Following the American Psychological Association’s Guidelines
The Nature of Competitive Market Structures
Market structures define the nature and characteristics of the competition that exists among the firms or sellers in a particular industry. There are generally four areas that are the foci in the study of market structures of industries: (1) firm boundaries, (2) seller concentration, (3) product differentiation, and (4) conditions of entry (Church and Ware, 2000). Firm boundaries apply to questions like why companies integrate vertically or why they outsource products and services. Seller concentration pertains to how many firms account for a greater percent of the market revenues or sales. Product differentiation refers to the unique characteristics that allow products in the market some form of monopoly power over its market. Conditions of entry pertain to the industry barriers that exist that bar competition from gaining easy access to the market. Each of these areas is used as the basis to typify industries and markets in the four different competitive market structures: perfect competition and the imperfect markets comprised of monopolistic competition, monopoly and oligopoly.
Rationale for Regulation
Regulation is the broad term for government intervention that seeks to change the outcome of market competition (Church and Ware, 2000). Regulation involves government requirements imposed on firms and individuals in order to keep in tow the effects of their economic activities, among which are better and cheaper goods and services, protection from unfair competition, cleaner air and water and safety at work. Regulation entails the imposition of fines, criminal penalties and prohibitions in the event that market players do not meet the requirements.
Why does government intervene in the markets? Government intervention in the markets in the form of regulation is seen mainly as socially-motivated. Government regulates industries and markets out of a need to fulfill a social goal when the outcomes of private enterprise prove undesirable (market failure, inequitable distribution of benefits). Competitive markets were seen as desirable because their mechanisms yielded outcomes that are supposedly socially optimal as goods are produced efficiently and distributed among those who value it the most (Church and Ware, 2000). Government intervenes to correct market failures and to promote some Pareto optimality that market structures and systems are supposed to produce. That is, at least one element in society is better off and no one is worse off.
Economic Regulation Defined
Economic regulation refers to the varying degrees that government exercises some form of control over the economic activities of firms, businesses and consumers under the different market structures. Government intervenes in these markets and has constrained the economic decisions of firms. These decisions involve pricing, product selection, advertising, investment, product quality, entry to and exit from the industry. Examples of economic regulation in markets are electricity, airlines, railroads, telecommunications and water (Church and Ware, 2000). A kind of economic regulation is the price-cap regulation introduced in the 1980s. This allows a multi-product regulated company to set the prices for its products as long as a price ceiling is established for a basket of products without the ability to charge monopoly prices (Church and Ware, 2000). AT&T, British Telecom and British Gas are three companies that were regulated in this manner.
Social Regulation Defined
The other type of regulation is social legislation that involves government intervening in the markets to impose environmental controls, healthy and safety regulations and restrictions on labeling and advertising. A number of prominent examples of this form of regulation abound. Among them are campaigns to stop smoking and environmental bans. In many cases, social regulations exist to correct negative externalities: those outcomes of economic activities that prove harmful to society. Examples of social regulatory bodies would be the Environmental Protection Agency, the Occupational Safety and Health Administration, the Federal Aviation Administration and the Food and Drug Administration (Taylor, n.d.).
Natural Monopolies Explained
Markets where competition is not possible are called a natural monopoly (Church and Ware, 2000). In a natural monopoly, conditions exist so that the industry average cost of production is minimized when there is only a single producer. In many cases, when such an industry is unregulated, there may exist a natural duopoly. An example is AT&T in the 1950s when it was the sole provider of wireline-based technology which had economies of scale at huge numbers and very capitalized.
U.S. anti-trust laws are defined in legislation that go back to 1890 with the Sherman Act, followed by the Clayton Act in 1914 and the Federal Trade Commission Act also in 1914. The Clayton Act defines anti-trust laws as embodied in the Sherman Act and the Clayton Act but not the FTCA. In Section 1 of the Clayton Act, there is a prohibition against concerted action (behavior involving two or more entities) that may lead to restraint of trade. In interpreting the anti-trust laws, the U.S. courts have found many business practices to be illegal. Among them are: horizontal price-fixing, vertical price-fixing, horizontal market divisions, tying, exclusive dealing and group boycotts (Church and Ware, 2000). Violators can be charged with felony and heavy penalties are imposed. The Clayton Act prohibits stock or asset acquisitions by firms that tend to acquire monopoly power through mergers.
In the U.S., the two enforcement agencies of the anti-trust laws are the Anti-Trust Division of the Department of Justice and the Federal Trade Commission. The Antitrust Division is responsible for public enforcement of the Sherman Act and shares that responsibility with the FTC for the Clayton Act. The division is headed by an assistant attorney general who sets division policy and exercises prosecutorial discretion. The Federal Trade Commission (FTC) was established by Section 1 of the FTCA and is an independent regulatory agency with a mandate to protect consumers by eliminating deceptive marketing practices.
There are arguments that reflect on the costs and benefits of regulation to society. Some sectors have argued for deregulation as government regulatory agencies have stepped up very high costs to serve the purpose to impose those regulations for the benefit of society especially. From a competition viewpoint, it is clear that government regulations serve to temper the natural inclination of imperfect markets, meaning non-competitive markets such as oligopolies and monopolies, to produce inefficient outcomes at excess unutilized capacities. Thus, we appreciate Anti-Trust laws in this manner as a form of regulation to temper the greed of markets and to produce a level and more competitive playing field that allows buyers and consumers choice.
Church, J. and Ware, R. 2000. Industrial Organization: A Strategic Approach. Boston: Irwin McGraw-Hill.
Hegarty, R. 2013. Market Structure & Regulation: Misconceptions & Realities. Retrieved from http://blog.thomsonreuters.com/index.php/market-structure-regulation-misconceptions-realities/.
Litan, R. 2008. Regulation. The Concise Encyclopedia of Economics. Retrieved from http://www.econlib.org/library/Enc/Regulation.html.
Taylor, J. n.d. Economic Regulation Versus Social Regulation. Principles of Microeconomics, 3rd edition. Retrieved from http://college.cengage.com/economics/taylor/econ/3e/micro/students/add_topics/ch12_econ_reg.html.