Economic Analysis of PD

8/10/2019 Economic Analysis of PD

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ECONOMIC ANALYSIS OF

PUBLIC DECISIONSEconomics of the Public Sector


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Course outline

1. Introduction to Public Sector Economics

2. The system of public economics

3. The state, actor of public economy

4. The Public Sectorstructure, reform5. The market failure

6. Labour market

7. Competition


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Why does PS economics interest us? (1)

Public economics is a branch of economics that aims at

analysing public decisions in economic terms (Matei

2003)

Reason: the need for organising the public activities

Regulation

Price setting

Supply of public goods and services

Publicrevenues

Publicexpenditures

- Taxes andtariffs/duties

- Income from

capital

- Income from

states privategoods

- Borrowing

- Transfers- Expenditures

with public

policies

- Capital

expenses

- Interest


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What is our aim? (1)

Introduce aspects of public economics, economic toolsand so on

- concepts, notions

Substantiate these elements through theoriesin the fieldof public economics

Strengthen your knowledge of public economics with

special reference to the European states economy,American or Asian economy if relevant to the subjectupon debatepublic intervention, market failure and soon.


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Triple view of public economy

Facts, phenomenaand economic

processes

Publicadministrations and

enterprises (orprivately heldenterprisesengaged in theproduction of publicgoods or services)

Sciencetheeconomic analysis

of public decisions(ECONOMICS)


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The object of public actions

Regulation

Price setting

(through taxes, duties,subsidies)

Production of public goodsand services

Consequences Publicrevenues

Publicexpenditures


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The public economics principle Human needs are always greater

than the available resources.

Resources = factors of production(land La, labour L and capital K). La (Land) = natural resources.

L (Labour) = physical and mentalcapacity of workers to produce goods

and services. K (Capital) = goods that do not directly

satisfy human needs: factories,machineries, equipment used toproduce other goods.

Is money considered capital ineconomics ?

The concerns of the public decision-maker:

What is to be produced?

How is to be produced?

For whom is it to be produced?

How are these decisions made?

Scarcity

Choice

Needs


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What is to be produced?

Production possibilityfrontier

Resource allocation inbetween the two

industries (public goods,

private goods)

Efficient allocation: A, B

A B public goods private goods

Inefficient allocation: C Infeasible allocation: D

Public

goods

Private

goods

A

B

C

D


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For who is to be produced? How are these decision made?

The distribution problem is

influenced by: Fiscal policy;

Social policy;

Provided public goods (satisfy the needsof certain groups).

Free rider issue(linking the paymentwith the benefits the tendency to

lie about the benefits)

Wagner Law(law of public activityincrease in the developed countriesthrough corelation with thenational income) an economicdevelopment pushes for more public

spending laissezfaire

Redistribution (matching the needsfor social aid to the financingobtained through taxes)

Collectively

David Hume - tragedy of the

commons

Stages of collective (public) decision:

Knowing the public sector activities

and organization:

Financing method;

Expenditures and taxes (on a

central and local level);

Anticipating the consequences:

The effects of a tax on return

(price increase, wage cut);

Increasing the retirement age;

Assessing the alternatives;

The influence of the political factor.


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Utility and preference

Let us rememberUtilityreal/assumed capacity of a good to satisfy a need.Economic utility = satisfaction felt by an individual after consuming a

good.

Marginal utility = the value of the last consumed quantity of a good; thegain in satisfaction after consuming an additional quantity from an

economic good.Indifference curve (isoutility) = combinations of goods from which the

consumer hopes to receive the same level of satisfaction.

Why does it interest us?

In the analysis of public economythe four pillars:

Optimum;

Public goods;

Collective choices;

Justice.


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Optimum

A balanced situation preferred by everyone (equilibrium);

Is reached by the presence of other individuals producing

spillovers (externalities) positive or negative (beneficial or

harmful); The value of an old house in a new neighborhood;

Pollution;

E.g. (Stiglitz, 2010) situations in which a trade involves certain costs

and benefits for third parties (non-participants).

Pareto Optimumno individual can be made better offwithout someone being made worse off efficient resourceallocation


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Public goods

Some goods will either not be supplied by the market or, ifsupplied, will be supplied in insufficient quantity.

Pure public goods:

It costs nothing for an additional individual to enjoy their benefits;

It is difficult or impossible to exclude individuals from the enjoyment of

a pure public good.

As more individuals join the group consuming the public

good its quality could decrease. The optimum size of a

groups consuming a certain good is analyzed by the theory

of clubsBuchanan, 1965.


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Collective choicesExample of collective decision-makingthe voting paradox (Marquis de Condorcet)

Voting preferences

As preferences Bs preferences Cs preferences

First choice Shrek Twitty Tom

Second choice Twitty Tom Shrek

Third choice Tom Shrek Twitty

2:1

2:1

tranzitivity ?

NO ! 2:1

The majority vote can only

compare two preferences and

cannot decide the order of all

preferences!


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Justice

Socially acceptable objective of the Government: Protecting life and property;

Economic efficiency(obtaining the best result with limited resources);

Reaching a standard of justice (equity) (income distributionequalvs. differentiated);

Economic growth;

Economic stability.

Tradeoff between equity and efficiency

leaky bucket

Economic policyfulfilling the criteria of economic efficiency; Social policyaims at fair income distribution.


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L'tat c'est moi!

Improving the utility of one individual must not diminishthe utility of another individual.

The individuals incapacity to cooperate market failure

Public economyactors: Manorganized in communities (or any other organizations)

Statethrough:

Power of coercionmonopoly on:

Law making;

National defense; Management of military reserves during war.

Accountabilitylimited power through nations will (Constitution, laws);

Motivationpublic interest.


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How much does the state matter?Public expenditures (% GDP)


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States functions Allocative function

Government intervention in the allocative

function of the market to correct its negative effects;

Distribution functionensuring equity, social justice on thedistribution of income and wealth;

Stability functionmitigate market failures in the national economyas inflation, unemployment, stagnating economic growth, balance of

payments imbalances;

Regulatory functionmaintenance of individual behavior withinlimits imposed by society and contract discipline (through a functioning

legal system).


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Allocative function

Property right Belongs to an individual (private property)the right to exclude other

individuals from the benefits provided by a certain good;

Belongs to more individuals (common property)the right of a groupof individuals to benefit without boundaries from the object of that

property (see tragedy of the commons andfree rider); The use of common property right:

Umg=Price

It does not involve scarce resources

Otherwise:

Excessive use (like in the case of excess hunting and fishing);

Premature exhaustion of natural resources;

Congestion (in the case ofpositional goods goods having an insufficient supplyand their production cannot be easily increase).


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Regulatory function (1)

Regulating the producers and consumers decisions so toreduce:

Tendencies towards monopoly;

Negative externalities.

Why the State and not another actor?

There are large costs (for the individual consumers) of obtaining and

interpreting information about product safety;

The individuals may not be able to protect themselves because they

do not have the resources at their disposal to establish minimum

standards and quality control. Regularization limits the discretionary behavior and freedom

of individuals by imposing rules.


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Regulatory function (2)

Regulations are based on legal norms aimed at: Protecting the consumer against fraud,

Preventing damage to consumer health,

Control the design of goods so as to ensure their safe operation,

Ensure harmless conditions of employment,

Control the commercial systems, biological research etc.

The State also regulates:

Money supply;

Prices of utilities and nationalized industries;

Many of the allocative decisions in the economy (through price andincome policies).


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Stability function (1)

When does it intervene? In case of macroeconomic imbalances (inflation, unemployment,economic downturn, deficits of the trade balance and balance ofpayments etc.)

To reach the macroeconomic targets:

Economic growth Job securityreducing unemployment;

Price stabilityinflation control;

External balancebalance of payments.

How?

Through monetary and fiscal policy instruments used to restorebalance

By coordinating the economic decisions of different groups ofeconomic actors from the private sector


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Economic growth global process referring to an upward evolution of certain aggregate

economic measures, over a period of time, on a national or

international level, and producing favorable effects both economically

and socially.

an element of continuity beyond the particular macroeconomic policiesimplemented by one government or another.

takes place long term, governments are often faced with cyclicity,

requiring reformulationof the objectives of economic growth:

Establishing a social, economic and institutional environment favorable to

economic growth Ensuring balance for an economic growth path (Keynes)

Targeting economic recovery (growth of real national income vs. Growth of

potential national income)limit economic cycle oscillation for ensuringsustainable and balanced economic growth


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Jobs security Utopia heavily promoted during the communist command

economic system

Associated with the right to work

Open access to the labor market institutional and economic environment to stimulate the

development of economic initiative

Confusion!

States responsibility to ensuring the general conditions for everyindividual to work (with the appropriate exceptions)

States duty to secure jobs for all those who want to work oversizing the public sector developing the PS in accordance with

different criteria, noteconomic efficiency


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Reformulating theobjective:

Much more productive

Full use of production factors (L

included) means:

Their efficient use (optimum use)

by every economic agent

NOTusing all factors of production

available at a time

unemployment rate 0

(an unemployment rate lower than the

natural rate can cause short circuits

on the labor market)

A difference must be made interms of types of unemployment

Securing jobs

Reduce

unemployment


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Price stabilityAssociated with the anti-inflationary policies The dilemma of macroeconomic policiesreducing unemployment

or reducing inflation

The achievement of a high degree of pr ice stabi l i ty; this will be

apparent from a rate of inf lat ion which is close to that of, at most,the three best performing Member States in terms of price stability(one of the convergence criteria)

Where is Romania standing?

Inflation/deflation/disinflation?

What is the supervising body?

Through what tools?

Also contributes to regulating competitiontendency toartificially increase prices for monopoly and oligopoly


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How do we define the public sector in economic terms?

3. Time

Short term

State budget Public revenues and

expenditures = Correlating

the budget with the publicsector size

Shows the balance/imbalance Budget surplus (can show a

false profitability, inflationarysituations)

Budget deficit (commonsituation)

Long term The public sector itself

Marginal social benefit (MSB) =marginal revenue of the publicsector

Marginal social costul (MSC) =cost of administering the publicsector

MSB = MSC optimum size ofthe public sector

MSB > MSCpublic sector isefficient, in terms of profitability

MSB < MSCoversizing thepublic sector, low publicservice efficiency


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How do we define the public sector in economic terms?

5. In terms of other criteria

Negative versus positive economic policy Negativepromotes competition, anti-monopoly, neutrality in thenational economic space

Positivedirect state involvement, supporting imports and exports,measures favoring the economic

Nationalization versus privatization Common objectives :

Improving resource allocation;

Improving pricing and investment policies;

Distinct objectives: Nationalizationstrengthening the public sector and national strategies,

control of natural resources;

Privatizationimprove efficiency and reduce costs, reduce the needs ofbudget financing/ public borrowing.


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Reforming the public sector (1) What is it? Politic activity

Why do we need it? Improving efficiency in public resource allocation;

Greater justice in income distribution.

What does it depend upon?

Technology; Economic and political circumstances.

What are the reform reasons? Institutional reform;

Reducing expenditures, costs savings

Who influences the reform? Decentralization institutional change (political and administrative);

Privatization institutional change (economic);

Private sectorderegulation (to intensify competition).


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Reforming the public sector(2)Results in the public sector

Expansion/reduction ofpublic sector

Decentralization

Privatization

Deregulation

Exemples Decentralization

Expansion of public services

Reducing expenditures through a

better allocation

Privatization Expansion after changing the state-

owned company into a joint stock

company (still state-owned)

Reducing PS by transferring social

assistance to the private sector

Deregulation

Expansion due to cost coverage

(American financial system)

Reducing PS through careful

deregulation


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Reforming the public sector (3)Micro-focused

Focused on single programs;

Technical and administrative

nature.

Macro-focused Focused on the general

dimension of PS;

Political nature.

Both strategies aim at:

Either improving results through:

Introducing new programs; Technologies; Institutions.

Or cost savings.


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Reforming the public sector (4) Privatizationcan cover:

Sales of public property;

Long-term lease of publicinfrastructure, privateenterprises;

Use of decision-makingprocesses like contracting andbidding (procurement);

Replacement authority as amechanism of coordination withmarket mechanisms;

Insertion of market incentives inthe reward system for the publicofficials.

Decentralization strategy

replaced:

Planning

Rigid budgets

Control

System ofrules

Supervising

Evaluation

Performancebudgets

Managementby objectives

Frameworklegislation

Discretion

Do these contribute to productivity and efficiency increase?


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AnswerEfficiency

Can be stimulated by a local

administrative (decentralized)

system, but moving resources

(down) does not necessarily

improve efficiency (e.g. police andjustice)

Reduction policies are neutral in

relation to efficiency or inefficiency

in the PS

ProductivityAimed at through

privatization

Need for increased competition

on the supply side

Expanding opportunities for

selection on the demand side

Will these released resources be used for public sector

development?!


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Structural analysis of sectors of activity

Existentcompetitorsin the field

Potentialcompetitors

Buyers

Substituteproducts

Suppliers


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Idea The five forcesare the grounds for STRATEGY

development reflect the complexity of competitionin a sector

A greater intensity of competition is registered under perfect competition(free market entrance, existing players have no bargaining power withsuppliers and customers, and the rivalry is unlimited due to the presence of

a large number of identical products) Influence the profitabilityof a sector

Lower return if there is a better and cheaper substitute

Or if there is market rivalry

Do not consider factors that may influence short-term return - have

TACTICAL significance Fluctuations in the economic situation;

Shortages of raw materials;

Strikes;

Demand fluctuations, etc.


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1. Threat of new entrants

Barriers to entry in a particular industry Economies of scale

Product differentiation

Financial needs

Costs of changing partner Access to distribution channels

Cost disadvantages independent of scale economies (know-how)

Existing reactions from the existing players

Price to prevent entry Characteristics of the barriers to entry (e.g. exclusive rights

to technology)


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2. Intensity of rivalry between existent

actorsDepends on structural factors:

The presence of a large

number of actors or actors of

equal size

Slow sector development

pace

High storage or fixed costs

Lack of differentiation or

partner switching costs

High strategic stakes

High barriers to exit

Entrancebarriers

High

Low Low

stable

earnings

Low,risky

earnings

Large,

stableearnings

Large,

riskyearnings

Exit barriersLow High


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3. Pressure from the substitute products

Perform a function identical to that of the product in question

Presents a dangerous cost-performance rate for the

products in a particular sector

Attitude towards substitute products takes the form of

collective action (Buy American)


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4. Bargaining power of buyers

It is a focused group or buy a large quantity of theconcerned products

Products are standard or undifferentiated

The switching cost is reduced

The buyer has complete information

In case of upstream integration


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Let us remember Public policy objectives impose:

The need for a market mix;

Technically possible (PPF); What and how is prod uced?

What individuals prefer (utility). Whom for?

Public intervention. How are these decision s taken?

The aims is to ensure a Pareto efficient economy (the idealsituation)

Namely a competitive economy

With an efficient resource allocation

What if the market fails?


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Failure dissatisfaction

You always want what you do not have! The idea of an alternative way to organize the economy

(more advantageous for one who thinks of it)

Maybe you are right!

Markets (almost always) produce too much of something(pollution) and too little something(research);

a change that improves the situation of the rich without

affecting the poor is also Pareto efficient

The market intervention can happen both when markets

fail, and when the markets are efficient


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Interventionthe beginning Property right

tragedy of the commons Property guarantee leads to:

Improvement (rent vs. property);

Increased saving and investment capacity.

Contracts guarantee

The problem of the overdue loans

Government intervenes to protect the citizens and

their rights


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The intervention generated by market failure Six situations in which the markets are not Pareto efficient:

1. Failure of competition

2. Public goods

3. Externalities

4. Incomplete markets

5. Failure of information

6. Unemployment, inflation and imbalance

! Failure = the best possible result was NOT reached= inability of individuals to cooperate


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1. Failure of competition

Pareto efficiency means perfect competition (idealsituation)

Number of companies is large enough to keep the

market priceunchanged

Otherwise:

Monopoly

Oligopoly


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Reasons to limit competition Competitive advantage of large companies

When the production cost decreases with the production growth

(economies of scale)

Natural monopoly

A company produces cheaper together with other companies (utilitieswater, electricity etc.)

Large transport costs

Granting patents / licenses - they stimulate innovation, but

restrict competition


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3. Externalities The actions of an individual / a firm raises costs for another

individual / companynegative externalities

Examples:

Pollution

Use of cars traffic jam more time spent while driving higher risk

(accidents)

Individuals do not cover the total cost of negative externalities they

generate they will get involved in more and more activities ofthis kind

People do not enjoy the full benefit of the positive externalities tempted to get involved less and less in such activities


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4. Incomplete markets Not only pure public goods and services are those that

private markets fail to provide

A completemarket - providing all goods and services for

which the delivery cost is lower than the cost that individuals

are willing to pay

An incompletemarket - which fails to provide these goods

and services

Examples:

Failure of the insurance marketcovering all types of risk

Failure of real estate marketfirst house loan

Failure of students loans market


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6. Unemployment, inflation and imbalance

The most common symptoms of market failure

Indicators of market failure but also of macroeconomic

imbalances

Influence the structure of fiscal policy

Heavily regulated on a regional level


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Intervention on efficient markets Income distribution

Competitive markets Equal distribution

Government intervenes for income redistribution (social services)

Merit goods

Perfect information does not always lead to good decisions Smoking, seat belt

this type of intervention = paternalism(example: drug prohibition,compulsory social security) libertarianism

Paternalism (smoking ban) externality (example: the cost of smokingmay be covered by a fee)


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The consequences of failure Changes made by state intervention are often unpredictable

Public policies aimed at ambiguous concepts such as

serving the public interest

Even the implementation of policies may be a failure (due to

complexity)

Government intervention is not free, is made through a

bureaucracy that is expensive to administer

Rent-seeking- lobbying to influence regulatory policies

(price distortion) which lowers social welfare (social costs)

(monopoly - transfer of wealth from buyer to producer)


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Let us remember Market fails

Markets (almost

always) produce too

much of something

(pollution) and toolittle of something

(research);

Market is efficient

Marginal benefit =

Marginal cost = PriceQ

P

SD

E

QE

PE

0


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Equilibrium (balance) on the labor market What do we take into

account?

Supply of labor

Demand of labor

Quantity of the good (labor)

Price of labor

Significance of the

imbalances

I over-wage II over-quantity

III under-wage

IV under-quantity

L

w

SLDLI

II

III

IV

LE

wE

0

E


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Overuse of labor Can lead to overproduction of goods

Associated to an economic boom

USA 2006-2007unemployment rate < 5%

Oversizing the wages

The costs of labor (L) increase

Inflationary pressures occur

Solution = perfect competition (equality of wages) ?!


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Change in wages Type of job

Education (undergrad studies, high school etc.)

Age

Experience at work (employee loyalty, encourage employment

stability and enterprise attachment) does not substitute theworkers competence

Gender and race (discriminations)

Market type (the case of the unionized labor markets)

Imperfections of the labor market


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Competition on the labor market Monopsony on the labo r market

A single dominant buyer

The small companies will follow the wage policy of the large

companies

Particular case : coordinated oligopsony (agreement between the

companies on wage levels)

Effects:

Lower wage levels

Lower employment levels (in comparison to the perfectcompetition)


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MonopsonyMonopsony with low wage

There is no negotiation on

wages, or differentiations in

these negotiations

The hiring conditions arepre-established (wage

included)

Labor: Accepts the monopsonys

terms,

Leaves the area to search for

work (uncommon, due to

rigidity)

Monopsony with differentiated wages

hiring is done in groups

wage negotiations take

place in groups or even

individually

Wages are set differently, so

that the wage costs do not

exceed the planned level


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Monopoly on the labor market The union sets a wage salary (Wi)

The employment level will be QC,

pertaining to the labor demand

Real supply is largerQr

The area WiEcQcO represents

supplementary income of the

employees (Union members)

The area ABQrQc (limited by WE)

represents losses for the workers

who could still be hired if the labor

market would be competitive Pareto inefficiency

BA

Wi

Qc Qr

Ec Er

Q

W

S

DE

QE

WE

0


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The monopolymonopsony confrontation Described by the negotiation power of the two sides

Creates powerful actors Unions

Employers associations

Trigger Large transaction costs on the labor market

Free rider behavior Illegal hiring

Hiring immigrants


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State interventions on the labor market Setting a minimum wage

Discourages the use of illegal labor since taxes and contributions arecalculated as percentages relative to the entrance wage

Diminishes the unduly monopsony profits received through wagedifferentiation

Avoids a low employment level (artificially)

Establishing the minimum wageon the level of the wage of thatmarket balance, otherwise imbalances occur

The meaning of the minimum wagea policy tool to correct the

income distribution and to combat povertyAlternativeraise taxes on high wage earners (also affects

companies through the contributions quota)


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Regulating the labor market

Limiting the excesses of the two main poles of the

labor market: union - monopoly

employersmonopsony

Involves two categories of actions: Trade unions and employers regulation in order to prevent excesses

and discrimination;

Direct involvement in the negotiations between unions and employers

as a mediator to ensure convergence to the labor markets optimum.


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Regulations on employers Consider void the employment contracts subject to not belonging

to the union (yellow-dog contracts); Declare as core labor rights: the right to self-organization of labor

and the right to collective bargaining;

Prohibit employers to interfere in trade union activities and createobstacles to trade union organization;

Prohibit employers discrimination against union membershippertaining to hiring, firing and promotions;

Consider illegal to discriminate against any worker who has claimsagainst employers, or testify against him;

Require employers to properly negotiate with the unions, withoutresorting to pressure or threats;

Prohibit or limits wage discrimination based on gender, race,religious beliefs etc.


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Regulations on unions

Address three main areas:

Union organization

Unfair union practices

Right to strike


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Unfair union practices Pressure on employees to become union members

Judicial jams

Secondary boycotts (confrontation between unions)

Sympathy strikes

Discriminatory or excessive contributions

Refusal to negotiate with employers


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The right to strike Free way of expressing the attitude of workers

about the working conditions

The aim should refer to the labor market

Otherwise, are prohibited: Political strikes

Religious strikes

solidarity or social groups strikes.

Are also prohibited : Strikes that can block the entire national economy and

may endanger public health,

or national security.


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Let us remember Economysystem organized on markets:

Labor market

Market of goods and services

Monetary market

An efficient market = a competitive market

Perfect competition

Imperfect competition Non-optimal income distribution

State intervention


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The Pareto inefficiency of monopoly Monopoly

Best known case of imperfect competition

Lack of competition on one goods market

The supplier has discretionary powers on settingthe operating conditions of a goods market

Monopolistic competition Who is competing against monopoly?


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Who is competing against monopoly? With the companies that produce substitutable goods in

relation to the good self-produced.

With any other company the limited nature of short-termincome.

Considering short-term consumer income constant, it results that any

increase in consumption of a good will lead to a reduction in

consumption of another good, regardless of the relationship of

substitutability or complementarity.

Advantages of monopoly will attract other supplier/

manufacturers.


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Monopolys strategies


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Legend (1) Monopoly faces the market demand demand curve

around the gates of the company will be identical with thoseof market demand.

The optimal level of monopoly output (Q*) is set in relation tothe intersection of marginal revenue with marginal cost curve(Vm < VM)

The price corresponding to this level of supply is P*, butmarket demand is at a higher marginal income PC> P*

Monopoly can set the supply at its discretion (the onlysupplier)

Usually the monopolistic firm restricts the supply to get ahigher sales price (the more the supply curve will be to theleft, the higher the price will get)


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Legend (2) The monopoly obtains superprofit (S), as the difference

between the profit pertaining to the intersection between thedemand curve and the supply curve (PC) and optimizing

price (P*)

Pareto optimum? No.

Obtaining superprofit is in the detriment of consumers, meaning thatthe Q* solution is not Pareto optimum

The prices are higher than the level pertaining to profit maximization

(P*)

Are there favorable conditions for monopoly? When it doesnot worsen the welfare of others

The case of the technological monopolyimproving technologicalperformance can be found in welfare improvements (R & D)


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The Pareto inefficiency of oligopoly

Kinked (broken)

demand curve


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Legend (1) Initial situation (Q0, P0).

Temptationprice control.

The oligopolistic firm has the following alternatives: If it wants to increase the price, the demand will suddenly turn elastic because

its product that became more expensive will be substituted by powerful

products of other firms from the oligopoly that have kept the price unchanged

losses for the supplier.

If it intends to reduce the price, the demand will turn inelastic, because at least

one other firm from the oligopoly will do the same, and the sales surplus willbe split between firms that reduce price losses for the supplier.


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Legend (2) The marginal income Vm in the case of the imperfect

competition is below average income (of the marketdemand) the marginal revenue curve of the oligopolisticfirm will be discontinuous

Point Nmarginal revenue curve break (slope changes inthe firm's demand curve)

The second part of the marginal revenue curve is negative

(which measures the change in total revenue of thecompany to lower prices, unlike the first part which describesthe change in revenue from an increase in price)


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Solutionnegotiation

Cooperationbetweenfirms in the oligopoly

avoids the kinked curve

and the firm gains

because the income

earned due to price

increase is larger than

the income lost due to

sales quantity drop


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Methods of coordination in the oligopoly

Trustfirms are horizontally integrated through joint assets monopoly

Cartelfirms keep their autonomy (e.g. OPEC)

Coordination may be based on agreements negotiated bythe participants

These agreements provide for:

commodity prices,

local markets,

Supply quotas assigned to each participant.


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Coordination difficulties in the oligopoly Non-transparent pricing strategiespricing information

exchanges take place only when cooperation is desired

Wholesale - If a company raises the price of some of its

supply contracts for next year is unlikely that a competitor

can benefit from an increase in sales since it works with itstraditional clients

Real complex and non-fungible goods

Antitrust law

C di ti h i t l/ ti l


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Coordinationhorizontal/vertical Horizontal structures define the same level of

economic activity (producers, sellers).

Vertical structures are considered:

Integration on technological flows (upstream-downstream),

producer-seller,

In line with the supplies of raw materials or parts.

How do we establish the influence of the oligopolistic


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How do we establish the influence of the oligopolistic

horizontal coordination on free competition?

market definitionmonitoring through specialized bodies(setting the price increase threshold)

sales concentration (degree of market concentration)determine the share in total salesH-H index

barriers to entry (see Porter's Forces)

other market characteristics

Predator behavior (price dumping)

degree of complexity pertaining to the supplied goods quality

Suppliers history on that market.

efficiency and cost savings following a merger.


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The case of coordination through vertical integration

Merger between two independent firms that had made

transactions, on being the others supplier

Where do problems occur?

long-term contractsmake the entrance of a new seller or buyerimpossible

franchise, sales, leasing, licensing, sales, exclusive, contractualrequirements, territorial restrictions

resale price maintenanceprice strategy used by the manufacturer tocontrol the final consumer price

informational limitations

conditional sales contractsconditions the delivery of a good by thepurchase of another good


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The difficultyestablishing the boundaries of the intervention

Regulation of competition Involves complex mechanisms

It is costly

It is unnecessary when the barriers created by state

regulations produce Pareto efficiency losses(beyond the benefits of regulation)?

Notnecessarilythe case of merit goods

But yes, looking for the solution of self-regulation: professional associations

agreements on compliance with quality goods and services

fair rules of doing business.

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Economic Analysis of PD

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