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Competition and Privatization

October 13, 2012

A long time ago, when I was in high school, we learned some basic principles of economics that are likely still valid today.  There’s a fundamental conflict in the market between producers and consumers.  Producers need to make a profit.  That’s their reward for operating the business.  Consumers expect to pay the lowest possible price.  They want to get good value for their money.

The key factor in the market is competition.  Private enterprises can be more efficient than government ones because of competition between them.  This is an automatic mechanism of the marketplace.  It requires real competition between producers.  As well, governments must monitor them to detect restraint of trade that lessens competition.

One extreme in this area is perfect competition, with many suppliers of identical products.  It results in zero profits to producers, benefiting only the consumers.  Markets for many agricultural products fall into this category.  To be fair to producers, perfect competition needs to be avoided or regulated.  The other extreme is a monopoly market, with only a single producer.  The producer benefits but the consumer is penalized.  This type of market also needs to be avoided or regulated.

With this framework, it’s easy to consider some situations that have been in the news recently.  How about government-run utilities, such as telephone, water, power, and rail, that are privatized?  How do we know that the new private companies are more efficient?  How can there be good competition when there’s only one operator in a region?  Even if the government holds regular tenders to select operators, how much can the different operators change?  Maybe all they can change is the management group.  Privatization may be a bad choice in some instances.

Patents, copyrights, and trademarks have been popular news items recently.  All of these confer monopoly privileges, at least for a limited time.  They do provide a reward for the holder, but they also bring the ills of a monopoly market.  Cross-licencing of patents lessens competition even more, making the situation worse.  The time period needs to be limited to something reasonable.  The use of these instruments also needs to be regulated.

Companies naturally try to maximize their profits, by a number of means.  Typically, they attempt to differentiate their products from others in the same market.  To the extent that this is legitimate, it’s certainly good.  Sometimes, however, it’s all an illusion bolstered by advertizing.  In this case, it’s the consumer who pays the extra cost.  Then there are questionable means like agreements between companies.  Apparently, Microsoft and Apple have agreed not to copy each other’s mobile phone designs.  Finally we have price fixing, something that seems to happen from time to time.  This practice is always illegal and prosecuted by government regulators.

Marketing boards have been used in Canada to improve the income of producers in a market of perfect competition.  They restrict supply by establishing production quotas.  This approach means that they must also block imports by regulation or by imposing duties.  The result is to raise income to producers by raising prices for consumers.  This all seems fair enough on the surface.  One problem is that it prevents wider trade by blocking imports.  Another is that the quotas themselves become a valuable asset to the producer.  What is the alternative?  Some countries use a direct subsidy to the producers.  This results in low prices for consumers, but it also leads to surplus production that has to be handled.  Some european countries had a mountain of butter.  Likely there’s no good solution in the case of perfect competition except for government intervention of some sort.

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