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Do We Need Government Intervention In The Form Of Competition Policy ? If So, Why? Applied And Discuss Based On Case Study Or Research

1715 words - 7 pages

Competition policy aims to ensure, wider consumer choice, technological innovation and effective price competition. If achieved, the above aims contribute to both consumer welfare and to the competitiveness of the industry. The main thrust of competition policy is to ensure that, companies compete rather than collude, dominant companies do not abuse their market power, and efficiencies are passed on to final consumer in the firm of lower prices and better products.In the real economy, is it always necessary for government intervention in the form of Competition Policy?Let's consider The United States Airline Deregulation 1978.This deregulation is seen to be successful, it brought benefit to customers. However, it also raised some problems such as congestion, limited re-emergence of monopoly power and with it, and the exploitation of a minority of customers. So when do we need competition policy?Abuse of market power is best tackled through antitrust policy. Externalities can be reduced through regulation, a tax or subsidy, or by using property rights to force the market to take into account the welfare of all who are affected by an economic activity.Airline Deregulation encouraged competition so there are more discount tickets available. After deregulation, customers benefited from travelling by discount tickets, and saved from $5 billion to $10 billion a year. The best estimates are that deregulated fares have been 10 to 18 percent lower, on average, than they would have been under the previous regulatory formulas. However, the fares varied between markets because prices also depend on the total costs of each flight. Tickets' price on thin routes must be more expensive than that on dense routes. As a matter of facts, not all airlines serve on the same routes, the airline company need to make profit so it will give up on some thin routes, this make potential for one dominant airline to become the only service for many customers - this leads to monopoly power. At that time, full fare was applied for routes supplied by only one or two airlines. When a single airline offer special routes which with no close substitutes, it has the market power to decide the price of its tickets prices. Typically, the monopoly airline will produce fewer services, at a higher price, than would be the case for the entire market under perfect competition. It decides its price by calculating the quantity of output at which its marginal revenue would equal its marginal cost, and then sets whatever price would enable it to sell exactly that quantity. The Department of Transportation found in 1990, for example, that after adjusting for differences in the average length of trip and density of traffic, fares on routes served by the eight most concentrated hubs averaged 18.7 percent higher than for similar markets served by other airports. When deregulation results monopoly power which against public interest, it is important to apply competition policy to re-balance the...

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