustenance by
increasing profitability and to reduce dependence
on budget allocations.
3. Reforming the Decision Making Systems
- The reforming process considering the
importance of decision making system allows the
PSEs to evolve their own policies for procurement
of material, investment decisions, financing
decisions, pricing of products, wage structure.
4. Disinvestment or Privatization
Disinvestment
- A process in which PSEs reduces its portion in
equity by disposing its shareholdings.
Privatization
-

Means giving the entire management control

over the PSE to private enterprising.

Objectives of Disinvestment/Privatization
1. Revenue Collection
- The government is making a way out of necessity
to raise revenues for bringing down the fiscal
deficit as commitment made to the IMF.
2. Improvement in Efficiency
- This is being undertaken to ensure greater
accountability and improved efficiency.
3. Market Discipline
- Disinvestment is resorted to meet budgetary
targets and to bring the PSEs to meet the market
discipline, competitiveness and to emphasize on
profitability and maximization of shareholders
wealth.

4. Resources Mobilization
- With the help of disinvestment program,
government would be in a position to garner
sufficient resources.
5. Direct Participation of Public
- Such disinvestment would enable the public, to
participate in the equity of PSEs.
6. Encourage Employee Ownership
- This would encourage the employees to buy
shares of PSEs and thereby become their owner
also.
7. Reduction of Bureaucratic Control
- With the reduced holding of the government in
the equity of PSEs, the bureaucratic hold and
control would also be reduced considerably.
Arguments Favor of Disinvestment/Privatization
Process
1. The basic problem of PSEs is neither the equality of
assets nor the skilled manpower, but the overall
decision making system.
2. The disinvestment and privatization process would
bring in better corporate governance, transparency,
corporate responsibility, exposure to competitive
forces, improvement in work environment and so
forth.
3. The market participation in capital of PSEs through
stock exchanges would enable the market to
discover the latent worth of PSEs.
4. The loss making PSEs can be successfully revived by
asking the strategic partner to infuse fresh capital
and by exercising excellent management control
over sick PSEs.

Argument against Disinvestment/Privatization

Process
1. Selling of profit making and divided paying PSE
would result in loss of regular source of income to
the government.
2. There would be chances of asset stripping by the
strategic partner.

3. The governments policy of disinvestment includes

the disposal of both profit making, as well as
potentially viable PSEs.