COMPETITION AND CONSUMER ACT 2010

Competition and Consumer Act 2010

Competition and Consumer Act 2010

Question 1) Competition is not an end in itself. Competition is valued for what it can deliver in terms of economic efficiency. Competition does not always maximise economic efficiency. Explain how the Competition and Consumer Act 2010 (Cth) accommodates conduct that may restrict competition, but enhances economic efficiency.

Step 1 Competitive Market & Inefficiency

A perfectly competitive market requires that there should be a large number of sellers and buyers, each seller, therefore, having only a small share of the market. Further, the product should be homogeneous, there should be no entry or exit barriers or information asymmetries and both the seller and buyer should have access to the market. In such a market, sellers are price takers, not price makers, and the price of a product equals its marginal cost; each supplier makes only a normal profit. A perfectly competitive market is said to achieve both allocative efficiency and productive efficiency. The combined effect of allocative and productive efficiencies is that society's welfare overall is maximized. Consumer welfare is also maximized in such a situation. Competition also enhances dynamic efficiency in that it spurs innovation, development of new products and technological growth. If perfect competition is at one end of the spectrum, at the other end is monopoly. Here, there are many buyers but only one seller, who is a monopolist and who is in a position therefore, to increase prices and reduce the volume of supply. In this situation there is allocative inefficiency, which is also referred to as deadweight loss. In economic theory, however, the objection to monopoly is not only that the monopolist is able to charge excessively and reduce production, but also that monopoly is inefficient. The inefficiency arises out of higher costs, for example, through higher remuneration and excessive staff. A monopolist may also waste resources by maintaining excess capacity or indulging in excessive product differentiation. This situation is also referred to as X-inefficiency, the term first used by Liebenstein.

For some industries the domestic markets may be too small to allow even one firm to be efficient and if it does, the resulting monopoly is likely to be inefficient exactly because it is a monopoly. Openness to trade is therefore crucial for such countries in order to enlarge their markets and allow their firms to exploit economies of scale. It is argued that due to this need of openness to trade, small economies are likely to have lower barriers to entry and that higher levels of concentration on domestic markets should be tolerated. However, small economies are not always open, and it is therefore necessary to make a distinction between open and isolated small economies. This also becomes clear in the ICN survey.

In some industries, state intervention is due to natural monopolies that arise because the market size and the cost structure of production allow a monopoly to produce more efficiently than if production was split among several ...