Competition Policy

General Principles

Business competition is essentially a rivalry among businesses for sales to potential customers. In a free market economy, competition works to ensure the efficient and effective operation of business. Competition also ensures that a firm will survive only if it serves its customers well. Economists recognise four different degrees of competition, ranging from ideal, complete competition to no competition at all. These are pure competition, monopolistic competition, oligopoly and monopoly.

• Pure Competition - the market situation in which there are many buyers and sellers of a product where no single buyer or seller is powerful enough to affect the price of that product.
  

• Monopolistic Competition - a market situation in which there are many buyers along with a relatively large number of sellers who differentiate their products from the products of competitors. The various products available in a monopolistically competitive market are very similar in nature and are intended to satisfy the same need. However each seller attempts to make its products somewhat different from the others by providing unique product features; an “attention – getting” brand name, unique packaging or services such as free delivery or a "lifetime" warranty. Product differentiation is a fact of life, in our case, for providers of Telecommunication and Internet services.
  

• Oligopoly - a market situation (or industry) in which there are few sellers. Generally these sellers are quite large and sizeable investments are required to enter into their market. Examples of oligopolies are American Automobile car rental and farm implement industries.
  

• Monopoly - a market with only one seller. Because only one firm is the supplier of a product, it would seem that it has complete control over price. However, no firm can set its price at some astronomical figure just because there is no competition. The firm would soon find it had no customers or sales revenue. Instead, the firm in a monopoly position must consider the demand for its product and set the price at the most profitable level. Classic examples are public utilities. Each utility firm operates in a natural monopoly, a situation where a particular industry requires a huge investment in capital and within which any duplication of facilities would be wasteful.
  

The Rationale for Competition Policy

In a competitive market, individual suppliers lack market power. They cannot dictate market terms, but must respond to the rivalry of their competitors in order to stay in business. Market power is generally defined as the power to unilaterally set and maintain prices or other key terms and conditions of sales; that is without reference to the market or to the actions of competitors.

Imperfect Competition

Imperfect competition gives rise to an inefficient allocation of resources. Imperfect competition is an important source of market failure. Market failure occurs when resources are misallocated or allocated inefficiently. The result is waste or lost value.

Monopoly

Monopoly can be the result of market failure. A monopolistic market is often associated with excessively high product prices, reduced supply levels or other behaviour that reduces consumer welfare. Collusive agreements among suppliers are another example of market failure. Supplier collusion can be directed to increasing prices or restricting output. This behaviour is similar to the exercise of monopoly power.

Telecommunications has, in most jurisdictions, developed in a monopoly environment. As competition is introduced into telecommunications markets, there are typically concerns about the continuing exercise of market power. This constitutes a special form of market failure that must be addressed by regulators and competition authorities in many countries.