Assess the view that competition policy is likely to lead to markets becoming less efficient in the long run.
Lets just assume diagrams are correct im confident on that for the natural monopoly diagram and the monopoly diagram.
The long run is a period of time in which all factors of production are variable, allowing for a firm to change its scale of production. Efficiency refers to the optimal allocation of resources to maximize social welfare, including productive, allocative, and dynamic efficiency. Competition policy is used by the CMA in the attempt to make markets more efficient and more competitive to achieve economic welfare which is a boost in individual living standards. To do this the CMA could use methods such as Privatisation which is when government-owned businesses and assets are sold and passed to the private sector. Deregulation which is lower government intervention through way of rules and regulation (less bureaucracy). This essay will assess whether competition policy is likely to lead to markets becoming less efficient over time.
By using competition policy such as deregulation, markets will become less efficient over time. Regulatory bodies such as the CMA use regulation on business and monopolies to prevent anti-competitive behavior. The CMA had blocked the merger of Sainsbury’s and ASDA, two supermarkets in the UK who have oligopolistic power. If the CMA had not blocked the merger, the firm would be able to gain monopoly power. As seen in the diagram, monopolies operate at output where MC=MR to profit maximize at output Q and price P. The monopoly would not be allocatively efficient (not producing at where P=MC) and productively inefficient as they are not minimizing average cost by producing at the bottom of the AC curve. However, due to deregulation allowing firms to be able to obtain monopoly power more easily, it allows static inefficiency.
On the other hand, monopolies are able to gain dynamic efficiency in both the short and long run due to the fact of the supernormal profit gained from profit maximization. In addition, deregulation may not lead to monopoly power but may open up markets, as for example the removal of the FSA which is the Financial Services Authority had to regulate firms whenever they wanted to set up on the Stock Exchange. It was an expensive and legacy process deterring firms from entering the market. Deregulation would lower barriers to entry, opening markets to more competition as seen in the budget airline market with firms like Ryanair, Jet2 and EasyJet who offer low prices (being allocatively efficient) and have low production costs to allow them to offer low prices (being productively efficient). Hence deregulation does not lead to less efficiency in the long run.
Competition policy such as privatisation is not likely to lead to markets being less efficient in the long run. The UK had sold its remaining services to the private sector in 2013 setting to allow Royal Mail to operate on the market. This was able to allow Royal Mail to be commercially aware as it was now owned by shareholders who are interested in maximizing profits to earn dividends. This would lead to Royal Mail lowering its production costs, which had been ignored due to under-nationalisation due to the lack of pressure of a profit motive. This would lead to efficiency, producing on the curve due to lower costs. In addition, the privatisation had allowed other firms to enter the mail sector such as Hermes and Whistl who were able to find a way to lower production costs, being productively efficient and offer lower prices (being allocatively efficient) to gain market share from Royal Mail. This would force Royal Mail to be statically efficient in the long run to keep market share and profits, hence competition policy promotes efficiency in the long run.
On the other hand, as seen in the natural monopoly diagram, the effectiveness of privatisation depends on the type of business which has been sold to the private sector. If a function like the railways is sold to the private sector, it would lead to a duplication of resources for firms. The firms compete on the same routes, hence if one firm had total control (this would mean quantity would fall from Q to Q_1 at P when privatized), as a result, firms would have less output to spread fixed costs over as they are not producing at the minimum of LRAC. There is a keen productive inefficiency, so price rises from P to P_1, reducing consumer surplus and economic welfare, hence not being efficient in the long run.
Competition policy such as contractualisation would be able to allow markets to become more efficient in the long run. Contractualisation is when government run functions like building hospitals or bin collecting are now being competed by private sector firms. The firm competes for the contract through competitive tendering where each firm states the price they take over the function. This allows the consumer to gain the highest quality services. Due to the fact economic theory suggests that firms are profit maximizing, they would want to minimize their costs to increase their profits. This would lead to productive efficiency as they operate at the minimum of AC curve. In addition to being efficient, reducing any waste. By this, contractualisation in competition policy is able to be productively efficient as firms have the incentive to maximize profits.
Although, this assumes that the government has perfect knowledge in choosing the firm which would be able to reduce and minimize average cost and be productive and efficient. Due to government failure arising from imperfect information, the wrong firm may be awarded a contract. This could lead to an inefficient firm wasting resources being inefficient and not productively efficient in the long run, hence not likely to lead to markets being more efficient in the long run.
In conclusion, despite competition policy reducing barriers to entry and increasing contestability of markets as a result through deregulation such as removal of heavy regulatory bodies like the FSA, reducing bureaucracy or removal of power of intellectual property rights like patents, which the USMCA had reduced the ease in obtaining in the pharmaceutical sector. Lowering barriers to entry and increasing contestability which encourages firms to be more statically efficient by reducing AC and offering lower prices and higher quality to gain market share. The drawback of competition policy which could be reinforcing monopoly power as a result of deregulating regulatory bodies like the CMA allows monopolies to be statically inefficient. In addition, privatisation leads to a wasteful duplication of resources in a market which is better off as a sole provider like the railways, which leads to higher costs of production for firms, being productively inefficient as compared to not having competition policy. Overall, competition policy is likely to lead to markets becoming less efficient in the long run as increased competition in a market erodes supernormal profits, making firms have less profit to reinvest, hence less dynamic efficiency in the long run.