Cost and Benefit of Regulation on Competition
Cost and Benefit of Regulation on Competition
Introduction
In a market economy, which is a system of private property rights and competitive markets, there is an evolution of institutions, rules and standards that further regulates the behavior of the economic agents. Generally, prices regulate the behavior of consumers and produces so as to allocate resources.
Regulations are developed to jointly coordinate behavior especially on scarce resources. Government intervention is the correction of an apparent market failure. It is now widely recognized that market failure, such as pollution, results from incompletely specified property rights. In the case of air pollution, for example, individuals do not have an enforceable and tradable right in air quality (2001).
It is widely recognized that regulatory intervention attenuates private property rights. Governments can theoretically define property rights where they do not exist, but public choice theory would predict that the process would end up in rent seeking rather than law making (1973). In any case, rather then creating property rights in the face of apparent externalities, governments typically turn to regulating economic activity.
Government regulation alters the allocation of resources and, indeed, is designed to accomplish just that reallocation. Along with attenuating property rights, government regulation can also undermine the complex system of market-based institutions, rules, and standards that enhance and strengthen property rights. That system, or institutional framework, is as an integral part of a market economy as is the price mechanism.
All economies have elements of both self-regulation and government regulation. Government regulation reinforces, supplants, or undermines market-based regulation. Accordingly, government intervention is efficacious, redundant, or counterproductive. We address classic textbook cases of public goods and externalities that suggest the case for "good" government regulation. We also present a number of cases in which bad government regulation suppresses the self-regulating mechanisms in a market economy.
Regulation is necessary for a well-functioning market economy, but that insight provides no necessary role for government intervention. Some additional factor must be adduced to justify government intervention because markets evolve self-regulatory mechanisms
Hayek, however, viewed the regulation of economic activity as the product of legislation or human design. He observed that "a free system does not exclude on principle" regulation of economic activity, including regulation of production techniques and 'factory legislation'" ( [1960] 1972). He advocated a cost-benefit approach to evaluating government regulations.
Thus, it can be asserted that regulations may have its advantages or disadvantage in the competition of the businesses on an economy.
Impact of Regulations on Competition in the Airline Industry
Airline Industry has been noted to be the most competitive industry in the world. In the airline industry, several regulations could affect its level of competition. A central policy choice is the mechanism for allocating airport boarding gates and facilities. Many airport commissions rely on non-market mechanisms to allocate these scarce resources. Changes in policies by these commissions to allow for competitive bidding for boarding gates and landing rights might encourage competition among airlines, and it also might encourage airport authorities to increase supply when bid values are higher than costs.
In addition, antitrust policy also may affect the level of competition. Like for example, United announced plans to acquire US Airways. These plans were later abandoned after the government decided to challenge the merger. Most observers anticipate that future merger attempts are likely. There is significant statistical evidence that airfares increase as market concentration increases, thereby harming consumers. However, concentrated markets also benefit some consumers by creating bigger networks with more frequent and convenient flights. Moreover, mergers also provide incentives for efficient managerial skills and business practices to dominate. In that mergers lead to concentrated markets, antitrust policies must balance these conflicting needs when deciding whether to approve a merger.
A third significant policy dimension involves restrictions on substantial foreign ownership of airlines and on domestic flights by foreign-owned airlines. Allowing foreign ownership of airlines could increase the level of competition for both international and domestic flights.
Like for example, As foreign airlines already fly to the United States, they are subject to U.S. safety and security regulations. However, while the current open-skies agreement between Canada and the United States allows Canadian carriers to pick up passengers in the United States, it does not allow Canadian carriers to pick up passengers in Portland and drop them off in Seattle; rather, they can only pick up passengers in Portland and drop them off in Vancouver. This limits the ability of a Canadian carrier to gain the hub-and-spoke economies of scale that might improve its competitive edge on the Portland to Vancouver market or the Seattle to Vancouver market, and also potentially on the Portland to Seattle market.
Accordingly, less competition would likely lead to an increase in fares
and a decrease in service. In domestic markets, most concern has centered
around the growth of dominant or fortress hubs, with particular concern
about the very aggressive competitive responses by the major airlines when
low- cost new entrant carriers try to serve markets involving these hubs.
While the ability and willingness of incumbent airlines to respond to
competitive
entry is central to competition, at some point that response may cross
the line of fair competition and become an unfairly exclusionary practice
intended to drive the entrant from the market. When that happens, the result
is insufficient competition to discipline the incumbent with resulting
higher fares and possibly lower service compared with a situation where
the entry had been successful.
In the perspective of the buyer, government regulation would leads to or protects a position of monopsony or oligopsony for a particular good or service. A firm might be the only buyer of that good or service in a specific geographical marketplace, because it has been granted an exclusive right in a business that requires specialized supplies. Such a situation might occur in a business like electricity generation and supply where there is a single vertically integrated firm providing power across a country or a region. By virtue of its position as a monopoly electricity supplier, this firm would also be a monopsonist for items of equipment with a use specialized to the electricity industry.
While in the perspective of a supplier, government regulation leads to or protects a position of monopoly or oligopoly (one or a few suppliers with many interchangeable buyers). This occurs, for example, when the state grants an exclusive license or a patent, both of which have the effect of impeding competitive imitation in the supply of a particular good or service for a specified period. Assuming that there is an effective demand for this good or service, the licensed supplier might be expected to have a significant power advantage in its dealings with buyers.
Monopoly or oligopoly might also occur as a result of state intervention to encourage consolidation in a particular industrial sector. A good deal of this kind of activity has occurred in the European Union (EU) in recent years. The European Commission and the Member States have sanctioned substantial cross-border mergers and acquisitions in key sectors such as telecommunications, pharmaceuticals, and transport equipment in an effort to address the twin issues of overcapacity and declining competitiveness (1995; 2001).
Turning to the issue of disruptive government regulation, from a buyer's perspective this constitutes actions that substantially erode, remove, or prevent a situation of monopsony or oligopsony. In the electricity industry, the government will use disruptive regulation if it liberalizes the market for electricity generation and supply. By moving from a situation in which only one electricity supplier is licensed to a situation in which several firms are allowed to operate, the government has effectively destroyed the monopsony for items of equipment with a use specialized to the electricity industry. In this situation, the power advantage of each individual equipment buyer over its supplier might be expected to decline.
From a supplier's perspective, disruptive government regulation constitutes those actions that substantially erode, remove, or prevent a situation of monopoly or oligopoly. This occurs, as in the electricity example, when the state intervenes to promote greater competition in a supply market. It also occurs when the state removes or refuses to renew an exclusive license or patent, thereby allowing either imitative competition or the transfer of the monopoly to another supplier. Either way, the important point is that an individual supplier has lost the basis of its power advantage over particular buyers.
Regulation on the demand side of a market is necessarily a good thing from the perspective of the buyer, because it generates a situation of monopsony or oligopsony. From the perspective of a supplier, however, this is largely unfavorable, because the supplier is heavily dependent upon and is likely to be exploited by the buyer. The same line of argument can, of course, be applied to creative regulation on the supply side of a market. This would be favorable for a supplier, but unfavorable for a buyer.
Regulations, however, is important on regulating competition. Regulation is necessary for a well-functioning market economy. According to the Standard market-based economic theory is based on the premise that for markets to operate at economic efficiency (to produce the most product at the lowest price to consumers), in most cases there should be many competitors within the market who, through competition with each other, drive down prices and drive up supply to the economically efficient production point.
Regulations on competition greatly benefited the economy through more efficient and quality products and services. In aggregate, efficiency gains have been made. (2002), in a review of national competition policy, makes the point that it is not easy to evaluate the actual progress on efficiency and costs.
Over the past ten years, Australia has experienced strong rates of economic growth. When compared to other OECD countries, Australia has done very well. For example, during the past seven years Australia's annual rate of growth, at constant prices, averaged 3.8 per cent. This compares to 3.2 per cent in the United States, 1.4 per cent in Germany and 2.3 percent in France.
It is true that that some have felt that this strong performance was the result of a long time American expansion and technological change. While this may in part be true, it should also be noted that the Australian economy has, in recent years, continued to grow, while the United States economy has been stagnant, and that Australians have enjoyed no monopoly on capital equipment or technology.
Sharper competition, a greater openness to trade, investment and technology, and increased business flexibility have boosted Australian productivity (2002). Unlike the 1960s and 1970s, our productivity performance during the 1990s was not part of a world-wide productivity boom. Australia was one of only three countries to experience a strong acceleration during the 1990s (2002). has previously pointed out: If Australia's productivity had grown in the 1990s at its previous trend rate, annual income in 2000 would have been reduced, on average, by around $2,700 per person, or about $7,000 per household (2001).
As well as generating income benefits, there is evidence from the OECD that suggests that anti-competitive market restrictions may act to reduce the employment rate by three percentage points from the OECD average. Such a result would accord with our a priori expectation that anti-competitive restrictions cost jobs ( 2001).
Conclusion
It has been discussed the benefits and the cost of regulation on competition. It has been asserted that regulations affect the competition of the companies in an industry in an economy. Regulations may be advantageous or disadvantageous depending on the type of industry regulations may be implemented. Through regulations, the market activities are being well defined. However, these regulations may also be a disaster to some consumers and suppliers. Regulations being imposed in a particular economy affect the level of competition. Anti-competitive restrictions may reduce employment rate since imitation is restricted causing a lower number of companies establish and lower number of people hired. Competition in the market gives companies a challenge to be more efficient and effective on their products and services. Thus, more quality products and services are being developed which is to the benefit of the consumers as well as the producers since efficiency means less costs.
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