Competition and Policies Toward

Monopolies and Oligopolies,

Privatization and Deregulation
R E P O RT E R S :
L E S L I E A N N E T. G A N D I A
CHARLIE MAGNE G. SANTIAGUEL

Learning Objectives
1. Understand the nature and significance of competition in a
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market economy.
Distinguish between price takers and price searchers.
Explain economic inequality and how it contributes to poverty.
Know the factors that make it difficult for potential
competitors enter a market.
Describe a monopolistic market and distinguish it from the
oligopolistic market.
Understand the fundamentals of financial management in
public sector enterprises.
Realize the causes of ineffectiveness, inefficiency and
corruption in public sector enterprises.
Identify the ways to reform public sector enterprises.
Know the objectives of privatization and disinvestment in
public sector enterprises.

Competition
As a dynamic process means, rivalry or

competitiveness between or among parties to

deliver a better deal to buyers in terms of
quality, price and product information.

Price Takers
In a price taker market, the firms all produce

identical products and each seller is small

relative to the total market.
Can sell all their output at the market price,
but cannot sell any of their output at a higher
price.
In the real world, most firms are not price
takers.

Price Searchers
These are firms that face a downward-sloping

demand for their product.

The term pure competition refers to a market

structure characterized by a larger number of

small firms producing a identical product in an
industry that permits complete freedom of
entry and exit.

Significance of Competition
Competition motivates businesses to produce

efficiently, cater to the views of consumers

and search for innovative improvements.
Competition puts pressure on producers to
operate efficiently and use resources wisely.
A firm in competitive markets has strong
incentive to discover and produce goods and
services that consumers value highly relative
to cost.
Makes firms innovative and forward looking.

 It is not from the benevolence of the butcher,

the brewer, or the baker, that we expect our
dinner, but from their regard to their own selfinterest. We address ourselves, not to their
humanity but to their self-love, and never talk
to them of our own necessities, but of their
advantages.
-- Adam Smith

Income Inequality and Poverty

Differences in resource prices and the

productivity of individual will cause incomes

to vary.
Money income is only one component of
economic well-being.
Low-income families are the primary
beneficiaries of noncash transfer programs
that provide people.
A market economy does not have a central
distributing agency that carves up the
economic pie and allocates slices to various
individuals. Rather each individual produces

Income Inequality and Poverty

It is important to recognize that income in a

market economy is not like manna from

heaven.
When it comes to issues of fairness, some
people argue that the process that generates
the outcomes is more important than the
actual result.
Economic provides insight into both the
allocative role and sources of differences in
income. It also indicates that it will be costly,
in terms of lost output, to redistribute income
through taxes and transfers.

Market Entry Barriers

1. Economies of Scale the fixed costs in an

industry are large, bigger firms can generally

achieve lower average total per-unit costs
than smaller one. Economies of scales and
high fixed costs, however, are not a
significant barrier to entry.

Market Entry Barriers

2. Control over an essential resource

control over a resource essential to produce

a product may also insulate a firm from
direct competitors. Barrier to entry like the
one has just been described is often
temporary but it exists that may be high
enough to limit the market to only one seller.

Market Entry Barriers

3. Government licensing Licensing is a

requirement that one obtains permission

from the government in order to perform
certain business activities or work I various
occupations. Legal barriers are the oldest
and considered most effective method of
protecting a business firm fro potential
competitors.

Market Entry Barriers

4. Patents Most countries have patent laws

to give investors a property right to their

inventions. A firm that develops a new drug
can use patent protection to restrain
production by others for 17 years from the
time the patent is issued.

Economists criticize high barriers to

market entry for the following reasons:

1. The ability of consumers to discipline

producers is weakened.
2. The unregulated monopolist or oligopoly
group can often gain by restricting output
and raising price, and
3. Legal barriers to entry encourage firms to
engage in masterful rent-seeking activities.

Four Policy Options

1. Control the structure of the industry to

ensure the presence of rival firms.

2. Reduce artificial barriers that limit
competition.
3. Regulate the price and output of firms in the
market.
4. Supply the market with goods produced by a
government firm.

Monopoly
Single seller
Market characterized by
1. A single seller of a well-defined product for which
there are no good substitutes, and
2. High barriers to the entry of any other firms into the
market for that product.

Oligopoly
Few sellers
Market characterized by
1. A small number of rival firms
2. Interdependence among the sellers because each is
large relative to the size of the market.
3. Substantial economies of scale, and
4. High entry barriers to the market.

Interdependence among Oligopolistic

Firms
Sellers in an oligopolistic industry is small, the

supply decisions of one firm will significantly

influence the demand, price, and profit of
rivals. This adds to the complexity of the
firms decision making.

Substantial Economies of Scale

In an oligopolistic industry, large-scale

production is generally required o achieve

minimum per-unit cost. Economies of scale
are present, so a small number of large scale
firms can produce enough of the product to
meet the entire market demand.

Significant Barriers to Entry

As with monopoly, barriers to entry limit the

ability of new firms to compete effectively in

oligopolistic industries. Except where a market
is contestable, economies of scale are
probably the most significant entry barrier
protecting firms in an oligopolistic industry.

The products of sellers in an oligopolistic

industry may be either similar or

differentiated.

Price and Output Under Oligopoly

An oligopolist, unlike a monopolist or a price

taker, cannot determine the product price that

will deliver maximum profit simply by
estimating its own costs and the existing
market demand.

Financial Management in Public Sector

A public sector enterprise (PSE) is a business

undertaking owned, controlled and managed

by the state on behalf of and for the benefit of
the public at large.
The basic objective of public enterprising is to
achieve the strong industrial base and to
provide infrastructure for the development of
the economy of the country.

The basic objectives of accounting and

financial reporting for government units
are to provide:
Financial information useful for making

economic, political and social decisions and

demonstrating accountability and
stewardship.
Information useful for evaluating managerial
and organizations performance.
Information useful for planning and budgeting.
Information useful for short-term financial
resources of the public sector unit.

Ineffectiveness, Inefficiency and

Corruption
1. Government is not truly profit-oriented.
2. Political interference is very high in PSEs.
3. Short-tenure managers appointed by

government to manage these units only take

steps for short-term gains ignoring long-term
implication.
4. Less flexibility in prevalent in PSEs.
5. Constant fear of COA queries and
parliamentary questions increase the
tendency of passing the buck and delaying
decisions.

Ways to Reform PSEs

1. De-licensing or deregulation
2. Reducing the budget allocation
3. Reforming the decision making systems
4. Disinvestment or Privatization

Objectives of
Disinvestment/Privatization
The major objectives of the
disinvestment/privatization can be summarized
as follows:
1. Revenue collection
2. Improvement in efficiency
3. Market discipline
4. Resources mobilization
5. Direct participation of public
6. Encourage employee ownership
7. Reduction of bureaucratic control

Arguments in Favor of Disinvestment/Privatization Process

1. The basic problem with PSEs is neither the

equality of assets nor the skilled manpower,

but the overall decision making system.
These enterprises would realize true
potential only when they are privatized.
2. The disinvestment and privatization process

could bring in better corporate governance,

transparency, corporate responsibility,
exposure to competitive forces,
improvement in work environment and so
forth.

Arguments in Favor of Disinvestment/Privatization Process

3. The market participation in capital of PSEs

through stock exchanges would enable the

market to discover the latent worth of PSEs.
4. The loss making PSEs can be successfully

revived by asking the strategic partner to

infuse fresh capital and by exercising
excellent management control over sick
PSEs.

Arguments Against Disinvestment/Privatization Process

1. Selling of profit making and dividend paying

PSE would result in loss of regular source of

income to the government.
2. There would be chances of asset stripping

by the strategic partner.

3. The governments policy of disinvestment

includes the disposal of both profit making,

as well as potentially viable PSEs.