Chapter20

Chapter20 - MANAGERIAL ECONOMICS An Analysis of Business...

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1 MANAGERIAL ECONOMICS An Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall
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2 Chapter 20: Competition and Competition Policy Objectives: After studying the chapter, you should understand: 1. the alternative concepts of competition and monopoly power 2. the rationale for competition law 3. the policies towards market dominance and restrictive trade practices
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3 Alternative Concepts of Competition and Monopoly Power Traditional concepts: Traditional concepts: Perfect competition: In fact no competition; no product differentiation, no advertising, brand name, etc.; all firms are price- takers. Imperfect competition: Monopoly: pure monopoly, which faces no competition, is a rare case. Oligopoly and monopolistic competition (developed by Robinson and Chamberlin in the 1930s).
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4 Adam Smith: The forcing of market price to its “natural level” or to the lowering of profits to a minimum Schumpeter: Competition as a process involving mainly the dynamic innovations of the entrepreneur (“creative destruction”) Linking competition with economic growth and development
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5 Knight: What competition actually means is simply the freedom of the individual to deal with any and all other individuals and to select the best terms as judged by himself, among those offered. Copeland: He criticised the traditional concepts of competition as too passive; competition involves the active effort to improve the terms on which one trades e.g. the competition for a position of monopoly power.
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6 The Search for “Workable Competition” Clarke (1940): “Workable competition is defined as the most desirable forms of competition, selected from those that are practically possible.” cannot have perfect competition; all forms of competition are of the second-best. Austrian view (Reekie, 1979): Competition is not a state; it is a process taking place through time which is never in equilibrium; competition is a dynamic process.
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7 Structure-conduct-performance Paradigm Turning away from theory and examine the facts about industries’ activities, in order to identify those factors that lead firms to behave in unacceptable ways, and those that lead to satisfactory performance Many different relationships were examined but the most common hypothesis to be tested was on profitability of an industry
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8 The Contestable Markets Approach
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This note was uploaded on 08/07/2011 for the course PMBA 2963.2 taught by Professor Stephenchiu during the Spring '03 term at HKU.

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Chapter20 - MANAGERIAL ECONOMICS An Analysis of Business...

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