ECON 3440: Competition Policy and Regulation
1. Introduction
Dr Heiko Gerlach
Associate Professor
The University of Queensland
Semester 1, 2024
ECON 3440: Competition Policy and Regulation 1
1. Course Organisation
Course Coordinator:
▶ Assoc Prof Heiko Gerlach
▶ Zoom: https://uqz.zoom.us/my/heiko.gerlach
▶ Consultation: Thursdays, 12-1pm, or by appointment
▶ Office: 39-549
▶ E-mail: h.gerlach@uq.edu.au
ECON 3440: Competition Policy and Regulation 2
Lecture organisation
▶ Lecture recording + lecture online quiz released on weekend for week
to come
▶ Go through lecture, then take quiz on blackboard (quiz not assessed)
▶ On Thursdays 10-11.50am (room 63-348): summary, review of main
concepts, case discussions and Q&A (recordings will be made available
on blackboard)
Tutorial organisation
▶ Tutorial questions released on weekend for week to come
▶ Parallel tutorial sessions on campus and online (see time table on
Blackboard), starting week 2
▶ You will also be provided with a recorded tutorials for convenience
▶ make use of consultation times of tutors (see timetable on Blackboard)
Learning Material (all posted on Blackboard):
▶ Lecture slides, Tutorial problems (+solutions), Additional exam
exercises, lecture online quizzes on blackboard, Readings, Lecture
Recordings
ECON 3440: Competition Policy and Regulation 3
Assessment:
▶ case study essay: 25%
▶ three Blackboard online tests each worth 25%
▶ dates for tests and essay
▶ once you start online test, you have 6 hours to complete
▶ questions include MCQ, problem solving and case analysis, some
questions require file submission
ECON 3440: Competition Policy and Regulation 4
Case Discussion: Essay
topics/cases provided in week 3
essay length: 1,000 words (excluding references)
due date: Monday, June 3, 4pm (submit electronically on blackboard)
criteria for grading the essay include:
▶ Case description (40%)
▶ Application of economic theory (40%)
▶ Presentation and writing (20%)
Competition Policy Pop Quiz and Guest Lecture
lecture in last week of semester (May 23):
▶ Competition Policy Pop Quiz with prizes!!!
▶ guest lecture ACCC Executive Director on digital platforms and
competition policy
ECON 3440: Competition Policy and Regulation 5
What do you learn in this course?
microeconomic concepts of competition policy and regulation
review of basic Industrial Organisation and Game Theory concepts
discussion of classic and recent theoretical models of competition
policy and regulation
application of theory to cases and real world examples
models to understand fundamental principles behind economic
concepts
course should give you solid, up-to-date understanding of competition
policy and regulation issues
foundations for analysis as competition economists for regulatory
bodies and consultancies
ECON 3440: Competition Policy and Regulation 5
Requirements
good understanding of second year level of microeconomics
you should like and be able to work with quantitative models
we use graphical intuition with mathematical analysis (algebra,
calculus)
you should know:
▶ calculus: differentiation rules
▶ algebra: solve systems of two equations and two unknowns
▶ optimisation theory: optimisation with constraints using Lagrange
be able to make connections between theory and its application in
real-world cases
if you are not comfortable with the maths requirements, you will
struggle and not be able to get the full learning experience from this
course!
ECON 3440: Competition Policy and Regulation 6
Course outline:
1. Introduction
2. Basic Concepts for Regulation and Competition Policy (weeks 1-2)
⋆ demand and cost analysis, monopoly, game theory, oligopoly
3. Collusion and Cartel Policy (weeks 3-4)
4. Monopolisation Practices (weeks 5-6)
5. Mergers and Acquisitions Policy (weeks 7-8)
6. Regulation (weeks 9-13)
⋆ natural monopoly
⋆ optimal price regulation
⋆ incentive regulation
⋆ bottleneck access pricing
ECON 3440: Competition Policy and Regulation 7
2. Competition Policy versus Regulation
Starting Point: Free markets may not achieve efficient outcomes due to
market failures, strategic behaviour, barriers to entry
Definition: Competition Policy and Regulation are set of policies and
laws that foster consumer surplus or welfare in cases where normal
competition is not possible or restricted.
competition policy regulation
sectors where “normal” competition
feasible (natural oligopoly)
special sectors (natural monopoly,
transitory phase)
authority checks lawfulness of firms’
action
regulator has extensive powers
(prices, investment, products)
ex post intervention ex ante intervention
occasional intervention long-run and continuous involvement
analysed with oligopoly theory principal-agent and price regulation
models
ECON 3440: Competition Policy and Regulation 8
3. Introduction to Competition Policy
3.1 Origins in the United States
NPR Podcast: https://www.npr.org/sections/money/2019/02/15/
695131832/antitrust-1-standard-oil
1890 Sherman Act in US
Section 1 prohibits contracts, combinations and conspiracies which restrain
trade and prescribes imprisonment and fines for violation
Section 2 prohibits monopolization, attempts to monopolize and
conspiracies to monopolize any part of trade and commerce
- Sherman Act has almost reached constitutional stature in US
- no other country has equally broad substantive provisions
- relies heavily on common law method of judicial interpretation
- “evolutionary” nature right from the beginning
- oscillating between rule of reason and per se rules
ECON 3440: Competition Policy and Regulation 9
Reason for Sherman Act
- reaction to industrialization and rise of huge corporations
- economies of scale and scope in second half of 19th century due to
improvement in transportation and communication
innovations in metallurgy, chemicals, energy
more advanced capital markets
- no enforcement until 1897 (price fixing of trust of 18 railways
Trans-Missouri Freight Association)
- Dr. Miles vs Park & Sons (1911) turned in per se prohibition of
(minimum) resale price maintenance clause (still valid today)
- 1911 Standard Oil split into 34 separate companies because of
monopolisation (predatory) practices
ECON 3440: Competition Policy and Regulation 10
Per Se Activism until early 70s
- vigorous antitrust enforcement to restrain large firms and de-concentrate
industries
- suspicion of corporate giants: fear of single firm dominance
- simplify burden of proof for government: per se rules
- per se prohibition of tie-in sale/bundling in International Salt (1947)
- per se prohibition of exclusive territories in Schwinn (1967)
- aluminium ingot producer Alcoa (1945) found guilty of monopolization
when increasing market share from 90% to 91%
- “David vs Goliath”: Supreme Court defended small against big
companies in controversial decisions (e.g. Utah Pie 1967)
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The Chicago School mid 70s-mid 90s
NPR Podcast on Chicago School: https://www.npr.org/sections/
money/2019/02/20/696342011/antitrust-2-the-paradox
- several authors of U of Chicago (Bork, Posner) criticized interventionism
and stressed efficiency rationale behind actions of big companies
- “Antitrust Paradox”: antitrust rulings in 60s defended competitors not
competition; antitrust rulings were harming competition
- Chicago introduced consumer welfare as standard for competition policy
- introduced small models of competition to show efficiency arguments in
defence of big companies
- turning point was GTE-Sylvania (1977) in which Supreme Court decided
that non-price vertical restraints should be subject to rule of reason
- rise of Chicago School: more trust in market forces and sharp decrease in
antitrust cases filed
ECON 3440: Competition Policy and Regulation 12
Advent of Game Theory
- advent of game theory revolution in IO end of 70s: complete change in
industry analysis methodology
- game theory allows more complex, interdependent industry analysis
- greater variety of equilibrium predictions as a function of industry
characteristics
- favours full-scale rule-of-reason inquiry
- game-theoretic argumentation and sophisticated models nowadays
commonly used by antitrust agencies and courts
ECON 3440: Competition Policy and Regulation 13
Current Practice and Challenges
1. Cartel Prosecution
- since beginning 90s increased effort in bringing down hard core cartels
- couple of high-profile cases like Vitamins, Citric Acid, Elevators, Art
Auction Houses etc.
- cartel prosecution tops priority list of OECD economic task list
- adoption of leniency programmes: immunity for cartel cheaters
- prosecution of behavior that facilitates collusion not just collusion itself
2. Monopolization
- before: Supreme Court ruled that exclusive behaviour rarely makes
business sense
- game theory explains how, when and why exclusion can occur
- now: rule of reason approach, plaintiff must prove exclusionary
mechanism and intent, defendant can recur to efficiency defence
ECON 3440: Competition Policy and Regulation 14
3. Merger Analysis
- now based on economic concepts, market simulation and integrated
competitive analysis of markets
- market definition to reject Staples/Home Depot merger
- since 1997 merger guidelines amended to allow more generously for
merger synergies
4. New challenges
- innovation industries: patent wars, litigation and licensing, and antitrust
- rise of internet tech giants (Facebook, Google, Amazon etc.): consumer
welfare in platform markets, inclusion of non-price measures such as
information and privacy
- internationalization of cartels and prosecution requires international
policy coordination
- devise readily applicable empirical techniques to identify business conduct
ECON 3440: Competition Policy and Regulation 15
3.2 Competition Policy in Australia
- for most of the 20th century, competition policy in Australia was weak
- tolerance of monopolies and restrictive trade practices within British
empire’s protected trading system
- reforms since 1980s due to poor economic performance in 70s/80s
- Hilmer committee’s report agreed in 1995: National Competition Policy
bring all commercial activity within the reach of the Trade Practices Act,
regardless of legal form or ownership of enterprise
harmonisation of rules and laws: increase rule of reason approach to
anticompetitive practices
organisational changes: ACCC, Competition Council (for interstate)
access regime for natural monopolies with essential facilities
sector-specific regulations: National Electricity Market, reforms to introduce more
competition in electricity generation and retailing
ECON 3440: Competition Policy and Regulation 16
- Dawson committee review of Act (2003):
act applied as broadly as possible across all sectors of the economy
formal merger clearance procedure
strengthening of penalties (including introduction of criminal sanctions for serious
forms of cartel conduct)
refinement of policies regarding horizontal agreements (what is collusion?)
more accountability for ACCC
led to Competition and Consumer Act 2010
- Harper review (2015):
recommendations to federal and state governments, root and branch review of
competition policy in Australia
targets specific industry legislation (water, freight, taxis, pharmacies etc)
suggests changes in major areas cartels, monopolisation and mergers in line with
international standards
biggest controversy in monopolisation: “take advantage” versus “conduct has the
purpose, effect or likely effect of substantially lessening competition”
ECON 3440: Competition Policy and Regulation 17
3.3 Objectives of Competition Policy
- consumer surplus standard: US, Europe, Korea, Japan
- total welfare standard: Canada, NZ, Australia (profit weight< 1)
- many cases would yield similar outcome with either standard
W or CS: Which standard makes better objective?
- W-criterion overlooks distribution issue (other instruments, consumer
shareholding)
- CS as countervailing power to lobbying and information disadvantage for
consumers
- effect on CS, that is prices, easier to assess
- CS standard taken literally would make it hard for firms to survive
- static CS standard is detrimental to firms’ incentives to invest: dynamic
CS standard takes firms’ profits into account
ECON 3440: Competition Policy and Regulation 18
4 Regulation
Definition
Government Regulation of industry is local, federal or state control of
individual or firm behaviour via the mechanisms of setting the prices or
controlling the quantity and quality of goods and services produced.
- we distinguish two fundamental types of regulation:
Economic Regulation: government control of firm behaviour in industries
characterised by lack of competition (traditionally natural monopolies).
e.g. electricity rates
Social Regulation: government control of individual and firm behaviour
with respect to environmental and health and safety implications of
production and consumption of goods and services (traditionally
externalities). e.g. emissions from power plants
ECON 3440: Competition Policy and Regulation 19
4.1 Regulation in Practice
stylized way regulation is implemented:
Government appoints a regulatory agency with a mandate to achieve
certain objectives
regulatory agency has discretion to set regulations which are
consistent with its mandate
regulatory change should pass social benefit-cost test
in most countries, regulation complicated by overlapping regulatory
jurisdictions: local, state and federal agencies may regulate aspects of
the same type of behaviour e.g. health and safety legislation.
ECON 3440: Competition Policy and Regulation 20
4.2 History of Regulation
0"
5"
10"
15"
20"
25"
30"
35"
40"
45"
1900" 1910" 1920" 1930" 1940" 1950" 1960" 1970" 1980" 1990" 2000"
Regulatory+Acts+passed+in+US+
big wave of nationalisation of industries (government ownership) in
1940s in Europe/UK/Australia
big wave of privatisation of industries in 1990s
ECON 3440: Competition Policy and Regulation 21
4.3 Regulation in Australia
- many regulators at state level, but trend is towards national regulation
agencies
area regulator
electricity/gas transmission and dis-
tribution
Australian Energy Regulator (AER)
and/or state level
water and sewer local/state regulators
telecommunications ACCC
postal services local, state regulator
financial services ASIC and APRA
rail ACCC and/or state level
airports, ports ACCC and/or state level
ECON 3440: Competition Policy and Regulation 22
Example: Regulation in the Electricity Industry
Australian
Competition Tribunal
Electricity –
application for
penalty for Code
breach ACCC
Transmission
revenue
determination
Federal or
Supreme Court
Australian Energy
Market Commission
Australian Energy
Regulator
Authorisation decision
MoU between
ACCC, AER
& AEMC
AEMC –
Comp. issues?
yes
no

Implement

Gas
only
ECON 3440: Competition Policy and Regulation 23