ECON101: Principles of Microeconomics

Competition Policy

This discussion helps to explain why policymakers may be concerned about firms that have few competitors. Market power allows the firms to set high prices – and make high profits – at the consumer's expense. Potential consumer surplus is lost because few consumers buy, and those who do pay a high price. The owners of the firm benefit, but overall, there is a deadweight loss.

A firm selling a niche product catering to the preferences of a small number of consumers (such as a luxury car brand like Lamborghini) is unlikely to attract the attention of policymakers despite the loss of consumer surplus. However, if one firm is becoming dominant in a large market, governments may intervene to promote competition. In 2000, the European Commission prevented the proposed merger of Volvo and Scania because the merged firm would have a dominant position in the heavy trucks market in Ireland and the Nordic countries. In Sweden, the combined market share of the two firms was 90%. The merged firm would almost have been a monopoly – the extreme case of a firm that has no competitors at all.

When there are only a few firms in a market, they may form a cartel⁠ – a group of firms that collude to keep the price high. By working together and behaving as a monopoly rather than competing, the firms can increase profits. A well-known example is OPEC, an association of oil-producing countries. OPEC members agreed to set production levels to control the global oil price. Following a sharp increase in oil prices in 1973 and again in 1979, the OPEC cartel played a major role in sustaining these high oil prices at a global level.

While cartels among private firms are illegal in many countries, firms often find ways to cooperate in setting prices to maximize profits. Policies to limit market power and prevent cartels are known as competition policies or antitrust policies in the United States.

Dominant firms may exploit their position by strategies other than high prices. In a famous antitrust case at the end of the 20th century, the U.S. Department of Justice accused Microsoft of behaving anticompetitively by "bundling" its web browser, Internet Explorer, with its Windows operating system. In the 1920s, an international group of companies making electric light bulbs – including Philips, Osram, and General Electric – formed a cartel that adopted a policy of "planned obsolescence" to reduce the lifetime of their bulbs to 1,000 hours so consumers would have to replace them more frequently.

Source: CORE Econ, https://www.core-econ.org/espp/book/text/07.html?query=competition+policy
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