Price Theory & Public Policy

3.0 Public Policy

3.1 Origins

3.2 Competition Policy

3.3 Equity

3.2 Competition Policy

As the Industrial Revolution worked its way through time small scale business began to be replaced by large scale business.  Fuelled by economies of scale, entrepreneurial genius and technological change, capital began to accumulate in fewer and fewer hands.  In the mid-19th century Karl Marx observed this tendency and predicted the overthrow of an increasingly narrow capitalist order.  It was, however, not in England but in the United States that this tendency towards monopoly - not granted by the State but taken from the market - reached its apogee.  Known as the 'Robber Barons' a diverse group of men between the mid- and late 19th century managed to, in effect, capture the market for a range of emerging goods and services, e.g. Rockefeller in oil, Carnegie in steel, Morgan in banking and Vanderbilt in ocean shipping and railways (see "Story of a Great Monopoly" by H. D. Lloyd, Atlantic Monthly, March 1881 - sorry , now requires registration). Interestingly none of these 'giants of industry' enjoyed inherited wealth.  They did it themselves - 'self-made men'. 


Anti-Trust, -Combines, -Competitive Practices

The increasing concentration of economic power in the hands of the 'trusts' led by the Robber Barons as well as their often violent business methods compelled a democratic government to pass the Sherman Antitrust Act of 1890 (see p. 5-6).  Like its subsequent foreign brothers, anti-trust, anti-combines (Canadian) and anti-competitive practice legislation or 'competition policy' as a whole is intended stop restraints of trade including 'unnatural' monopolization of trade or commerce.  That such practices continue to this day is exhibited in "The World Gets Tough on Price Fixers" by Stephen Labaton  in New York Times On-Line, June 3, 2001.

Anti-trust policy has two primary focii: (a) 'conspiracies in restraint of trade' between producers (collusive oligopolies, cartels, etc.); and, (b) anti-competitive business practices of individual producers. 

In Canada, 'conspiracies' are represented by the Hull Paving Contract case in Quebec and the Brewers' Retail case in Ontario in the 1950s.  

Anti-competitive practices include such things as discriminating pricing, predator price competition and resale price maintenance.  Mergers and acquisitions - horizontal or vertical - also raise concerns about restraint in trade. The Microsoft anti-trust case in the U.S. highlights other practices of a dominant firm that can, in some cases, be considered anti-competitive - bundling, vaporware, restricted display of competitors products, software 'bugs', etc.  Today attention  is also focusing on the business practices of 'big box' retailers, e.g. Walmart, Safeway, etc., including 'display fees'.  Other rising questions are 'standard setting'.

One complicating factor at the global level is that often business practices considered 'anti-competitive' in some countries are not in others.  Furthermore, penalties for breaking 'competition' law can vary from fines to jail sentences to, in the People's Republic of China,  the death sentence for some 'economic crimes'.

In general, public competition policy takes the outcome under perfect competition as the standard against which anti-competitive outcomes are judged.  Any behaviour that is consciously intended (criminal intent) to restrict or monopolize trade is treated as a criminal offense.  Under criminal law, the State attempts to remove malign market forces and approximate a perfectly competitive outcome if not marketplace - more or less.  Damages may be assessed relative to the loss of 'consumer surplus'.


There are, however, cases where a 'natural' monopoly exists.

Definition: An industry in which the average cost of production reaches a minimum at an output rate large enough to satisfy the entire market, thus competition cannot be sustained and one firm becomes the monopolist.

By regulation, usually through a tribunal of some sort, the State can set a maximum price or compel a certain level of output (Fig. 11.13, p. 359) or allow a 'fair' rate of return (profit) (Fig. 11.14, p. 359).  In both cases, the State tends to take the outcome under perfect competition as the standard against which price, quantity and profit of a 'regulated' monopoly are to be set.

One complicating factor at the global level involves what is the 'entire market'?  Is it the marketplace within a given nation state, e.g. Canada, or, is it a global market itself?  After about 1990, many nation states have allowed mergers and acquisitions within their domestic markets, in effect allowing monopoly to arise, in the hope that such 'large' firms can exploit economies of 'global' production, i.e. allow national firms to be globally competitive.

One response to this 'globalization' tendency has been the creation of the World Trade Organization that is establishing a 'global' competition policy.  The standard against which actions by member states are judged is, in effect, the standard Neo-Classical model of perfect competition - at the global level.  The ultimate triumph of Markets over Marx.

However, the WTO role is still limited.  In effect, global 'competition' policy is being set by the one remaining super-power, the U.S.A., and the European Union.  The recent refusal by the EU Competition Commissioner to permit the merger of two U.S. firms - General Electric and Honeywell - is evidence of a  shifting global balance.  Once upon a time the 'extra-territorial' reach of American law was consider an indication of the 'imperialist' tendency of the U.S.  Today, the EU is having a similar effect.  This is highlighted by the fact that the EU anti-trust case against Microsoft is still waxing while the American case wanes.  Entry of the People's Republic of China into the WTO also indicates the increased 'global' nature of the economy - global even for the US, China and the European Union.

Rights & Privileges
- IPRs

- tax holidays and other expenditures

Industrial Organization

a) The Industrial Organization Model  

IO is the brain-child of the late Joe Bain. His seminal work - Industrial Organization - was published in 1959 (Bain 1968).  Using IO, Bain began what has become an ongoing process within the economics profession of linking macroeconomics (the study of the economy as a whole) to microeconomics (consumer, producer and market theory) to better understand the way the 'real' world works.

The IO schema (Exhibit 1) consists of four parts.  First, basic conditions face an industry on the supply- (production) and demand-side (consumption) of the economic equation.  Second, an industry has a structure or organizational character.  Third, enterprise in an industry tend to follow typical patterns of conduct or behavior in adapting and adjusting to a specific but ever changing and evolving marketplace.  Fourth, an industry achieves varying levels of performance with respect to contemporary socio-economic-political goals.

b) Elemental Economic Terms  

Four elemental economic terms will be used.  First, buyers and sellers exchange of goods and services in markets - geographic and/or commodity-based.  Second, an enterprise is any entity engaging in productive activity - with or without the hope of making a profit.  This thus includes profit, nonprofit and public enterprise as well as self-employed individuals.  All enterprises have scarce resources and are accountable to shareholders and/or the public and the courts.  An enterprise is defined in terms of total assets and operations controlled by a single management empowered by a common ownership.  Third, an industry is a group of sellers of close-substitutes to a common group of buyers, e.g. the automobile industry.  Fourth, a sector is a group of related industries, e.g. the automobile, airline and railway industries form part of the transportation sector.  Often, as herein, 'sector' and 'industry' are used interchangeably, for example - the transportation industry or sector.

c) The Arts Industry  

For purposes of this demonstration, the arts industry (Exhibit 2), or more properly, 'the arts sector', includes all profit, nonprofit and public enterprises including incorporated and unincorporated businesses that, and self-employed individuals who:

i - use one or more of the arts including the heritage, literary, media, performing or visual arts - live or recorded - as a primary factor of production, e.g. in advertising, fashion, industrial & product design as well as Internet, magazine and newspaper publishing;

ii - rely on one or more of the arts as a 'tied-good' in consumption, e.g. home entertainment hardware and software; or,

iii - produce one or more of the arts as their final output, i.e. they create, produce, distribute and/or conserve artistic goods and services.

Using this definition the Arts Industry can be seen as the center of a circle of circles made up of the so-called 'cultural industries' or the widely defined Arts & Cultural Industry (Exhibit 2).  The economic term 'tied-good' requires explanation. An example is the old 'punch card' computer.  The computer could not operate without such cards which, technically, were an output of the pulp, paper and publishing industries, sequentially.  The computer and cards were tied-goods in production of computational results.  Similarly, there can only be a market for audio-visual software, e.g. records and tapes if there is a market for home entertainment hardware, e.g. cameras, record players, TV sets, etc.  They are tied-goods in consumption fitting hand in glove.  In this regard, it is likely, but not proved, that the home entertainment center (HEC) is the third most expensive consumer durable purchased by the average consumer after house and car.  Similarly, private collections of audio-visual software including phonographs, photographs and video tapes constitute an enormous stock of American cultural wealth.


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