● Relative to monopoly, competition increases net welfare but
does not bring about a Pareto improvement (i.e. not
CHAPTER 2:
Market Power and Welfare: Introduction
1. Overview of the Chapter
● Basis of competition policy- idea that monopolies are “bad”
● Sec. 2
○ Monopoly causes a static inefficiency: monopoly
pricing results in a welfare loss for given
technologies
○ Inverse relationship between market power (ability
of firms to set prices above marginal costs), of
which monopoly is the most extreme form, and
(static) welfare.
● Secs. 3 and 4
○ Monopoly might result in productive and dynamic
inefficiencies too, not just allocative inefficiency
○ Not only does monopolies charge too high, but it
might also have too high costs and innovate too
little
○ Without competition- companies would not adopt
most efficient technologies and invest in R&D
● Sec.3
○ Competition policy is not about maximizing the
number of firms, it is about defending market
competition in order to increase welfare, and not
about defending competitors.
○ Inverse relationship between market power and
welfare on a static analysis- not clear when
productive and dynamic inefficiencies are
considered
● Sec. 4
○ Market power is not per se bad
○ Prospect of enjoying some market power (and
profits) is the main incentive for the firms to invest
and innovate
● Sec. 5
○ There often exists trade-offs between ex-post and
ex-ante considerations
○ If ex-post, one would be tempted to eliminate
market power to reduce prices and increase
allocative efficiency
○ Such policy is detrimental in ex-ante because it
would eliminate the incentives for firms to improve
their quality offerings and technologies
○ Competition policy is not concerned with
monopolies per se, but rather with monopolies
which distort the competitive process
● Sec.6
○ There exist market mechanisms which prevent a
monopolist from exercising market power (ex. free
entry)
● Sec. 7
○ Potential entrants can discipline incumbents but
monopolies often continue unperturbed to charge
high prices for reasons (e.g. existence of sunk cost,
consumer switching costs, and network effects)
2. Allocative Efficiency
2.1 Market Power: A definition
● Ability of a firm to raise price above some competition level-
the benchmark price- in a profitable way
● Difference between prices charged by a firm and its marginal
cost of production (lowest possible price a firm can profitably
charge)
● Concept of “market dominance”- no clear translation in
economic terms but interpreted as a situation where a firm has
a large degree of market power which allows it to charge
prices close enough to a monopolist’s charge
2.2 The allocative inefficiency of a monopoly
● When prices are above marginal costs, this entails higher
production surplus but not high enough to compensate for the
lower consumer surplus caused by higher prices
everybody is better off), since the producer surplus shrinks
● Industry’s producers will try to lobby in favour of more
protection and less competitive pressure, while consumers
and users of the industry products will have interest in backing
proposals of more competition
● Welfare loss occurs not just for monopoly price but for any
price above marginal cost
● Welfare decreases with market power
● The deadweight loss caused by monopoly power depends on
the elasticity of the market
○ Perfectly elastic- monopolist would not be able to
set price above marginal cost (consumers would
not buy the goods if there was even a slight
increase in price); deadweight loss is nil
○ As market demand elasticity decreases, the ability
of the monopolist to charge higher prices rises and
the deadweight loss decreases
○ Absolute value of deadweight loss depends on the
size of the market
2.3 Rent-seeking activities
● Rent-seeking activities enlarge the expected welfare loss from
monopoly
● Posner- social cost of a monopoly should include an area
which might be as large as the overall monopoly profit a firm
obtains
● Posner’s 3 assumptions:
○ There exists perfect competition among agents who
engage in rent-seeking activities
○ The rent-seeking “technology”is characterized by
constant returns to scale
○ The costs incurred in obtaining a monopoly do not
have any socially valuable by-product
● Posner’s assumptions are questionable
○ It might well be that some agents are better than
others and very efficient in their rent-seeking
operations, which means that dissipated rent, if it
exists, does not necessarily coincide w/ monopoly
profits
○ The assumption that rent-seeking activities never
create socially valuable results is very strong
○ Ex. Advertising outlays might increase info
available to customers as well as their perceived
value of the goods
3. Productive Efficiency
● Welfare loss if a firm operating under monopoly has a higher
cost than if it were operating in more competitive
environments
3.1 Additional welfare loss from productive inefficiency
● While firms operating in a more competitive industry have
marginal cost, a monopolist would operate at higher cost
● Welfare loss is bigger than deadweight loss which considered
only allocative inefficiency
3.2 Why is a monopolist less efficient?
● If a monopolist does not adopt the more efficient technology
than firms operating under a competition, then monopoly
entails additional productive efficiency loss
● 2 main arguments which suggest that a monopoly is likely to
involve productive inefficiency:
○ Managers of a monopolistic firm have less incentive
to make an effort
○ A darwinian selection argument- when competition
exists, more efficient firms will survive and thrive,
whereas less efficient firms will shut down
3,2,1 Monopoly and managerial slack
● Adam Smith and John Hicks
○ Competitive pressure leads a firm to look for the
most efficient way to organize its production and
reduce its cost
● Leibenstein (1966)
LECOREG SEM2-19-20 | 8
 ○ Introduced concept of “X-inefficiency” to restate the
idea that monopoly power and the quiet life that
comes with it brings about managerial inefficiency
● Firms are complex organizations and decisions regarding
adopting technologies and those affecting the overall
efficiency of the firm are taken by managers who might have
objectives other than profit maximisation (e.g. individual utility,
determined by wage, career prospects, level of effort and time
to put into the job)
● Principal-agent models
○ Models where a principal (ex. owner) wants to
induce an agent (ex. manager) to take actions that
maximize her payoff
○ Study how market structure would affect (via the
decisions of the owner) the actions of the manager,
and hence the cost of the firm
○ Conclusion of this model- increasing competitive
pressure in a market where there is a monopolist
will lead it to be more efficient, but increasing
pressure in a market where there is already a great
deal of competition might reduce efficiency
● Managerial slack applies to both productive inefficiency and
dynamic inefficiency (quiet life does not push managers to
innovate)
3.2.2. Empirical evidence on individual firms’ productivity
● The managerial slack hypothesis is difficult to test empirically
● But there exists some evidence that individual firms’
productivity is higher in more competitive markets
● Nickel: Analysed 700 UK firms
○ Found out that when market share is higher=firms’
productivity levels are lower while the vice versa
holds true, lower market share (more
competition)=individual firms’ productivity is higher
● Schmidt’s model: Premise: a firm might go bankrupt and a
manager will incur a loss by losing his job
○ A firm has to devise a way to motivate more effort
from the manager
○ But motivating more effort requires more cost
○ Note: ideal to motivate manager for firm because it
makes firm more efficient
○ Market competition can affect this premise in 2
ways, either:
■ Manager exerts more effort due to the
fear of being unemployed if the firm
closes down OR
■ Firm would want to cut costs, therefore
provide lesser means (money) to entice
the manager to exert more effort
○ But results were not conclusive, but Schmidt did
find that there is higher effort for a duopoly, thus
concluding that at end of the day it is still better to
avoid monopoly to maximize effort
3.2.3 Darwinian mechanism: competition selects efficient firms
● Competition drives out inefficient firms and this in effect
improves welfare in that output will be produced at lower costs
● An efficient market will drive out inefficient firms and only the
efficient survives (like natural selection)
● This natural selection will increase productivity through a
process of entry into and exit from the industry
○ This is explained by a larger share in output of the
more productive firms by transferring the outputs of
the inefficient firms to those which are efficient
● The conclusion here and an additional important competition
policy is that: if less efficient firms were being protected, this
would prevent the invisible hand in selecting only the best
firms, which in turn will lead to higher prices and lower welfare
3.3 Number of firms and welfare
● One might come to the conclusion that more firms, more
competition equals higher welfare
○ Such is not the case always because all firms have
fixed costs
○ Fixed costs give rise to scale of economies
○ What is the net effect then of having more firms?
■ Higher firms=competition=lower prices --
>> consumer surplus
■ BUT also higher firms=duplication of
fixed costs (loss in productive efficiency)
-->> loss on producer surplus
■ Net effect? Motta says inconclusive
○ But this at least shows that policy aimed at
maximizing number of firms would be unsound
● Ultimate conclusion here: competition policy should not be
defending competitors which are inefficient but competition
per se
3.4 Conclusion
● 2 conclusions:
○ Competition pushes managers to more more effort
thus being more productive
○ Competition selects more efficient firms resulting in
lower market prices
3.5 Competition and productive efficiency
● Only says look at my examples in 3.5.1 and 3.5.2
3.5.1 Competition and selection of firms: An example
● Will not post formulas here anymore but will just explain
premise and results
● Premise: homogenous good industry where firms compete in
quantities and firms have different efficiency levels
● Variable: Number of firms
● Conclusion: higher number of firms=stronger
competition=will drive out inefficient firms at equilibrium
○ This also shows that despite decrease in number of
sellers, price in industry still decrease
○ Decrease in price due to re-allocation of output from
inefficient to efficient firms
3.5.2 Too many firms in the industry
● Again will not show formulas
● Premise: homogenous good with number firms which are of
perfect symmetry
● Variable: number of firms
● Conclusion: multiplication of fixed costs=producer surplus
decreases
○ Therefore a policy aimed at maximizing number of
firms would be against objective of economic
efficiency as a whole
4 Dynamic efficiency
● Dynamic Efficiency refers to extent to which a firm introduces
new products or processes of production
4.1 The lower incentives to innovate of a monopolist
● Suppose that a monopolist has the opportunity to adopt a new
process innovation which allows it to produce at a lower
marginal cost rather than their current cost by paying a fixed
cost
○ To decide whether to adopt such method or not, the
monopolist will only factor in the additional profit it
makes out of such
● On the other hand, in a competitive market, all firms make
zero profit at marginal costs or the current costs they have
○ Suppose one of these firms get the opportunity to
adopt new technology which allows it to operate at
a lower cost compared to all other firms
○ By adopting such new method, the firm will have a
chance to make profit, thus deciding to take on such
new method, thus innovating
● The monopolist will only choose to innovate under a stricter
condition vs. firm in market competition:
○ Monopolist: only if with additional profits
○ Competition: the mere chance of earning profits
4.2 Incentives to invest in R&D
● The expectation of being able to appropriate its investment in
R&D stimulates innovation as well
● Assume a market wherein innovations cannot be appropriated
exclusively by the firm which innovated such (i.e. there is no
patent protection in that industry)
○ The firms will not incur additional costs for such
R&D because it will not recover them anyway
LECOREG SEM2-19-20 | 9
 because it cannot stand out among its competing
firms if they can all have access to such innovation
○ That is why the ability to appropriate is important
4.3 Models of Competition and innovation
4.3.1 Monopoly gives fewer incentives to innovate: an example
● Monopoly vs Duopoly
○ Monopoly and duopoly does not affect innovation in
both market structures innovation occurs or does
not occur
○ In an equilibrium innovation occurs in duopoly and
not in monopoly.
4.3.2 R&D and competition
● Three different effects at play when deciding the optimal R&D
levels.
● The First one is the appropriability effect: the larger the
demand the higher the incentive to R&D
● The Second is competition effect. When there is a monopoly
the terms disappear completely while it is strictly positive
when there is competition
● The last term is a combination of both, the more firms in the
industry which is more competition the larger the R&D which
increases welfare.
4.3.3 Appropriability and R&D
● Duopoly under Price competition one can immediately rule
out equilibria as one of the firms involved will not be able to
recover costs.
● Two possible situations one which is 1. The innovation is
drastic in this case the monopolistic price of the innovating
firm is lower than the cost of a non innovating firm. And 2. The
innovation is non drastic optimum level of this one is similar to
the non-innovation.
● Patent (no spillovers) the patent is protecting spillovers.
Conclusions-
● Patent improves welfare. Because of Spillovers R&D is good
for public good. Since R&D efforts are sometimes not
appropriate, firms are less likely to invest in R&D. Patent
however prevents spillovers and restores incentives to R&D
● This simple model does not capture that the patents require
firms to disclose the technology.
. ○
5 Public Policies and incentives to innovate
● Very existence of market power helps competition
● It is the existence of market power that pushes firms to use
innovations or technology.
● Elimination of all market power has a detrimental effect.
5.1 Ex-ante v. ex-post: property rights protection
● Ex ante efficiency- one wants to preserve the incentives to
innovate
● Ex post efficiency- means that once a firm innovates it would
be better if all firms had access to it.
● Governments find a time-consistency problem where they can
promise full protection and then renege
● Patent laws help government insure their promises. And that
firms are protected for a time to enjoy the R&D innovations.
● Too Broad a protection also discourages on the other hand
competing firms from introducing innovations vaguely related
to the patent.
● Other than patents there are copyright and trademark laws
● Trade secret laws are in place in order to protect businesses
5.2 essential facilities
● Any input which is deemed necessary for all industry
participants which is not easily duplicated is an essential
facility. I.e. airline and airport slots
● Thus a lot of essential facilities doctrine where the
government declares that it should be made available to
everyone. And grant it availability to rivals.
5.3 Price controls and structural remedies
● Use of price controls and price caps in general contrasts with
competition policy.
● However, many competition laws like Art. 82 of the EU Treaty
allows authorities to intervene if prices set by a dominant firm
are “too high”.
● “Very dangerous provisions”
○ Deciding if a price is too high or not involves a high
degree of arbitrariness
○ Even if it was established that a firm is charging too
high a price, why should it be punished for it.
5.4 Internal vs. External growth
● Internal Growth - when a firm acquires market power and
grows on the merits. Market power and profit are the
legitimate reward for the fact that a given firm has been more
successful than others.
● External Growth - where a firm grows and acquires market
power not because of its investments but simply because it
takes other firms over or merges with them.
○ Market power is not the legitimate reward of some
risky activity of the firm, but a product of the direct
elimination of competitors
6. Monopoly: will the market fix it all?
● Market mechanisms prevent even a monopolist from
exercising market power
○ A durable good monopolist is unable to keep prices
high because. Consumers anticipate that it will
reduce prices in the future
○ If there is free entry, this will prevent the monopolist
from setting high prices as they would trigger entry
● These arguments are derived from the Coase conjecture and
contestable markets theory
○ Would imply that one should not worry about
market power, at least when durable good sellers
are involved and when there exists free entry.
6.1 Durable good monopolist
● Coase (1972): suggested that the producer of a durable good
might price at marginal cost even if it is a monopolist.
● Scenario 1:
○ Suppose that a producer is facing TWO groups of
potential clients who have different valuation for
durable good it sells.’
The producer will first try to charge a high price and
sell to consumers who have a high valuation for the
good.
○ Since it is a durable good, the group with high
valuation won't buy again.
○ You may now decrease the price to be able to sell
to those with low valuation.
○ It is reasonable to expect that the high valuation
consumers understand that the producer will
decrease the price in the future.
○ Unless they incur a high cost from delaying the
purchase, they will abstain from buying until the
price for the good has decreased.
● Scenario 2:
○ There is an extremely large number of groups of
consumers
○ They have valuations for the same durable good
that are between the marginal cost and the
monopoly price.
○ The monopolist will then have an incentive in each
period to reduce the price to sell to those who have
not previously bought.
○ Since each consumer will expect that the
monopolist will eventually reduce the price to
marginal cost, each consumer will postpone buying
until price is equal to marginal cost.
○ This will result in the monopolist losing all possible
market power because consumers anticipate it will
reduce prices down to marginal cost in the future.
● This is also called the Coase Conjecture.
● The crucial issue is that the monopolist is hurt by its flexibility
to change price in the future periods.
LECOREG SEM2-19-20 | 10
 ● Price flexibility might indeed hurt a seller of durable goods as
well as of other goods which have similar characteristics.
● Some instruments solve or alleviate the commitment problem
○ One possible way for the monopolist to evade the
Coase problem is to resort to contractual clauses
that make its commitment not to lower prices
credible
○ Instead of selling the durable good, the producer
might rent it to customers.
■ In a way, it commits itself not to decrease
the price in the future since a decrease
will hurt it by reducing the value of the
goods he owns.
○ If there is not just 1 but a stream of products that
the monopolist will bring to the market.
● Theoretically, a durable good monopolist might be unable to
charge prices above marginal costs.
6.2 Contestable Markets
● It is therefore important to analyze whether free entry is likely
to decrease market concentration or in any case to decrease
the welfare loss which is due to monopoly power.
● Contestable Markets Theory
○ Scenario:
■ Consider an industry which produces a
homogeneous good by means of a
technology which is equally accessible
by both an incumbent monopolist and
potential entrant.
■ If the monopolist charged a price above
average cost, it would obtain positive
profits attracted by these profits a new
firm would enter and charge a price
slightly lower than the price of the
monopolist and steal all the market from
the latter
■ If at equilibrium the incumbent cannot set
a price below average costs, because it
would not be able to cover its fixed costs
and accumulate losses.
■ At the equilibrium one would not observe
any entry in the market because no firms
would start operating in the industry
when the monopolist makes zero profit.
6.3 Monopoly and free entry
● Monopolies might exist under free entry
○ If more than one firm enters the market, competition
will be so fierce that even duopoly profits will not be
enough to cover fixed costs.
● Persistence of concentration when sunk costs exists.
○ Finiteness property - in markets where consumers
value quality of the products, industrial
concentration will not fall below a certain threshold
even if market size grew arbitrarily large.
6.3.1 Concentration under free entry*
● Simple example:
○ Imagine a homogenous product which can be
produced by 2 firms which are perfectly identical.
○ First stage: the 2 firms have to decide whether to
enter the industry or not.
■ if they do, they have to incur a fixed set-
up cost which is necessary to start
production
○ Second stage: the firms choose prices.
○ Note that when both firms enter they incur a loss
due to the fixed set-up cost. There exist 2 equilibria
in pure strategies of the game.
○ No matter which firm ends up with being the only
producer, a monopolistic structure arises in the
market.
○ Despite free entry, the market outcome is a
monopoly and the monopolist does earn supra-
competitive profits.
○ The anticipation of market competition might lead
one firm not to enter the market even when entry is
not restricted.
● Finiteness property in vertical differentiation model.s
○ One of the most important contribution in oligopoly
models is given by the work of Shaked and Sutton.
■ They analyse a vertical product
differentiation model which is a model
where consumers agree on the ranking
they give to products of different
qualities.
■ Analyze a game where firms choose
whether to enter the industry or not at the
first stage then choose quality of goods
in the second stage and choose price in
the third stage.
○ Shaked and Sutton reformulate the finiteness
property result in a weaker but more robust
version,in the sense that it holds across a number
of specifications and in particular when firms
produce goods which are not only qualitatively
different but are horizontally differentiated.
○ The increases the fixed sunk costs of the
investments needed and tends to limit the number
of firms in the market.
○ New entrants might still enter the industry and
manage to operate profitably, but they would have
to rely on a low price, low quality strategy which
does not jeopardise the market positions of the
incumbents.
6.3.2 Switching Costs
● Another situation where market power does not necessarily
decrease under free entry is when there exists consumer
switching costs
● Switching to a new product or a new supplier entails:
○ Transaction costs (e.g. when one closes an
account in a bank and opens another in a new
bank); and
○ Learning costs (e.g. cost of passing to a new
software application after having learned how to
operate with a different one)
● Some of the switching costs can also be Artificial or
Contractual:
○ Created on purpose by the firms to make it more
difficult for consumers to pass to new products
○ E.g. Frequent Flyer Programs (After having
accumulated miles with an airline and they switch
to another would not be able to reach the number
of miles necessary to have a free flight)
○ E.g. Fees charged by banks to close an account
● Existence of Switching costs effectively differentiates goods
which would otherwise be perceived as perfectly identical
(e.g. After having opened an account at a particular bank, the
existence of switching costs would make it worth changing
banks only if the alternative bank will give much better rates
or services)
● When switching costs exist:
○ New entrants generally have a harder time in
getting market shares from the incumbents
○ Firms which already have a large base of
customers would have a large advantage since
important price cuts will be offered by new firms to
attract customers
○ Free Entry does not guarantee that market power
will decrease
○ Allow incumbent firms to choose pre-entry prices
and quantities to deter entry in later periods (e.g.
Firm that is a monopolist today will under-price in
order to build a large customer base and make it
more difficult for a potential entrant to enter the
market)
Competitiveness of Switching Cost Markets
LECOREG SEM2-19-20 | 11
 ● Not necessarily always as anti-competitive as they might
appear (e.g. Two firms which are both new entrants in an
industry)
○ 1st period: Each firm has simultaneously to decide
the price to be charged in the market
○ 2nd period: Each firm will have some Captive
Customers (the customers in the first period will
tend to buy from the same firm in the 2nd period)
○ The larger the 1st period market share of a firm the
larger the profit it will make in the 2nd period
○ Since the 1st period customer base has a positive
impact on the 2nd period profit, each firm will price
more aggressively in the 1st period
○ Thus, it is not possible to conclude whether
switching costs will result in higher or lower total
welfare
HOWEVER, there is a presumption that:
● PRESUMPTION: Switching costs decrease competition
○ Beggs and Klemperer examine a market where in
each period firms have to set:
■ Set Prices
■ Some New Consumers Arrive
■ Some Old Consumers leave the market
2 different effects when firms set prices in any current period:
● Charge higher prices to exploit the current
customer base
● Set lower prices to expand the future customer
base (to be able to exploit it later)
● The first effect (charging higher prices) would be
more dominating
● Why? Better to have higher profit today than
tomorrow; lower prices today are ineffective in
attracting consumers since they will expect that
they will face higher price tomorrow
● Unlikely that today’s prices will be much lower to
attract future customers
CONCLUSIONS
● Switching costs is detrimental to welfare because they make
entry more difficult and markets less competitive
● “Public policy should discourage activities that increase
consumer switching costs and encourage activities that
reduce them” (Klemperer, 1995)
● Authorities should check that firm created switching costs are
not preventing competition in markets
● Consumers are not locked in by artificial switching costs (e.g.
switching telephone provider would imply changing one’s
telephone number)
● Authorities should use their bargaining power to impose
reduction on switching costs which are artificial
6.3.3. Network effects
● In industries with network effects, consumers derive utility
from the number of other consumers who choose the same
product
● Two types of Network Effects:
○ 1st Type: Physical or Communications Networks
■ Consumer’s Utility in the consumption of
a good increases directly with the
number of other people consuming the
same good
■ E.g. Telephones (The larger the number
of people in a given telephone network
the more useful the telephone service)
■ Other examples: Fixed Telephones,
mobile telephones, fax, telefax, telex,
email services
● 2nd type: Virtual or Hardware-Software Network
○ Consumer Utility increases indirectly with
the number of other consumers buying
the same good because of its effects on
the availability of a complementary
product
○ E.g. Credit Card Network (The larger the
number of holders of the same credit
card the more likely shop keepers will
accept it)
● In all situations, consumers will face coordination problems
○ Choices are based on what other people will also
do
○ In some cases, this is not a problem (e.g. Email
because there are enough people to communicate
with through email)
○ In other cases, when completely new networks or
products are introduced, expectations about what
other people will do are relevant (e.g. Development
of a new generation of mobile phones will be
hindered by doubts about how consumers will
adopt them; New Firm launches a network with
different standard than the one being used)
● Expectations play a crucial role in network industries
● Each prospective customer has to take a purchase decision
on the basis of his or her expectation of other prospective
customers
● If all consumers believe that a million other people will buy, all
will buy; If none think that anyone will buy it, none will
● Expectations will be self-fulfilling
● A potential entrant might find it difficult to challenge an
incumbent in these industries
● Crucial component: Number of Current and Future users of
the product
● The larger the number of consumers already locked in with
the current standard, the more difficult will be the task
● The stronger the reputation of the new entrant and the more
resources it commits to the new product, higher chances of
succeeding
Strategies of New Entrants:
● Introductory price offers
● Convincing firms selling complementary services to develop
them
Strategies of Incumbents to delay or completely deter new
entrants:
● Ensure that new products cannot be compatible with theirs (as
long as standard is proprietary)
● Engage in anti-competitive practices (e.g. if a new entrant has
a product that has new features, the incumbent can announce
that it will have an upgrade of its product that incorporates
these new features even if not true; Can also advertise that
new entrant is making slow progress in building a customer
base
○ This strategy must be carefully monitored by anti-
trust authorities
○ Anti-trust authorities can also force compatibility in
the industry (e.g. imposing on an incumbent full
inter-operability with a new entrant’s products)
○ Effects: Ex-post (beneficial because it allows more
competition); Ex-Ante, before a given product
appears on the market (discourages firms from
introducing new products and to fight for them to
become the standard)
● Network Industries are prone to dominance and naturally
associated with monopolies
● Market Tipping: When there are competing systems, once a
system manages to gain a certain advantage in consumer
preferences, then it might become more and more popular
and its rivals might fade out
○ Important phenomenon in network industries
● Qualifications to Network Industries:
LECOREG SEM2-19-20 | 12
 ○ Many situations in which different standards might
co-exist in a given industry (e.g. Different credit
card and ATM networks)
○ The existence of tipping and large profit can be
reaped once the own product is established as the
industry’s standard which would prompt firms to
compete fiercely to win the “standards war”
○ Intense promotional activities of various types
○ Aggressive pricing in the introductory periods
○ Large profit made by the firm after its product has
become the dominant standard will cover the costs
incurred during the standards war
● Existence of only one network in the market might even
benefit consumers to the extent that they will be able to enjoy
more communication possibilities or more complementary
services
● “Examples of entrants which manage to establish a product
incompatible with previous standards abound in the real
world; from the welfare point of view, it is not clear that entry
would always be beneficial.” (Katz and Shapiro, 1994)
6.3.4. Model of (physical) networks
● Presented by Fumagalli, Karlinger and Motta (2003) to
illustrate the coordination problems that arise for consumers
when network externalities exist
● Two Types of Equilibria:
○ a.) Entry Equilibrium: Entrant enters and all new
consumers join its network
■ This is an equilibrium because consider
consumers first, consumers have no
incentive to deviate
■ Firms have no incentives to deviate
either: One firm would have no incentive
to decrease its price because should it
get consumers, it would make losses;
The other firm would not have an
incentive to increase its price because
customers would switch to the incumbent
○ Price Discriminating
○ Tying
● Competition authorities should be vigilant and promptly
intervene whenever monopolists impede entry through
practices that keep entrants off the market
7. Summary and policy conclusions
● Market power brings about a welfare loss, due to higher prices
than in a competitive situation
● Competition policy should be concerned with market power
● Elimination of market power even if it were practicable is not
one of the objectives competition policy agencies should
pursue
● The prospect of having some market power (some profit)
represents a powerful incentive for firms to innovate and
invest
● Competition laws and their enforcement should therefore
ensure firms will be able to enjoy the rewards for their
investment
● Expropriation of firms’ assets (whether material or immaterial)
should be avoided
● Resorting to the doctrine of essential facilities (granting
access of crucial assets to competitors) to price controls must
be done only in exceptional circumstances
● Competition often leads inefficient firms to exit and is
beneficial from a welfare point of view
● Competition policy must be vigilant, and guarantee an
environment where potential and actual competitors are able
to challenge firms enjoying a position of large market power

● b.) Persistence of Monopoly Equilibrium:

Consumers fail to coordinate on the outcome that
would be more efficient
■ The one firm has no incentive
to change its price since it is
earning monopoly profits and
the other firm would have no
incentive to deviate, as by
entering it would not be able to
recover its fixed cost, however
small
● Price Discrimination to exclude entry in a network
industry
○ Offers a price below cost to one buyer only, while
setting the monopoly price to the other

6.3.5 Exclusionary Practices

● Free entry does not guarantee that an industry structure will

become less concentrated over time
● Entrants will often find it difficult to challenge successfully
incumbents even if the incumbents do not behave
strategically in markets characterized by consumer switching
costs or network effects
● A monopolist (firm with large market power) might engage in
many different practices aimed at deterring entrants or
preventing entry:
○ Investing in extra-capacity
○ Setting prices below cost
○ Flooding a market with many different product
specifications
○ Foreclosing access of rivals to crucial inputs
○ Bundling
LECOREG SEM2-19-20 | 13
 ○ No 2 or more persons have identical
characteristics—all have differing preference
AN INTRODUCTION TO ANTITRUST ECONOMICS patterns
ERNEST GELLHORN ● The Theory of the Firm
○ This theory assumes that each firm has but one
The objective of antitrust law is to assure a competitive economy, based primary goal, namely, to make as much money as
upon the belief that through competition, consumer wants will be possible. The ultimate objective of a firm is to
satisfied at the lowest price with the sacrifice of the least amount of generate profits.
scarce resources. To express this is economic terms, competition ○ In order to achieve its goal of profit maximization,
maximizes both allocative efficiency (making what the consumer wants) the firm will seek to organize its factors of
and productive efficiency (using the least amount of resources). Antitrust production efficiently and to put its resources to
laws rely upon the operation of the “market” system (free enterprise) to their most valuable use—and this depends on the
decide what shall be produced, how scarce resources shall be allocated, operation of the market in which the firm operates
and to whom products shall be distributed. ● The Equilibrium Price - prices are determined by supply and
demand
Antitrust’s primary concern is not with the entire economy, but with the ○ The Demand Schedule -statement of the different
manufacturing and service sectors of our industrialized economy—but quantities of a particular good or service that a
the size of such sectors assure that antitrust is the central of the entire consumer would purchase at each of several
economy. different price levels
○ The amount of an item that a person will purchase
Because antitrust cases involve basic economic issues, the great cannot be determined without considering its
disputes revolve around inferences drawn from economic analysis price—it is this relationship between the prices and
the quantities demanded at these prices that
1. Some Basic Explanations and Behavioral Assumptions constitutes the demand schedule
● Scarcity ○ Example: I use 10 gallons of gas per week if the
○ There are not enough resources available to price were $.10 per gallon. If the price is increased,
produce all of the goods and services that could be I would reduce my consumption of 1 gallon for every
consumed $.10 per gallon price increase. A table of my
○ All societies therefore, must develop social demand schedule would then look like this:
arrangements to deal with the production and
distribution of scarce goods and resources
● Market or Price System
○ In a market system, this choice or allocation is not
the decision of a central planner, but the net result
of millions of decisions made independently by
consumers and producers, all acting through the
market (the price system)
○ Prices - coordinating mechanism for the millions of
decentralized production and consumption units ○ My gasoline demand schedule could also be
○ Several basic points illustrated on a graph, which could be referred to as
■ Market mechanism works without the demand curve:
anyone having power to change the price
level by his own individual action
■ Price system and its adaptation to shifts
in consumer demands or producer
supplies is the result of uncoordinated
and separate decisions by large numbers
of sellers and buyers
■ In the free market, prices are determined
by demand and supply
■ Market system framework is based upon
each individual economic unit seeking to
maximize its own welfare
● Theories of consumer behavior
○ Each person desires numerous economic goods—
economic entity is anything one prefers to have in
greater amount than he now has ○ Using this, when the price of gas is $.50 per gallon,
○ For each person, some goods are scarce—each of I will demand 6 gallons of gas per week. The whole
us has less of something than he would like to have demand curve represents the complete functional
if it cost nothing relationship between quantity demanded and price.
○ Postulate of substitutability—a person is willing to Thus, if the price of gas is raised, the amount
sacrifice some of any of his goods in order to obtain demanded by me will change, and I will desire less
more of other goods gas.
■ Measure of substitutability of one good ○ The movement form one point to another on the
for another is the value attached to the same demand curve measures the change in the
first in terms of the other good
○ Law of diminishing value or diminishing marginal
utility - the more one has any good, the lower the
personal substitution value it possesses for him
■ The value which a consumer will attach
to successive units of a particular
commodity diminishes, as his total
consumption of that commodity
increases

LECOREG SEM2-19-20 | 14
 amount demanded as price is raised.

○ Most demand schedules do not relate to individual

consumer demands; instead, they are an aggregate
of market demand schedules showing total amount
of an item that all consumers would buy from the
selleters.
○ A market demand schedule is
the addition of various individual
consumer schedules. This graph
illustrates how 3 individual demand
schedules are added together
horizontally:
(4) The Principle of Supply
- The primary difference between supply and demand
schedules is that supply schedules are positive or upward sloping, since
there is a positive or direct price/quantity relationship for supply. While
relationship for demand is generally negative or downward sloping.
- The point is that the higher the price, the greater the amount
which will be supplied.
- But because there are exceptions to this principle-in
particular, the backward bending supply case --the principle of supply is
only a hypothesis, fitting most, but not all, cases.

(5) Determination of Price

- Concept of market equilibrium price – where the supply and
demand curve intersect.
- Market equilibrium price dictates the amount demanded and
the amount offered
- Prices below equilibrium will result in shortage, prices above
results in surplus
- Market equilibrium prices are internal and self adjusting. It does
(2) Fundamental Law of Demand not take into consideration government supervision or intervention
- Demand schedule is a function of
o Consumer tastes/preference
o Individual income
o Distribution of income
o Size of population
o Price of goods
- If all factors above remain constant EXCEPT price, basic rule
in economics, the higher the price of the goods the lower the rate
of consumption; Quantity demanded varies inversely with price.
- The demand curve is downward sloping. The Higher the P, the
lower the Q.
- As the price decreases, increase in demand will be due to the
following
o More if the item will be consumed
o And new users will be able to afford the item
- Demand schedule pertains to the CONSUMER

(3) Supply Schedule

- Opposite of the demand schedule.
- Supply schedule is a statement of what businesses are willing
to offer for sale at various prices.
- As the price of the item goes up, more suppliers are willing to
sell.
- Supply schedule pertains to the SUPPLIER (6) Shifts in Demand and Supply
- Quantity supplied depends upon - Movement in demand curve indicates a change in the amount
o Strategy demanded because as the prices increases, consumer will
o Technology substitute cheaper goods or consume less.
o Cost of production - If factors other than price change, the whole demand curve
shifts
o Relative price of commodity
- Shifts in demand curve will change market equilibrium price.
- Does not apply to monopolies because they can fix the price
A shift to the right means an increase in income which results in
or quantity of good regardless of free market conditions
excess demand, to restore equilibrium, prices go up until the new
- Curve is positive, upward sloping.
demand curve and the original supply curve intersect.

LECOREG SEM2-19-20 | 15
 - First law of supply and demand. A rise in demand for a good
from a change other than price causes an increase in both the
equilibrium price and equilibrium quantity bough and sold. The 2nd
law is the opposite, a decline in demand for a good from a change
other than price causes a decrease in equilibrium quantity and
price.
- Supply curves are not constant and are affected by economies
of scale. If the quantity of goods is increased, the price will
decrease.
- 3rd law of supply and demand which states that an increase in
supply causes a decrease in the equilibrium price and increase in
equilibrium quantity bought and sold.

● In both illustrations the original price (p1) and quantity (q1) are
identical; in both the shift in supply (to the left from S1 to S2)
is the same. However, because the slope of the demand curve
differs (i.e. D1 is much steeper than D2), the new equilibrium
price is much higher and the drop in quantity demanded is
slight where demand is relatively inelastic (Figure 9A), and,
conversely, the same shift in supply results in a much larger
change in the amount bought and sold where the demand
curve is elastic (Figure 9B). Since the supply curves are
identical, the difference stems from the way consumers will
respond to price changes.
● In the first (inelastic demand) situation, the quantity
demanded is relatively insensitive to price changes, and price
equilibrium is restored only when the price rise is large enough
to diminish demand for a product that many consumers
believe is relatively essential.
○ This includes goods which do not have many
substitute (e.g. insulin, cigarettes).
● In the second (elastic demand) example, there is a
pronounced variance in the quantity demanded with changes
in price.
○ It includes relatively undifferentiated producer
goods like cotton or cocoa.
● As these illustrations suggest, price elasticity varies greatly
among different types of goods and services. Two basic
factors apparently determine this difference:
○ The availability of substitute products; and
○ The proportion of consumer income that is spent on
the good.
■ If only a relatively small proportion of
consumer income is spent on a particular
product, then price elasticity of demand
depends almost wholly upon the availability of
substitute. E.g. table salt; it is but a small
fraction of the consumer’s purchasing dollar;
there are no ready substitute for it; hence,
F. Price Elasticity of Demand consumption is unaffected by price changes.
● Price elasticity of demand measures the degree of ■ On the other hand, when a relatively large
responsiveness of the quantity demanded to changes in price. proportion of consumer income is spent on a
● Figures 9A and 9B show how different demand curves reflect particular good, then price elasticity depends
consumer responsiveness to price changes caused by shifts on whether the good is one a consumer wants
in supply: more of as his income increases. If it is, then
as price falls and he has more free income, he
will buy more, and demand will be elastic. If he
wants less of the good as his income rises and
he can afford more expensive substitutes,
then the reverse will be true: as price falls, he
LECOREG SEM2-19-20 | 16
 will buy less, and demand will tend to be
inelastic.
● Technically, and more accurately, a demand schedule is
"elastic" where the percentage change in the quantity
demanded is numerically greater than the corresponding
percentage change in the price. And it is inelastic where the
percentage change in quantity is less.
● Price elasticity has been an important consideration in
defining the market within which the seller operates and in
determining his market power.
● On the other hand, the extent of price elasticity depends to a
considerable degree on how widely or narrowly a good is
defined.
II. BASIC MARKET MODELS
● The market price is important because, in theory at least, it
is the price for each good at which every buyer can purchase
as much as he chooses-and every seller can dispose of all he
wishes. It is where demand would be satisfied and supply
exhausted.
○ This description is inaccurate if it is understood as
describing the real world or all possible conditions
because price (and quality, service, or credit) is not
determined simply by the shapes of the buyers'
demand and the sellers' supply curves.
○ In other words, the analysis of equilibrium price
demonstrates how prices emerge from the
marketplace but it does not describe a basic
condition for the formation of these prices or the role
of competition.
● The discussion in this section, therefore, considers the role of
competition as the regulator that supervises the orderly
working of the market.
A. Profit-Maximizing Behavior by Firms
● Sellers would seek to maximize their profits by organizing the
factors of production in the most efficient method possible.
● Efficient production generally means lower costs and, if prices
remain stable, increased profits.
● Firm will continue to produce a product or will increase
production of it as long as the last unit (i.e., the "marginal" unit)
of production increases the firm's profits (marginal revenue
exceeds marginal costs).
○ If the firm finds that greater production increases
profit, it will expand output; if greater production
decreases profit, output will be reduced.
● This rule of profit-maximizing behavior is readily illustrated as
follows:
● The profit-maximizing price for this hypothetical firm, then, is
p which equates with output q (and generates total revenues
reflected by the square bounded by the lines drawn between
points p-E-q-O, assuming a single price). Again, this technical
explanation merely sets forth what common sense suggests.
B. Perfect or Pure Competition
● The following conditions are frequently said to define the
existence of perfect competition:
○ There are large numbers of buyers and sellers.
○ The quantity of the market's products bought by any
buyer or sold by any seller is so small relative to the
total quantity traded that changes in these
quantities leave market price unaffected.
○ The product is homogeneous; there is no reason for
any buyer to prefer a particular seller and vice
versa.
○ All buyers and sellers have perfect information
about the prices in the market and the nature of the
goods sold.
○ There is complete freedom of entry into the market.
● These conditions neither define perfect competition nor are a
priori present where competitive rivalry is inevitable or
necessary.
● More accurately, perfect or pure competition relates to a
particular demand condition faced by an individual seller.
○ It describes a market where a single seller's sales
would plummet if he raised his prices above that
charged by another seller. He sees in essence a
horizontal demand for his products at the prevailing
market price.
○ This phenomenon also applies to demand
conditions facing a seller where he cannot increase
his sales even though he lowers his price below the
market level, or, alternatively, where market prices
would be wholly unaffected if he withholds his
products from the market. A seller facing these
demand conditions is called a "price-taker"
because his actions have no immediate impact on
price or production.
■ In a perfectly competitive market this seller
must passively accept whatever price
happens to prevail in the market.
■ The individual price-taking seller’s view of
market demand (as contrasted to the
industry’s view) is illustrated in Figure 11:
● The primary reason for the different views of demand
conditions facing sellers in the same market is that the
individual seller produces only a tiny fraction of total industry
supply; each seller's production is insignificant. Moreover,
entry into the industry is probably easy so that buyers have
ready alternatives. Any withdrawal of sales at prevailing
market prices is quickly supplanted by offerings of others.
● In addition, as Figure 11 suggests, no individual seller has
significant market power in terms of the price to be charged or
output supplied. Each seller's output, rather, is determined by
his costs.
○ Since the price-taking seller can sell all, or as little
as, he wants at the market price, his marginal
revenue curve---the revenue he receives from the
last unit sold-is identical to the demand curve
(which is also called his average revenue curve).
● A seller's output in a perfectly competitive market, assuming
he is a profit-maximizer, is determined by his marginal cost
curve (MC) and the point where it intersects the demand line
LECOREG SEM2-19-20 | 17
 (D) (Point A, Figure 12), which is also his marginal revenue price higher (and sell less) or lower (and sell more); the price-
line (MR), as illustrated in the following diagram: taking firm in a competitive market does not have this option.”
● Table 2:

● In Table 2, the seller can sell 5 Units at $0.60 [or 6 Units at

● As Figure 12 indicates, in short-run equilibrium, all firms
produce the output that corresponds to the point where their
marginal cost and marginal revenue curves cross.
● Figure 13
$0.50 for the highest Total Revenue. Any other choice is less
ideal since it is not as high as this.
○ And since the monopolist does not know a priori
what the demand schedule is, he must constantly
probe and search for the most favorable profit-
maximizing price.
● Figure 14:

Perfectly Competitive Market

● Here, each firm will increase output until its marginal costs
equal price. This does not mean that there are zero profits. ● Mathematically, the Marginal Revenue line (MR) is always
● “Cost” includes normal competitive return on investment TWICE as steep as the Demand Curve (D).
necessary to attract capital into the industry. ● Figure 15:
● Size of Maximised Profit depends on Average Cost and
Average Revenue.
● However, in Perfect Competition, Average Revenue =
Average Cost [Thus, no excess or monopolistic profits].
● There are gains in efficiency, and some firms may be able to
reduce Costs because of this. They in turn will have supra-
normal profits. However, in the long run, more firms join in,
others become efficient and thus, supra-normal profits will be
lost. In the long run, competition eliminate supra-normal
profits.
● This is in the long-run though. Since this adjustment takes
time, firms are still incentivized to cut costs and become more
efficient.
● Recall: In Perfect Competition, firms are PRICE-TAKERS and
QUANTITY-ADJUSTERS. No firms can affect price by
adjusting output, or adjust output by adjusting price.

Monopoly
● This is the opposite end of the spectrum from Perfect
Competition. This is has 4 main factors:
1. Single seller occupies entire market
2. Product sold is unique
3. Substantial Barriers to Entry
4. Imperfect Market Knowledge
● Here, 1 seller produces the output for a whole industry [the
Demand Curve here is ipso facto identical with Seller’s
Demand Curve].
● “In a monopoly market the seller is sufficiently large relative to
the total amount demanded that he can set the market selling

LECOREG SEM2-19-20 | 18
 ● Point A is the intersection of the MR and the Marginal Cost
(MC).1
● Point B is where the D Curve intersects with the Quantity (qm).
Thus, a Monopolist can set the Price at Pm.
● Note: There is no “Supply Curve” here. This is because in a
Monopoly set-up, the Profit-Maximizing Firm equates MC to
MR and MR =/= Price. In fact price is determined at the D
Curve.
Competition and Monopoly Compared
● Monopoly, compared to Perfect Competition, has reduced
output, higher prices, and transfer of income from consumers
to producers. [Cost curves are unaffected, prices rise, and
quantities produced are decreased].
● Figure 16:
● In Perfect Competition, MC = D.
● Monopoly, it is dictated by the intersection of MC and MR.
○ “[W]hen the market is competitive, price will be at
Pc and output at qc. (In this instance, industry
supply is the equivalent of the horizontal sum of
individual firm marginal cost curves.) Should the
industry become monopolized, output would be
reduced to qm and price raised to Pm.”
● Shaded portions are DEADWEIGHT WELFARE LOSS.
○ Captured NEITHER by consumers NOR producers.
● “While most emphasis is placed on the undesirable features
of monopoly in comparison with competition, especially with
respect to allocative and productive efficiency, it should be
noted that monopoly is not universally condemned. Monopoly
may, according to some theories, generate profits which
support innovation; it may be inevitable and result in a
reduction of price and increase of output where it alone would
bring economies of large scale production. It may also provide
the product variety which consumers desire and which perfect
competition might preclude”
Monopolistic Competition
● Tries to reconcile Perfect Competition and Monopoly. BUT not
exactly a middle ground.
● Recognizes that each producer sells a somewhat
differentiated product.
○ Distinct and distinguishable brands.
● Not engage in price competition, but compete in NONPRICE
COMPETITION (e.g. Advertising, Product Quality, and Sales
Techniques).
● Reflects Monopoly: Prices exceed MC. Average Costs are
higher too.
● “[I]t also portrays aspects of competition, however, in that the
uniqueness of each product discourages the seller from
combining with others to restrict output and that the availability
of similar products from many sellers gives buyers ready
alternatives.”
● Its graph is almost indistinguishable from a Monopolist.
1
In Economics, we call the Monopolist’s MC Curve the “Nike Curve”
for easy recall.
Theory of monopolistic competition is an important step in
understanding monopolistic behavior:
- It demonstrates how monopolistic elements in an industry can
lead to production at a point where output is restricted and
costs are aboive those of the most efficient scale, even though
the industry firms only earn normal profits.
Oligopoly:
- Theory of oligopoly is that because there are only a few sellers
in oligopoly markets, all sellers recognize that
- They are to a substantial degree interdependent
- Each seller takes into account the REACTIONS of rival sellers
when making output and pricing decisions
- Firms in oligopoly markets will not reduce prices to increase
sales because they expect that action to be fruitless
- Any gains will be cancelled immediately when rival
sellers retaliate with similar price reductions
- Theory of coordination and anticipation
- What competition exists is in the form of INDIRECT
competition
- It means it is a disguised price cutsand nonprice
competition i.e. advertising
- Competition is LIMITED so as not to invite
retaliation or to increase average total costs
- Oligopoly vs. Monopoly
- Oligopoly, price and output decisions are made
while ANTICIPATING the reactions of the
IDENTIFIED RIVALS
- But oligopoly and monopoly do not consider the
reactions of others
- Oligopoly: competitive seller has no impact on his
rivals
- Monopoly: no close rivals
- Oligopoly is not exact coordination but predicted
competition nearing the levels of monopoly
- Oligopoly is a guessing game where the rewards go
to the firms who outguess their opponents
- To maximize profits, oligopolists must do what any
other firm facing a negatively sloped demand curve
must do: produce to the point that marginal cost
equals marginal revenue and charge the highest
price that consumers will pay for that output
- Oligopolist’s demand curve cannot be identified
(w/o knowing how his rivals will react)
- Like in the military strategy, mutual
interdependence depend on offensive and
defensive maneuvers with the resources and
capabilities of the opponent.
- For it to be successful/effective
- 1) Systemic analysis of possible
alternatives facing the seller in an
oligopoly market and to predict
performance
- 2 Observe the performance of firms in
oligopoly markets and to measure the
results
- Assumption of Anti-Trust laws: Competitive markets are not
always self-policing, and the lucrative gains available from
monopoly certainly sugggest that the profit-maximizing firm
will find it rewarding to destroy competition unless otherwise
constrained
- Unless a firm or group of firms can create barriers to entry,
unaided private efforts to maintain monopoly positions are
doomed to failure
- The cost of short-term monopoly may be substantial and
barristers to entry may exist, especially when some other
governmental policy supports them
- Antitrust laws always seek to maximize consumer welfare
LECOREG SEM2-19-20 | 19

VOLUNTARY PEER REVIEW OF COMPETITION LAW IN THE PH
UNCTAD
Foundations and history of competition policy
Economic policy
- Like most developing countries, the Philippines adopted an
import substitution strategy from the 1950s up to the late
1970s. The manufacturing sector was well protected behind
high tariffs.
- To promote manufacturing growth and development, the
Government provided subsidies and created regulatory
institutions to control prices, domestic supply, and market
entry in sectors such as cement, passenger cars, trucks,
motorcycles, iron and steel, electrical appliances, sugar
milling and refining, flour milling, textiles, and paper.
a. Along with other countries in the region, the
Philippines abandoned the import substitution
policy in favour of an export-oriented one.
b. In 1981, the Government switched to liberal trade
and investment policies.
c. Two decades later, import duties on most goods
have been reduced significantly through successive
rounds of tariffs reform. Under the ASEAN Free
Trade Agreement most tariff lines have been
reduced to zero for imports from member countries.
- Furthermore, the Government eased entry of foreign
investment into the Philippines. Under the Foreign Investment
Act amended in 1996, 100 per cent foreign equity may be
allowed in all areas of investment except those reserved for
Filipinos by mandate of the Philippine Constitutionand existing
laws.
- According to Aldaba (2012), the trade reform that took place
from the early 1980s to mid-1990s brought about a less
concentrated manufacturing sector.
- While trade liberalization may help promote competition from
imported products, from the early 2000s the Government
maintained in-quota and out-quota tariffs for selected
agricultural products such as rice and sugar. The Government
also resorted to contingent protection measures such as anti-
dumping and safeguard measures subject to conditions set in
Philippine laws.
- Aldaba (2005) found that these protective measures led to
high market concentration in many manufacturing industries
including cement, iron, steel, float glass, plastics and resin.
- Another study by Aldaba (2010) found that prices of cement
remained high even when tariffs have been removed. This is
because cement is a high-weight-to-value product with high
transport and handling costs. As an island State, moving
products or services from one island to another is costly,
rendering the domestic market highly fragmented, and hence
particularly vulnerable to capture by regional monopolies or
oligopolies. It should be noted that although high domestic
prices (from alleged collusion) may be attractive to importers,
dominant local manufacturers can easily cut prices to fend off
competition from imported products because of clear cost
advantage.
- High market concentration can be found not only in the
manufacturing sector, but also in the non-traded service
sector and the agricultural sector. It is noteworthy that the
country’s foreign investment restriction in public utility
services mandated by the constitution also contributes to
market concentration in key service sectors such as tele-
communications, energy and transport.
a. In the telecommunications sector, the mobile phone
market recently witnessed a merger that resulted in
a duopoly.
b. The energy sector, on the other hand, faces alleged
price manipulation in the wholesale electricity spot
market resulting from an insufficient number of
players in the electric power generation market.
c. Cabotage and frequent mergers in the domestic
cargo and passenger shipping contributes to a
concentrated inter-island and coastal shipping
industry.
- Limited market competition leads to widespread rigging of
bids in government procurement as the number of participants
in most bids does not exceed three.
a. According to the World Bank’s 2008 Philippines –
Country Procurement Assessment Re- port “there
is a perception that collusion or rigging of bids is
common, particularly for big ticket con tracts”.
b. In 2009, the World Bank blacklisted three Filipino
and four foreign contractors because of alleged
collusion in the bidding of a World Bank- funded
road project. These companies were suspended for
15 days by the Department of Public Works and
Highways but were qualified to bid for other projects
and allowed to continue on pro- jects they had
already procured.
- According to the Philippine Institute for Development Studies
(PIDS), “weak competition is one of the fundamental factors
that explain limited growth, productivity, employment in the
economy”.
- There has not been a single case brought to court under any
of the existing competition provisions, although a few cases
have been investigated.
- For example, in 2007 the Energy Regulatory Commission
investigated the alleged fixing of spot electricity prices in the
wholesale power pool, and in 2009, the Department of Justice
and Department of Energy Task Force launched a probe into
oil companies for unreasonable oil price increases but found
insufficient evidence of collusion.
- The main obstacles to effective enforcement of the
competition provisions are the criminal sanctions which
require the standard of proof “beyond reasonable doubt”, the
sheer lack of awareness of the nature of trade practices that
constitute restrictive practices, and the absence of an
authority designated to oversee the enforcement of the
scattered competition provisions
The legal framework
- The Philippines has a history stretching back to the Spanish
regime of laws dealing with competition issues. Current laws
dealing with monopolies go back to 1925 and restraint of trade
provisions date back to 1932 in the Revised Penal Code. The
current Constitution with reference to control of monopolies
was established in 1987, although the same provisions are
similarly found in the 1973 Constitution.
The current laws
1987 Constitution, article XII, section 19
- This provides: “The State shall regulate or prohibit monopolies
when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be allowed”.
- The Constitution does not make any reference to the term
“abuse of dominance”.
- Having established the constitutional authority, the most
prominent law and the only law that could be truly described
as covering the whole economy is the Revised Penal Code
The Revised Penal Code
(Act No. 3815) of 01 January 1932, article
186
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- “The penalty of prison correctional in its minimum period or a
fine ranging from 200 to 6,000 pesos, or both, shall be
imposed upon:
o Any person who shall enter into any con- tract or
agreement or shall take any part in any conspiracy
or combination in the form of a trust or otherwise, in
restraint of trade or commerce to prevent by
artificial means free competition in the market. 
 refineries of various capacities. The tariff differential
o Any person who shall monopolize any merchandise
or object of trade or commerce, or shall combine
with any other person or persons to monopolize
said merchandise or object on order to alter the
price thereof by spreading false rumours or making
use of any other article to restrain free competition
in the market. 
 billions of pesos. Those who will not build refineries
o Any person who, being a manufacturer, producer,
or processor of any merchandise or object of any
commerce or an importer of any merchandise or
object of commerce from any foreign country, either
as principal or agent, wholesaler or retailer, shall
combine, conspire or agree in any manner with any
person likewise engaged in the manufacture,
production, processing, assembling or importation
of such merchandise or object of commerce or with
any other persons not so similarly engaged for the
purpose of making transactions prejudicial to lawful
commerce, or of increasing the market price in any
part of the Philippines, or any such merchandise or
object of commerce manufactured, produced,
processed, assembled in or imported into the
Philippines, or of any article in the manufacture of
which such manufactured, produced, processed, or
imported merchandise or object of commerce is
used.” 
 protectionist policy.
- While the term monopoly is not defined in either the
Constitution or the Revised Penal Code, the Supreme Court
has defined it as “a privilege or particular advantage vested in
one or more per- sons or companies, consisting of the
exclusive right (or power) to carry on a particular business,
trade, manufacture a particular article or control the sale of a
particular commodity”.
- This definition by the Supreme Court was part of a case in
which the constitutionality of a law that regulated the
Philippine Oil industry put in question. That case found the law
to be unconstitutional because its provisions on tariff
differential, inventory reserves and predatory prices were
found to inhibit the formation of a competitive market. A new
law was enacted to deal with the deficiencies identified by this
first Supreme Court case.
- A reference to the Philippines Case Digest offers a useful
explanation of this Supreme Court case:
a. “The Downstream Oil Deregulation Act of 1996 or
Republic Act No. 8180 allows any person or entity
to import or purchase any quantity of crude oil and
petroleum products from a foreign or domestic
source, lease or own and operate refineries and
other downstream oil facilities and market such
crude oil or use the same for his own requirement
subject only to monitoring by the Department of
Energy.
b. Tatad assails the constitutionality of the law
claiming, among others, that the imposition of
different tariff rates on imported crude oil and
imported refined petroleum products violates the
equal protection clause. Tatad contends that the 3
per cent-7 per cent tariff differential unduly favours
the three existing oil refineries and discriminates
against prospective investors in the downstream oil
industry who do not have their own refineries and
will have to source refined petroleum products from
abroad. Notably, 3 per cent is to be taxed on
unrefined crude products and 7 per cent on refined
crude products.
c. ISSUE: Whether or not RA 8180 is constitutional.
d. HELD: The Supreme Court declared RA 8180
unconstitutional because it violated Section 19 of
article XII of the Constitution. It cannot be denied
that the downstream oil industry is operated and
controlled by an oligopoly, a foreign oligopoly at
that. Petron, Shell, and Caltex stand as the only
major league players in the oil market.
e. As the dominant players, they boast of existing
of 4 per cent therefore works to their immense
benefit. Yet, this is only one edge of the tariff
differential. It sets up a high barrier to the entry of
new players. New players that intend to equalize
the market power of Petron, Shell, and Caltex by
building refineries of their own will have to spend
but compete with them will suffer the huge
disadvantage of increasing their product cost by 4
per cent. They will be competing on an uneven field.
The first need is to attract new players and they
cannot be attracted by burdening them with heavy
disincentives. With- out new players belonging to
the league of Petron, Shell, and Caltex, competition
in the downstream oil industry is an idle dream.
f. RA 8180 is likewise unconstitutional because it
discriminated against the “new players,” placing
them at a competitive disadvantage vis-à-vis the
established oil companies by requiring them to
meet certain conditions al- ready being observed by
the latter.”
- This case clearly demonstrates the court has a clear
understanding of the potential for anti-competitive effects from
what may have been thought to be a relatively benign albeit
- The Supreme Court has helpfully defined combination in
restraint of trade as provided for in article 186 as:
- “an agreement or understanding between two or more
persons, in the form of a con- tract, trust, pool, holding
company, or other form of association, for the purpose of un-
duly restricting competition, monopolizing trade and
commerce in a certain commodity, controlling its production,
distribution and price, or otherwise interfering with freedom of
trade without statutory authority”
- Importantly, article 186 does not provide direct liability for
corporations. The provision is criminal in nature and in the
Philippines legal regime penalties are restricted to natural
persons. While there is scope for the corporation to be held
liable civilly, article 186 will “hold liable as principals” those
representatives and agents who “knowingly permitted or failed
to prevent the commission of the offense”.
- At the heart of the competition regime is the article 186
provision as described above. It is a provision that provides
for criminal penalty at the lower end of the scale (ranging from
six months and one day to two years and four months
imprisonment) and a fine that can only be described as
ineffective. The penalty range of 200 to 6,000 pesos was set
in 1932 and has never been upgraded to reflect inflation. The
financial penalty could never be considered a likely deterrent
given that the range expressed in United States dollars is
approximately $15 to $150.
- Unlike some of the other provisions about to be addressed
there is no administrative penalty regime contained within
article 186.
- As a criminal provision, an allegation will be brought before a
judge in the Regional Trial Court and is tested against a
burden of proof of “beyond reasonable doubt”.
Act to Prohibit Monopolies and Combination in Restraint of Trade
(Act. No. 3427) of December 1,1925
● Act 3427 is the oldest competition law that penalizes
monopolies and combinations in restraint of trade and
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 provides for treble damages in civil actions. Most of its
provisions have been incorporated in the RPC, except for
Sect. 6.
○ Section 6. Any person who shall be injured in his
business or property by any other person by reason
of anything forbidden or declared to be unlawful by
this Act, shall recover threefold the damages by him
sustained and the costs of suit, including a
reasonable attorney’s fee.
Amending the Law Prescribing the Duties and Qualifications of
Legal Staff in the Office of the Secretary of Justice (RA No. 4152)
of June 20, 1964
● This is a law that vests the Secretary of Justice with legal and
enforcement duties in competition.
The Price Act (RA No. 7581) of May 27, 1992
● Arguably, the next most powerful statute in relation to
anticompetitive conduct.
● Purpose: An act providing protection to consumers by
stabilizing the prices of basic necessities and Prime
commodities and by prescribing measures against undue
price increases during emergency situations and like
occasions.
● The agency tasked with administration of the law is an agency
with a major objective to deal with prices during emergency or
calamitous situations.
● Material Provisions:
○ Section 5. Illegal Acts of Price Manipulation
■ Without prejudice to the provisions of
existing laws on goods not covered by
this Act, it shall be unlawful for any
person habitually engaged in the
production, manufacture, importation,
storage, transport, distribution, sale or
other methods of disposition of goods to
engage in the following acts of price
manipulation of the price of any basic
necessity of prime commodity:
● Hoarding
● Profiteering
● Cartel, which is a combination
of or agreement between 2 or
more persons engaged in the
production, manufacacture,
processing, storage, supply,
distribution, marketing, sale or
disposition of any basic
necessity or prime commodity
designed to artificially and
unreasonably increase or
manipulate its price. There
shall be prima facie evidence
of engaging in a cartel
whenever 2or more persons or
business enterprises
competing for the same
market and dealing with the
same basic necessity or prime
commodity, perform uniform or
complementary acts amongst
themselves which tend to bring
about artificial and
unreasonable increase in price
of any basic necessity or prime
commodity or when they
simultaneously and
unreasonably increase prices
on their competing products
thereby lessening competition
amongst themselves
○ Section 15. Penalty for Acts of Illegal Price
Manipulation
■ Any person who commits any act of
illegal price manipulation of any basic
necessity or prime commodity under
Section 5 hereof shall suffer the penalty
of imprisonment for a period of not less
than 5 years nor more than 15 years,
and shall be imposed a fine of not less
than P5,000 nor more than P2,000,000
○ Section 17. Violation of Juridical Persons.
■ Whenever any violation of the provisions
of this Act is committed by a juridical
person, its officials or employees, or in
the case of a foreign corporation or
association, its agent or representative in
the Philippines who are responsible for
the violation will be held liable therefor.
○ Section 20. Criminal Penalties Without Prejudice to
Administrative Sanctions
■ The foregoing criminal penalties shall be
without prejudice to any administrative
sanctions which the implementing
agency may impose under this Act or any
other law
● RA No. 10623 expanded the definition of basic necessities
and prime commodities and strengthened the power of the
Price Coordinating Council
○ Definition of Terms
■ Basic Necessities are goods vital to the
needs of consumers for their sustenance
and existence in times of any of the
cases provided under Sect. 6 or 7 of this
Act such as, but not limited to, rice, corn,
root crops, bread; fresh, dried or canned
fish and other marine products; fresh
pork, beef and poultry meat; fresh eggs;
potable water in bottles and containers;
fresh and processed milk; fresh
vegetables and fruits; locally
manufactured instant noodles; coffee;
sugar; cooking oil; salt; laundry soap and
detergents; firewood; charcoal;
household liquefied petroleum gas (LPG)
and kerosene; candles; drugs classified
as essential by the DOH and such other
goods as may be included under Sect. 4
of this Act.
■ Prime Commodities are goods not
considered as basic necessities but are
essential to consumers in times of any of
the case provided under Section 7 of this
Act such as, but not limited to, flour;
dried, processed or canned pork, beef
and poultry meat; dairy products not
falling under basic necessities; onions,
garlic, vinegar, patis, soy sauce; toilet
soap; fertilizer, pesticides and
herbicides; poultry, livestock and fishery
feeds and veterinary products; paper;
school supplies; nipa shingles; sawali;
cement; clinker; GI sheets; hollow blocks;
plywood; plyboard; construction nails;
batteries; electrical supplies; light bulbs;
steel wire; all drugs not classified as
essential drugs by the DOH and such
other gods as may be included under
Section 4 of this Act.
● The Act provides extensive price-monitoring and price-setting
powers in the event of “disaster” or “calamity” with the
objective of maintaining supply at reasonable prices for the
basic commodities important to all consumers.
● Notwithstanding that focus, the existence of an offence
defined as “cartel” is not limited to the declaration of a disaster
or calamity is an important element of the competition regime
in the Philippines
● The Price Act does not address the provision of services and
it does not directly address the conduct of corporations even
when it has a provision on the liability of corporations.
● When considering the potential impact of the Price Act it is
important to understand what is the result of Section 10,
LECOREG SEM2-19-20 | 22
 subpar. 9 which empowers the DTI to impose administrative
fines.
● The range of sanctions provided in the Act are only available
after a clearly defined process has been undertaken which
can include the laying of formal charges, formal response,
hearings - the process is an attempt to offer the protections of
a court-based process but is managed within the department
by designated adjudication officers who are ultimately the
decision makers.
● A decision of the adjudication officer may be appealed to the
Office of the President or to the Court of Appeals. However,
in practice the law was never enforced.
The Downstream Oil Industry Deregulation Act (RA No. 84799) of
February 10, 1998
● This Act was passed in response to the country’s power-
supply crisis that began in 1992 and that resulted in major
interruptions that weighed down the economic growth and the
rising fiscal instability of the Oil Price Stabilization Fund.
● President Ramos at that time thought that the downstream oil
industry - oil importation, refining, and distribution - needed to
be liberalized in order to attract new players and investment
into the energy market.
● The law abolished the power of the State to set prices of oil or
to set any rules governing competition in the market.
However, to ensure that subsequent competition in the market
is not only “free” but also “fair”, the law contains provisions
prohibiting collusion and predatory pricing.
● Section 11(a) prohibits cartelization which is defined as “any
agreement, combination or concerted action by refiners,
importers and/or dealers or their representatives, to fix prices
restrict outputs or divide market, either by products or by
areas, or allocate markets, either by products or by areas, in
restraint of trade or free competition, including contractual
stipulation which prescribes pricing level and profit margins.”
● Section 11 (b) prohibits predatory pricing which is defined
“selling or offering to sell any oil product at a price below the
seller’s or offerrer’s average variable cost for purposes of
destroying competition, eliminating a competitor or
discouraging a potential competitor from entering the market.”
● Unfortunately, the deregulation did not lead to a more
competitive market environment as intended as there was a
failure of the price and market deregulation to attract new
players.
The Revised Penal Code (RA 3185) Article 185
● Machinations in public auctions - any person who shall
solicit any git or a promise as a consideration for refraining
from taking part in any public auction, and any person who
shall attempt to cause bidders to stay away from an auction
by threats, gifts, promises, or any other artifice, with intent to
cause the reduction of the price of the thing auctioned, shall
suffer the penalty of prision correccional in its minimum period
and a fine ranging from 10 to 50 per centum of the value of
the thing auctioned.
● This is the first reference to an “attempt” at anticompetitive
conduct being treated in the same way as actual conduct
The Corporation Code of the Philippines (BP No. 68) of May 1, 1980
● Mergers and Acquisitions are covered by sections 76 and 80
of the Corporation Code. Parties are required to file articles of
the merger or consolidation with the Securities and Exchange
Commission (SEC). SEC approval of a merger is required
prior to issuing a certificate of merger or consolidation.
● There is no competition assessment or competition law based
guidelines that would be used by the SEC when considering
a merger prior to approval
Summary of the Current Laws
● The most comprehensive law dealing with anticompetitive
conduct in the Philippines is within the Revised Penal Code,
as amended - the statute provides no administrative penalty
options and does not penalize corporations other than via the
employees and officials of those companies.
○ The provision does not offer a custodial penalty and
a paltry fiscal penalty being at its maximum P6,000.
○ The conduct most easily recognized that can be
dealt with in this statute is a combination in restraint
of trade, which would include a cartel by the normal
definition of the term.
● The Price Act offers regulators an alternative to criminal
sanctions when pursuing cartel conduct.
○ Administrative penalties are available and may be
levied without impact on the scope for pursuit of
criminal sanctions.
○ The reach of Price Act is limited, however - only
conduct concerning goods defined in Section 3 as
“basic necessities” or “prime commodities” is
captured
● Merger control does not allow the prohibition of a merger on
the basis of competition analysis
● There exists, therefore, what appears to be a robust law
dealing with attempts to manipulate public auctions and also
with attempts to manipulate price/participation
● With the exception of the Price Act, and in addition to treble
damages under civil penalties, the laws are of a criminal
nature requiring proceedings to be launched and dealt with in
compliance with Supreme Court Rules. Offences need to be
proven to a criminal standard, beyond doubt, before the
prosecutor can succeed.
Association of Southeast Asian Nations (ASEAN) Guidelines
● The Philippines as a member State of ASEAN Economic
Community has adopted a goal of introduction of nation-wide
competition policy and law by 2015.
● In contemplating the introduction of laws, the ASEAN
Regional Guidelines on Competition Policy, August 2010,
invites member states to:
○ Prohibiting horizontal and vertical agreements
between undertakings that prevent, distort or
restrict competition in the member State’s territory
unless otherwise exempted. This would include so-
called hard-core examples such as price fixing, bid
rigging, market sharing and limiting or controlling
production or investment
○ Prohibiting the abuse of dominant position
○ Prohibiting mergers that lead to a substantial
lessening of competition or would significantly
impede effective competition in the relevant market
or in a substantial part of it, unless otherwise
exempted.
○ Provide a whole range of sanctions, punitive and
non-punitive coercive measures, whether criminal,
civil, or administrative to ensure compliance with
the law.
○ Introduce a leniency programme targeted at
undertakings who have participated in cartel
activities
○ Entitle any applicant to bring a specific lawsuit
before the appropriate judicial authorities for
breachers of competition law, in order to recover
the damages suffered.
○ In summary form, the current laws of the Philippines
when assessed against the framework suggested
by the ASEAN guidelines:
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 ○ By any standard the current law cannot be
described as a comprehensive competition
regime, notwithstanding the existence of some
sector specific laws, (such as in the electricity
market) with the very best intentions and in some
cases good result.
○ The recent history of the Philippines in terms of
enforcement is not encouraging. The evidence
indicates a complete lack of prosecutions in the
courts for anticompetitive behavior

Potential for New Competition Laws

Competition Bills before the 15th and 16th Congresses

● By way of background, during the 14th Congress, the Office
for Competition shepherded the preparation of the first
consolidated bill.
● The 15th Congress was noteworthy for bills being before both
the Senate and the House of Reps.
○ Senate Bill No. 3098 is in substitution of a number
of bills including the very first bill filed in the Senate
of the 15th Congress. The Committees passed a
joint report endorsing the approval of the same.
○ House Bill No. 4835 in substitution of several bills
filed in the HoR was pending interpellation.
○ Notwithstanding the well advanced bills before
each of the houses, no bill has progressed to a final
bicameral committee stage for
consideration/approval.
● It is noteworthy that when the 16th Congress commenced,
bills similar to the consolidated versions pending in the
previous Congress as well as new versions were filed before
Senate and the House.
● A useful summary of the proposed law is provided in the fact
sheet tendered with HB No. 4835 (please read the document
page 16-18 because the provisions are long)
○ Assessing this proposed law against the ASEAN
guidelines demonstrates that the passage of a law
as proposed in the 15th Congress would provide a
huge leap towards comprehensive regulation of
anticompetitive conduct across the economy:

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