Chapter 4

Imperfect Competition

Learning outcomes

• Discuss the social costs of a monopoly and indicate its relevance for ‘deregulation’

• Outline the characteristic features of a natural monopoly

• Discuss the case for and against regulating a natural monopoly

• Explain the meaning of the ‘structure-conduct-performance’ (SCP) hypothesis and discuss its relevance for competition policy in South Africa

• Explain Demsetz’s ‘efficiency hypothesis’ and discuss its relevance for competition policy generally.

Monopoly vs perfect competition

The social costs of monopoly

MRPTxy =MCx =

Px

MCy Py

MRPTxy >Px

Py

Efficiency implications of monopoly

X-inefficiency, technological advancement and deregulationX-inefficiency• Additional cost of a monopoly• Utilisation of existing resources• Labour productivity• Time and effort for researchTechnological advancement• Incentive• MeansDeregulation• Removal of barriers to entry.

The decreasing case: regulatory options• Natural monopoly

– Large capital outlay– Examples: provision of water, electricity, rail & road

transport, postal services

• Increasing returns to scale• Privatisation• Regulatory measures• Regulation• Efficiency gains• Regulated privatisation.

Decreasing cost cause

Market power and competition policy

• Monopolistic competition– Firms produce close substitutes and each firm has some

control over price

• Oligopoly– Only a few firms produce a homogeneous product and each

one has considerable control over price

• Tendency for:– Higher equilibrium quantities at lower equilibrium prices– Lower quantities at higher prices.

Imperfect competition

Structure-conduct-performance (SCP) hypothesis

• Highly concentrated industry• Correlation between the degree of concentration and

profitability of industries• Power of highly concentrated industries.

The structure of an industry determines the conduct of its constituent firms, which in turn, determines their

performance.

Competition policy

• Indirect government intervention• Restrictive practices• Abuse of a dominant position.

Competition policy in South Africa

• National Economic Development and Labour Council (NEDLAC)

• Competition Act– Competition Commission– Rationale for the policy– Objective of the policy– Focus of the policy.

Necessity for competition policy

• Efficiency hypothesis – Harold Demsetz

• Contestable industries and markets– Potential vs actual competition– Global competition.

Thank you.