ECON 309 SPRING 2022 RESEARCH PROJECT STEP 3
DUE MARCH 29, 11:59 PM Victoria, B.C. Time
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Marking scheme – Make sure you answer all the questions before handing this in!
Question
Max Mark
Q1
a
5
Q2
a
75
b
75
c
75
Average
75
Q3
a
5
Q4
a
5
Communication
10
Total
100
PROJECTS WILL BE MARKED AS SUBMITTED.
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Table of Contents
ECON 309 SPRING 2022 RESEARCH PROJECT STEP 3 1
Question 1: (Challenge) Explain your theory of harm again 2
1.a (5 marks) 2
Question 2: The remedy 3
2.a Suggest a remedy 3
2.b How will this help? 4
2.c How will this affect the benefits? 4
Question 3: (Challenge) What could possibly go wrong? 5
3.a (5 marks) 5
Question 4: (Challenge) Painting a picture 6
4.a (5 marks) 6
Question 1: (Challenge) Explain your theory of harm again
1. a (5 marks)
For reference purposes, please briefly explain the main theory of harm you are using to examine your situation. You do not need to use diagrams, buy you may do so if you to. For full marks you should be able to explain how and why total surplus is reduced by the firms’ behaviour. This explanation should be logical, and apply to the case you are studying.
Hint: Since we’re taking a ‘total surplus’ approach to societal welfare in this research project, a ‘theory of harm’ is a brief explanation of why it is that you believe the behaviour of the firms you are studying will reduce total surplus. (For example, if you were looking at a situation where the firms in a previously competitive market merged to monopoly, you could explain that since they now were the market, they’d restrict output and raise prices, ‘pricing out’ consumers who would have been willing to buy the good at or above marginal cost, and thereby imposing a deadweight loss on society – a loss of total surplus relative to the original competitive situation.)
Theory of harm:
The monopoly theory of profit is a popular economic theory that explains monopolies and their relationship with the local and global market. The theory is based on the principle that the market has only one seller who serves as the supplier and has absolute control over the supply and pricing of a given commodity. Therefore, such a seller has absolute control over market factors given that they determine and influence the movement and availability of products. The seller also has significant influence and controls all the prices relating to the product in question in the market given that no other seller is available. The demand curve of a monopoly seller has a downward trend because the seller operates on low prices as compared to other sellers in the market. Therefore, the major operating principles is that they must lower the prices to operate and outdo other firms in the market.
From a broad perspective, a theory of harm in a competition law case explains why a particular type of behaviour constitutes a breach of competition law. This explanation is in reference to the relevant legal tests, and explains in particular why various forms of conduct causes harm to competition. Traditionally, monopolies benefit the companies that have them, as they can raise prices and reduce services without consequence. Therefore, the customers are usually at a loss because the sellers have absolute power over market forces. However, they can harm consumer interests because there is no suitable competition to encourage lower prices or better-quality offerings. According to the monopoly theory of profit, an entrepreneur can earn a pure profit, referred to as monopoly profit and can maintain it for a longer time period by using his monopoly powers.
If you used any outside sources for Question 1, please cite them below in APA format:
[Citations, if needed]
Christophers, B. (2018). Financialisation as monopoly profit: the case of US banking. Antipode, 50(4), 864-890. https://www.academia.edu/download/57271120/Christophers-2018-financialization.pdf.
Lambert, T. E. (2020). Monopoly capital and innovation: an exploratory assessment of R&D effectiveness. International Review of Applied Economics, 34(1), 36-49. https://mpra.ub.uni-muenchen.de/89503/1/MPRA_paper_89503.pdf.
Denicolò, V., & Polo, M. (2018). The innovation theory of harm: an appraisal. Antitrust LJ, 82, 921. https://repec.unibocconi.it/iefe/bcu/papers/iefewp103.pdf.
Question 2: The remedy
The rest of this assignment is all about establishing a potential fix or remedy for the situation you are looking at.
2.a Suggest a remedy
Suggest a remedy for the situation you are looking at. What could a government or regulatory agency do to reduce or eliminate the harm from the way the companies are acting, while keeping as many of the benefits as possible? You may find it useful to look up what remedies have been used in the past for the situation you are looking at.
For example, if you are looking at a monopoly causing deadweight loss from under-producing, you could require that the monopoly produce at a certain minimum level (possibly raising costs if previously it was producing at its minimum efficient scale). Another option would be to break the monopoly up into multiple companies, as was famously done in the case of Standard Oil in the United States. If you are looking at a merger between two companies that would give the merged company too much market power, you could force the companies to get rid of some of their holdings, in order to keep competitive pressure up (as when Canadian Waste Services was asked to get rid of a landfill it had purchased).
Write a description of your proposed remedy (fix for the situation) below. I am aware that there are many creative students in this course, but for full marks your description of the proposed remedy should show that you are aware of how competition authorities have dealt with these issues in the past – it’s probably best to go for a ‘tried and true’ go-to fix for these situations, rather than try to come up with something new.
Write a description of your remedy/fix below
[Write your answer below, in 5 to 1,000 words]
The most applicable remedy in this situation is the implementation of price control policies to ensure that monopolies do not have the power that the can abuse. This is done through capping and price control which both control the price limit of select products and services despite their sellers being monopolies. By definition, price control is an economic policy imposed through enforcement of price floors and ceilings, also referred to as minimums and maximums. These price limits are set by government agencies with the intention of making products more affordable hence they reduce harm caused to consumers by monopolies. The most common types of price control effected by the government include rent control, limitation of the prices of medicinal drugs, and minimum wage. Even though the types of price control mentioned are different and apply to different sectors of the economy, they all serve the purpose of reducing harm. Therefore, price control is a highly effective form of harm control given that it safeguards the interests of both buyers and sellers while promoting fair competition.
The government may wish to regulate monopolies to protect the interests of consumers. For example, monopolies have the market power to set prices higher than the prices that naturally exist in competitive markets. As a result, the government is forced to regulate monopolies through price control given that this ensures that there is fair competition and that consumers have access to affordable and readily available products. To eliminate harm from the way the monopolistic companies are acting while keeping as many of the benefits as possible, governments and regulatory agencies can determine fair price ranges and establish price caps that must be adhered to. Additionally, there is the possibility of controlling prices directly as this would also reduce harm especially to consumers. When these remedies are applied, sellers will still be able to earn profits while consumers will have access to affordable prices hence all market benefits will be retained while harm will be eliminated.
2.b How will this help?
Explain how your remedy will reduce or eliminate the harm from the situation. While not required, you may use diagrams as part of your explanation, if you wish. For full marks, it should be clear from your answer that you understand how it is that your proposed fix will partially or fully undo the loss of total surplus (the ‘harm’) from the firms’ bad behaviour.
[Write your answer below in 5 to 1,000 words]
Price control is an effective tool of managing market prices and eliminating harm to consumers and the general economy because it enables governments and regulatory bodies to reduce harm while maintaining all relevant benefits to all involved parties. Price control can be used in several ways, one of which is the implementation of maximum price legislation. This approach reduces harm to sellers by ensuring that the set prices include reasonable profits. On the other hand, the approach protects consumers by ensuring that products and services are sold at affordable and competitive prices. Additionally, price control can be achieved through price regulation which involves setting minimum and maximum price caps to ensure that no seller is selling below or above the market price. Therefore, this ensures that there is fair competition and that consumers are protected from harm caused by monopolies.
If we take the example of minimum wage which is a price control technique covering the labor market, it is clear that it eliminates exploitation and affects productivity positively. Prior to the implementation of minimum wage requirement laws, companies could pay laborers poorly because supply was in excess and demand was limited. Additionally, there were no regulations regarding enumeration hence companies utilized this loophole to maximize returns. This resulted in laborers being overworked and underpaid because in many cases the cost of labor was significantly exceeded by the cost of the products produced using the said labor. Therefore, should price control be implemented as a remedy, it would be effective in ensuring that consumers are charged fairly for products and services. Additionally, the techniques would be effective in protecting consumers from overzealous suppliers who charge unfairly due to the lack of competition.
2.c How will this affect the benefits?
Explain how your proposed remedy will impact possible benefits from the firms’ (otherwise) bad behaviour. Even if your answer is ‘it won’t affect them’, you have to explain why that is the case. In Step 2, you were asked to analyze the possible benefits from the firms’ behaviour. For example, while mergers to monopoly will tend to reduce output and raise prices, they could also create efficiencies in the form of lower costs for the merging firms. If your remedy was to have the merged firm divest (get rid of) some of its assets, this could raise the merged firms’ costs, partially undoing the efficiencies created by the merger.
[Write your answer below in 5 to 500 words]
Price control will have no negative effect on the benefits of firms because the remedy considers the needs of both the buyers and sellers. As a result, it ensures that while consumers have access to affordably priced products and services, sellers are able to earn reasonable profits. Therefore, even though the remedy eliminates harm by eliminating bad behaviour, it has no negative effect on benefits because of the considerations made during policy implementation. However, it affects the profits earned by firms significantly because bad behaviour enables companies to inflate prices and as a result earn maximum profits. However, in the event that the remedy of price control is implemented, some firms may only earn marginal profits while others earn reduced profits. Hence long-term effects may be felt by firms given that reduced revenue affects productive capacity, operating capital, access to capital and other operational efficiencies.
In the long run, price control techniques used to reduce the harm associate with powerful monopolies may result in shortages, rationing, inferior product quality, and illegal markets. This is because when revenue declines, firms lose the capacity to operate more efficiently given that there is reduced access to capital and this results in an inability to make use of economies of scale. Additionally, companies may create temporary shortages and induce reduced supply due to lower productive capacities. This is brought on by price control mechanisms that do not consider overhead costs and other operational costs that influence pricing. Moreover, monopolies exist due to high production costs, high capital requirements, and restrictive legislation, thus, monopolistic sellers may be force to charge higher prices to get a return on investment. As a result the companies inflate product prices, therefore, implementing price control may result in the production of poor quality products as reduced revenue results in reduced productive capacity.
If you used any outside sources for Question 2, please cite them below in APA format:
[Citations, if needed]
Rioux, B., Galkin, P., Murphy, F., Feijoo, F., Pierru, A., Malov, A., … & Wu, K. (2019). The economic impact of price controls on China’s natural gas supply chain. Energy Economics, 80, 394-410. https://www.sciencedirect.com/science/article/pii/S0140988319300052.
Dean, E. B. (2019). Who Benefits from Pharmaceutical Price Controls?: Evidence from India (No. 509). Center for Global Development. https://heatinformatics.com/sites/default/files/images-videosFileContent/who-benefits-pharmaceutical-price-controls-evidence-india.pdf.
Question 3: (Challenge) What could possibly go wrong?
3.a (5 marks)
This the question, I ask you to consider possible difficulties in implementing your remedy.
What is the main way in which your remedy could go wrong? (Is the remedy too difficult to enforce properly? there any way for a firm to cheat? Will the remedy create new incentives that lead to inefficiency? Example: if your remedy for a monopolist charging high prices was a law saying that prices had to be low, you might see very few goods being sold officially, at the low prices, and a black market pop up where people would have to buy the goods illegally, at higher prices – perhaps even higher than before, since now the sellers have to be compensated for the risk of fines and jail time.) Briefly explain the impact of this situation, if it happens, on consumer surplus and total surplus.
For full marks, it should be clear that you understand how your remedy works, and how it could go wrong. The good news is that if you followed my earlier suggestions and picked a common remedy for the situation you’re studying, in many cases it may be easy to find ways in which those remedies have proved challenging or created new problems.
[Write your answer below, in 5 to 1,000 words]
If you used any outside sources for Question 3, please cite them below in APA format:
[Citations, if needed]
The implementation of price control as a remedy may be problematic because the approach has a number of effects that may affect companies and consumers negatively. Firstly, when prices are capped or controlled to stay at a specified level that may be considered unnatural, resources such as labor and investor capital may exist the associated industry in search of more lucrative opportunities with higher returns. As a result of such actions, the industry will experience reduced innovation, discovery and lower rates of market entry. Additionally, the rate of market exit would increase drastically and the result would be shortages which cause harm to consumers. Secondly, price control disrupts supply and demand as it inhibits the determination of market prices through the dynamic interaction of supply and demand. If the price of a certain product is controlled, consumers will buy more while sellers will decide on a quantity to produce at different prices hence there will be a disruption in market dynamics.
Additionally, price control may lead to more drastic consequences such as market failure. When sellers are forced to sell their products and services at a price that is not considered profitable, there is usually a high rate of market exist caused by the movement of labor and investor capital towards more profitable venture. As a result, industries may collapse due to price controls as the remedy disrupts the normal functioning of market forces and results in reduced market entry and innovation. In theory, market failure can be mitigated trough the right level of price control, however, this is difficult to achieve in practice as it is hard to identify the exact imperfection in the model used, hence price control may cause major problems and result in more harm rather that eliminate it.
Question 4: (Challenge) Painting a picture
4.a (5 marks)
This is a CHALLENGE question. It’s only worth 5 marks. It’s expected that a good student in this course will only do SOME of the challenge questions. You can skip this question and still get up to an 84 on the project. I encourage you to skip this question if you feel the extra marks aren’t worth the extra work and stress.
Draw a diagram (or diagrams) in which you clearly illustrate the potential impact on total surplus from your remedy. What happens to consumer surplus, compared to the situation before the remedy? What happens to producer surplus? Label these clearly on your diagram.
For example, suppose you are looking at a merger to monopoly, and you suggest as a remedy that the price be set equal to the competitive equilibrium price. The main potential problem you pointed out was the creation of a black market. You could have one diagram be the standard monopoly diagram, and another one where the firm sells a few units at the official price, to satisfy regulators, but sells a lot more unofficially, on the black market, at a higher price than before.
These diagrams do NOT have to be perfectly to scale (even if you have numbers, which is not necessarily the case). General sketches such as those used in the lecture notes are fine. If you drew a diagram earlier in the assignment, it’s fine to copy/paste it here, or even to write down, ‘refer to the diagram in my answer to Question 2.a’.
Please make sure your diagrams are in GIF, JPG, TIFF, PNG or PDF format. You may put them directly in this word document or upload them as separate files (e.g. as a separate image taken from your phone).
[Insert diagram here]
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