Economics 348
Competition Policy
These notes include:
1. The Economic Rationale for Competition Policy – The South African Authorities and
the Competition Act
2. Motta Chapter 2: Market Power and Welfare
3. Vertical Constraints harm on Competition: BATSA Case
4. Motta Chapter 3: Market Definition in Competition Economics
5. Why do we Define Markets in Competition Cases
6. Motta Chapter 4: Collusion and Horizontal Agreements
7. The Impact of Competition Enforcement on the Cement Industry in South Africa
,Competition Policy
Theme 1: The Economic Rationale for Competition Policy – The South
African Authorities and the Competition Act
The underlying foundation of competition policy is to try understand what the optimal
allocation of resources is and where total welfare is maximised. We have to think about the
interests of different people in the economy, and whose interests are the most important.
Chapter 1
Competition Policy: History, Objective and the Law
There are a number of ways in which competition policy can be defined. It is the set of
policies and laws which ensure that competition in the market place is not restricted in a
way that is detrimental to society, as well as the set of policies and laws which ensure that
competition int the market place is not restricted in such a way as to reduce economic
welfare.
Welfare as the Objective of Competition Policy
Economic welfare is a standard concept used in economics to measure how well an industry
performs. It is a measure which aggregates the welfare/surplus of different groups in the
economy. In each given industry, welfare is given by total surplus – the sum of consumer
and producer surplus: Welfare (total surplus) = Consumer surplus + Producer surplus
Surpluses are calculated as follows:
• Individual consumer surplus: the difference between the consumer’s valuation for
the good considered (or their willingness to pay for it) and the price which effectively
they have to pay for it
• Consumer surplus: the aggregate measure of the surplus of all consumers
• Individual producer surplus: the profit it makes by selling the goods in question
• Producer surplus: the sum of all profits made by producers in the industry
The above suggests that a price increase at which goods are sold reduces consumer surplus
and increases producer surplus. However, as price increases, the increase in profits does not
compensate for the reduction in consumer surplus. So, welfare is the lowest when the
market price equals that of the monopoly price (the highest possible price level). On the
other hand, welfare is at its highest when price is equal to the marginal cost.
This concept of welfare should not only be interpreted in a static sense, but also in its
dynamic concept. Both current and future welfare matter, however, the 2 do not necessarily
coincide. When prices increase:
What does Economics Contribute?
In South Africa, the competition authorities have a high standard of analysis and application.
It is a successful area in the South African government.
Bids to construct the stadiums for the 2010 world cup ended in 2006. The competition
commission have recently uncovered a construction cartel and all who were involved were
, found guilty. The construction companies divided stadiums among each other and signed
consent agreements. In September, there will be a. week hearing to determine what
damages Cape Town can retrieve from these construction firms. Thus becomes slightly
challenging as they will need to determine the competitive price, meaning they will need to
know the structure of the market in 2006.
If you fly to Cape Town today, the person sitting next to you did not necessarily pay the
same amount of money for their ticket as you did. So, is price discrimination prohibited?
Economists actually think it is the perfect solution, because everyone is priced at their
marginal utility price. In competition policy, and in certain circumstances, dominant firms
aren’t allowed to price discriminate. An early case of the abuse of dominance in South Africa
would be SAA.
Price fixing is one of the worst things that can happen. Opec is a petroleum producing
company. They would move prices up the demand curve to a point where producer surplus
was maximized, resulting in a deadweight loss that everybody paid for. Collusions of
monopolies can also cause prices to increase, as the monopoly extracts all surplus from the
market for themselves and the consumer loses out.
It is difficult to think of monopolies in the real world. In south Africa, there are a few
regulatory monopolies that have been created by regulations. An example is Telcom in the
fixed line telecommunications. This is because the act said there could only be 1 firm of its
operation in the market. This is how they have been able to be a monopoly.
Economic models can aid analysis of this. For example, econometrics, as the world is very
data driven and we have access to a lot of information.
A platform market is a market that brings together 2 sets if customers through 1 platform.
Examples are:
• Uber: The driver and the person needing a lift
• Takealot: The retailer and the consumer
• Airbnb: The house owner and the guests
A reason why there seem to be a dominant firm in each industry is because of the tipping
point: they benefit from more people using their platform.
So, what do we want to achieve? This is an important question in this course.
Philosophically, we want to intervene in markets to change the outcomes (e.g., limit
monopoly powers and get closer to an equilibrium level). The rationale for competition
policy in South Africa is we want to address inequality and economic growth.
Motta’s view is that if a government want to achieve objectives other than economic
welfare, they should resort to policy instruments that distort competition as little as
possible. However, in many countries, competition policies have embraced many objectives
other than economic welfare. For example, South Africa wont only intervene to move to a
more perfect competition. They will also intervene because they are serious about other
objectives, such as: employment; small firms; B-BEE; environmental concerns.
Competition Policy
These notes include:
1. The Economic Rationale for Competition Policy – The South African Authorities and
the Competition Act
2. Motta Chapter 2: Market Power and Welfare
3. Vertical Constraints harm on Competition: BATSA Case
4. Motta Chapter 3: Market Definition in Competition Economics
5. Why do we Define Markets in Competition Cases
6. Motta Chapter 4: Collusion and Horizontal Agreements
7. The Impact of Competition Enforcement on the Cement Industry in South Africa
,Competition Policy
Theme 1: The Economic Rationale for Competition Policy – The South
African Authorities and the Competition Act
The underlying foundation of competition policy is to try understand what the optimal
allocation of resources is and where total welfare is maximised. We have to think about the
interests of different people in the economy, and whose interests are the most important.
Chapter 1
Competition Policy: History, Objective and the Law
There are a number of ways in which competition policy can be defined. It is the set of
policies and laws which ensure that competition in the market place is not restricted in a
way that is detrimental to society, as well as the set of policies and laws which ensure that
competition int the market place is not restricted in such a way as to reduce economic
welfare.
Welfare as the Objective of Competition Policy
Economic welfare is a standard concept used in economics to measure how well an industry
performs. It is a measure which aggregates the welfare/surplus of different groups in the
economy. In each given industry, welfare is given by total surplus – the sum of consumer
and producer surplus: Welfare (total surplus) = Consumer surplus + Producer surplus
Surpluses are calculated as follows:
• Individual consumer surplus: the difference between the consumer’s valuation for
the good considered (or their willingness to pay for it) and the price which effectively
they have to pay for it
• Consumer surplus: the aggregate measure of the surplus of all consumers
• Individual producer surplus: the profit it makes by selling the goods in question
• Producer surplus: the sum of all profits made by producers in the industry
The above suggests that a price increase at which goods are sold reduces consumer surplus
and increases producer surplus. However, as price increases, the increase in profits does not
compensate for the reduction in consumer surplus. So, welfare is the lowest when the
market price equals that of the monopoly price (the highest possible price level). On the
other hand, welfare is at its highest when price is equal to the marginal cost.
This concept of welfare should not only be interpreted in a static sense, but also in its
dynamic concept. Both current and future welfare matter, however, the 2 do not necessarily
coincide. When prices increase:
What does Economics Contribute?
In South Africa, the competition authorities have a high standard of analysis and application.
It is a successful area in the South African government.
Bids to construct the stadiums for the 2010 world cup ended in 2006. The competition
commission have recently uncovered a construction cartel and all who were involved were
, found guilty. The construction companies divided stadiums among each other and signed
consent agreements. In September, there will be a. week hearing to determine what
damages Cape Town can retrieve from these construction firms. Thus becomes slightly
challenging as they will need to determine the competitive price, meaning they will need to
know the structure of the market in 2006.
If you fly to Cape Town today, the person sitting next to you did not necessarily pay the
same amount of money for their ticket as you did. So, is price discrimination prohibited?
Economists actually think it is the perfect solution, because everyone is priced at their
marginal utility price. In competition policy, and in certain circumstances, dominant firms
aren’t allowed to price discriminate. An early case of the abuse of dominance in South Africa
would be SAA.
Price fixing is one of the worst things that can happen. Opec is a petroleum producing
company. They would move prices up the demand curve to a point where producer surplus
was maximized, resulting in a deadweight loss that everybody paid for. Collusions of
monopolies can also cause prices to increase, as the monopoly extracts all surplus from the
market for themselves and the consumer loses out.
It is difficult to think of monopolies in the real world. In south Africa, there are a few
regulatory monopolies that have been created by regulations. An example is Telcom in the
fixed line telecommunications. This is because the act said there could only be 1 firm of its
operation in the market. This is how they have been able to be a monopoly.
Economic models can aid analysis of this. For example, econometrics, as the world is very
data driven and we have access to a lot of information.
A platform market is a market that brings together 2 sets if customers through 1 platform.
Examples are:
• Uber: The driver and the person needing a lift
• Takealot: The retailer and the consumer
• Airbnb: The house owner and the guests
A reason why there seem to be a dominant firm in each industry is because of the tipping
point: they benefit from more people using their platform.
So, what do we want to achieve? This is an important question in this course.
Philosophically, we want to intervene in markets to change the outcomes (e.g., limit
monopoly powers and get closer to an equilibrium level). The rationale for competition
policy in South Africa is we want to address inequality and economic growth.
Motta’s view is that if a government want to achieve objectives other than economic
welfare, they should resort to policy instruments that distort competition as little as
possible. However, in many countries, competition policies have embraced many objectives
other than economic welfare. For example, South Africa wont only intervene to move to a
more perfect competition. They will also intervene because they are serious about other
objectives, such as: employment; small firms; B-BEE; environmental concerns.
