Introduction

The economists have always advocated governments to deregulate and privatize most industries to stimulate competition and maximize productivity and efficiency gains, as well as benefiting consumers in terms of more choice and lower price. However, is that firms in competitive industries always good for consumers? There are lots of debates about this issue and it’s impacts on societies has significant importance for policy makers. Here, I would like to analysis in detail both the advantages and disadvantages of competition from a theoretical economist’s perspective to more practical ones.

Theoretical perspective

Firstly, I would explain why academic economists always favour high competition by comparing the theory of perfect competition and monopoly. In the perfect competition, firms are price takers who face very close substitutes, both consumers and suppliers have perfect information and firms could enter or exit a market freely in the long run. E.g. agricultural industries almost satisfy these conditions. In short run, profit-maximizing firms set price equals to marginal costs of production, i.e. the benefit for consumers of purchasing the product is the same as the cost of producing the last unit of output. Over the long run, if there are positive economic profits in an industry, it will attract more suppliers to enter the market freely. Then more competition drives the price down until there is only normal profit in the market and no firm are willing to enter or exit the industry. So, the marginal cost is equal to the long run average total cost and the price. Therefore, there is allocative efficiency in both short run and long run. Overall, more competition maximize social welfare which provides consumers more choices, lower prices and higher output. In addition, the desires for survival stimulate firms to control cost of production through investment in technology and innovation. (Robert H. Frank, 5th edition).

In contrast, there are only a few firms with no close substitutes for monopolies. For a profit maximizing monopolist, it would set a price where marginal cost equals to marginal benefit in both short and long run, and the price is always greater than marginal cost. The higher price leads to a loss of consumer surplus and a deadweight loss to the whole society. Therefore, monopolies are not allocative efficient. In addition, customers as price takers have little choices over product and pay higher prices than in a competitive industry. Many also criticise that although the state monopolies could provide low prices to consumers, there are always X-inefficiency where managers tend to spend more on prestigious products or maximize their salaries rather than on cost-saving or profit maximization. Therefore, highly competitive markets tend to yield more benefits to consumers than monopolies. However, monopolies such as state electricity and telecommunications industries benefit exclusively from economies of scale (lower average cost per unit as output increases) enabling them to provide cheaper products than in competitive markets. In addition, monopoly firms could use the hurdle model of discrimination pricing to charge different customers different prices, therefore minimizing the welfare loss. (Robert H. Frank).