ECON 309 Competition Policy Essay

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ECON 309 SPRING 2022 RESEARCH PROJECT STEP 2
DUE MARCH 4, 11:59 PM Victoria, B.C. Time
You are NOT ALONE. I’m here to help. If you are confused, or stuck, or not sure if you’re
on the right track, or if you just want somebody to talk to about your research, or even about
how things are going in general, I’m here. Send an e-mail to willmore@uvic.ca . You matter.
By submitting this assignment you agree to the following honor code, and understand that
any violation of the honor code may lead to penalties including but not limited to a nonnegotiable mark of zero on the assignment:
Honor Code: I guarantee that all the answers in this assignment are my own work. I have cited
any outside sources that I used to create these answers.
Type your name or initials to agree to the honor code: _______________________________
Marking scheme – Make sure you answer all the questions before handing this in!
Question
Q1
a
a
Q2
b
a
Q3
b
Q4
a
Regular: (2.a + 3.a)/2
Challenge: 1+2.b+3.b+4
Communication
Total
Max Mark
1
75
4
75
4
5
75
15
10
100
PROJECTS WILL BE MARKED AS SUBMITTED.
CHECK YOUR FILE UPLOADS!
1
Table of Contents
Hints and Pointers…………………………………………………………………………………………………………..2
Question 1: Name your theory of harm (2 marks) …………………………………………………………………3
Question 2: Show the harm in using supply/demand diagram. ………………………………………………..4
2.a The diagrams (out of 75) ………………………………………………………………………………………………………………..4
2.b Explain what’s going on in the diagrams (4 marks) …………………………………………………………………………….5
Question 3: Defend the firm using supply/demand diagrams ………………………………………………….6
2.a The diagrams (out of 75) ………………………………………………………………………………………………………………..6
2.b Explain what’s going on in the diagrams (4 marks) …………………………………………………………………………….7
Question 4: All together now (5 marks) ………………………………………………………………………………8
Hints and Pointers
This step is not difficult, but it can be confusing, as most of you are probably not yet used to
thinking in terms of competition policy. To help you out, and hopefully reduce your frustration,
I’ll spell out what I’m looking for as clearly as I can.
• You’re studying a firm or group of firms ‘behaving badly’.
• If they’re ‘behaving badly’ from a competition policy perspective, that means that they are
reducing society’s total well-being, as measured via total surplus.
• That means that by behaving badly they’re reducing producer surplus (not their own,
probably, but that of their competitors/possible entrants), consumer surplus, or both…
• …compared to what surplus would have been if they were not ‘behaving badly’.
• With very, very few exceptions, you should be able to draw this ‘harm’ on the same type
of supply/demand diagram we’ve been using in class – and in particular, the same type of
diagram you worked with in Assignment 2.
• Knowing you’ll be using that type of diagram for your analysis is convenient, because it
lets you know what your ‘harm’ can affect: quantities, prices, increasing/lowering
Demand (willingness to pay), or increasing/lowering Supply (marginal cost).
• Suppose you’re looking at a cartel. Very loosely, this is a group of firms jointly acting like
a monopolist. The main way they ‘behave badly’ is to restrict output (or raise prices). This
harms society by creating the usual deadweight loss triangle, when compared with what
would happen if the firms were not colluding with each other. That would be your ‘theory
of harm’.
• Another example: Suppose that a producer switched to a production technology that is
cheaper to them, but which causes a lot of pollution. Although the cost to the producer has
fallen, the cost to society has gone up1. The producer will probably produce more than it
did under the old technology, since its costs are now lower, but society may be worse off,
due to the added pollution.
1
For an introductory discussion of the economics of pollution, see

12.1 The Economics of Pollution


2
Question 1: Name your theory of harm (2 marks)
For reference purposes, please name or briefly describe the main theory of harm (e.g.
monopoly, cartel, abuse of dominance) you are using to examine your situation. If you are
using more than one, feel free to write them all down. These are meant to be almost free marks.
Theory or theories of harm:
3
Question 2: Show the harm in using supply/demand diagram.
2.a The diagrams (out of 75)
1. This assignment is all about establishing the potential harm and benefit from the situation you
are studying. Question 1 asks about harm.
Draw two diagrams in which you clearly illustrate the potential harm to society from the
situation you are studying. You need one ‘before’ diagram, showing what total surplus was
like before the firm started behaving badly (or what it would be if the firm stopped behaving
badly), and one ‘after’ diagram, showing the reduction in surplus due to the firm’s
behaviour.
For example, if you are looking at a monopoly in a market that, without the monopoly, would
probably be perfectly competitive, you could draw two diagrams: one showing price,
quantity and surplus in a perfectly competitive market, and one showing price, quantity,
surplus and the deadweight loss under monopoly.
This diagram is intended to be very similar to the ones you worked with in Assignment 2.
You do NOT need to have a specific formula for your demand curve, etc. – but if it makes
things easier for you, feel free to use one, as long as it applies to your situation. (e.g. In
Assignment 2 our firms mostly had zero marginal costs of production, but that will almost
certainly not be the case in your topic – most students will probably want to use a standard
upward-sloping supply curve, or a ‘hockey-stick’ shaped one if capacity constraints are an
important part of your story.)
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.
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 diagrams here]
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2.b Explain what’s going on in the diagrams (4 marks)
Explain the reason for the harm using a combination of background information and
economic reasoning & theory. Cite any sources used in APA format.
For example, in class we learned that when Australia had trouble recovering costs for its
power grid, a consulting report briefly considered charging higher fixed fees to users with
less elastic demand. If this is was your topic, you could explain the need for cost recovery in
a marginal cost pricing context leading to the use of fixed fees, that on paper a social planner
would want to charge the highest fees to those with the least elastic demand to minimize
deadweight loss, but that in the Australian situation, those with least elastic demand also
happened to be very light (and often very poor) users of electricity: their demand was
inelastic because they were already consuming as little as possible. Charging them high fixed
fees could cause a lot of harm.
[Insert explanation here, in 5 to 1,000 words]
Cite any sources used in APA format:
5
Question 3: Defend the firm using supply/demand diagrams
2.a The diagrams (out of 75)
This assignment is all about establishing the potential harm and benefit from the situation you are
studying. Question 3 asks about benefits.
a. (Regular) Draw two supply & demand diagrams in which you clearly illustrate the
potential benefit to society from the situation you are studying. There needs to be at least one.
For example, suppose you are looking at a merger to monopoly of a type of shop that had
previously been so competitive that there were rival shops on every corner. (For example, a
McDonald’s and a Burger King.) Now you would need only one shop – maybe slightly
expanded – where before there had been two, which could lower fixed and marginal costs.
That would represent an efficiency gain to society, and could help counteract the deadweight
loss of monopoly. Your diagrams could show quantity, output & surplus before and after the
merger.
Hint: What you’re showing in this diagram is what you would expect the firm to counter with if
the Competition Bureau accused them of punishably bad behaviour. For example, “Yes, we’re
merging to monopoly, and that would normally create a deadweight loss, BUT there’s so much
synergy between our companies that our costs will fall by almost half. This would make our merger
a net benefit to society, even if we acted like a monopolist.”
Since you’re working with a supply/demand diagram, your options for showing a benefit are
limited: higher quantities, lower costs, shifted up demand (willingness to pay) curve or shifted
down supply (marginal cost) curve.
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.
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]
6
2.b Explain what’s going on in the diagrams (4 marks)
Explain the reason for the benefit above using a combination of background information and
economic reasoning & theory. Cite any sources used in APA format.
If you were looking at mergers among food retailers, a Google Scholar search would quickly
lead you to an article called “Food Retailing: Mergers, Leveraged Buyouts, and
Performance” by R. W. Cotterill. This article mostly lists negative impacts of these mergers,
but there is one very interesting positive one: food retailing mergers lead to a lot of debt for
the merged company, and this has sped up the adoption of cost-reducing technology, relative
to what would have been seen before. Fewer retailers also mean each retailer has more
bargaining power, which could lead to lower wholesale costs. In this specific market (retail,
not wholesale), that could be seen as an efficiency. This would be a good start to this section,
and all just from an abstract – reading the paper (and sources it cites) could give you a better
idea of the basic economic reasoning and theory behind the efficiency results (and how
applicable they are to your specific situation).
[Insert explanation here – use 5 to 1,000 words]
Cite any sources used in APA format:
7
Question 4: All together now (5 marks)
By now you should have a shape or shapes (triangles, rectangles, etc.) representing the loss to total
surplus from the firm’s actions, and a shape or shapes representing the benefit to total surplus from
the firm’s actions. Whether or not the firm should be allowed to continue behaving in this way
depends on which of the shapes is bigger: the one representing loss, or the one representing benefit.
Based on your diagrams, and your research, which do you think is greater: the loss to society
(total surplus) from the firm’s actions, or the possible benefit to society from the firm’s
actions? Explain your reasoning.
Note: For full marks, it’s not enough to speak in generalities, e.g. “I think the harm is bigger,
because I’m looking at a monopoly and monopolies always create a deadweight loss.” Instead, for
full marks I expect you to make use of the insight from your diagrams. For example, “The harm is
a triangle with base = (merged firm output – competitive output), and height equal to the price
charged minus the marginal cost at the merged firm output, and the benefit is the parallelogram
with a height equal to the difference between the ‘before’ and ‘after’ marginal cost curves, and…”
etc., followed by something like, “In order for the area of the loss triangle to be greater than the
area of the benefit parallelogram, the merged firm output would have to be less than half of the
pre-merger duopoly output. A lot of near substitutes exist for the good produced by the firm, such
as [examples]. This means that there’s likely to be a high price elasticity of demand – in fact,
according to this CBC news report [citation], last time the industry had to raise prices they
immediately lost a third of their customers. This, combined with the incentive to increase output
after the fall in costs from the merger, means that the profit-maximizing monopoly output is almost
certainly greater than half of current output, and therefore the benefits from the merger are
probably greater than the costs.”
[Insert your answer here – use 5 to 1,000 words]
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