试听180秒068：How Can Goverment React When Firms are not Competing

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Hello, Himalaya’s subscribers. My name is Timothy Taylor. 
And today we're going to discuss how can government react if firms are not competing? So let's start with the basic question here. Are the people who are owners and managers of business strong supporters of economic competition? So let's think about that question by instead asking a related question. Imagine you were an Olympic athlete and you really really, really want to win a medal, a gold medal. Would you rather have lots of very tough competitors, every bit as good as you are or maybe even better? 

Or would you rather have most of your competitors be small and weak, and not very many of them? If your goal is to win a medal, clearly, less competition is better. But if the goal is for everyone to have very high levels of skill and performance, then more competition is better. Economists take this idea very seriously. Economists do not expect that people who run businesses will like competition. In fact, economists expect that companies will often try to reduce and avoid competition. And as a result, the government may have a useful role to perform in encouraging competition. 

Let's explore this idea by breaking it into three parts. First of all, we'll talk about competition policy in different competitive settings. Second, we'll review anti-monopoly law in China. And third we'll talk in general about policies to encourage competition. Our first topic is competition policy in different competitive settings. In perfect competition, many firms are trying to sell at a lower price. Because of entry and exit, they aren't going to earn long term profits. So in this situation, you might have government rules about protecting the environment or protecting product safety or workers safety. But there's really no real need for government to worry that there's a lack of competition. 
Similarly, in a situation with monopolistic competition, many firms are trying to differentiate their products so they can raise prices a bit and earn some short run profits. But over time, with entry and exit and other firms trying to come up with differentiated products, no firm is likely to earn long term profits. And so again, you might have government rules about protecting the environment or product safety or workers safety, but you don't really need the government to worry there's a lack of competition. The competition issue usually comes up with larger firms in situations where there are barriers to entry. 

Now, as we talked about before, sometimes these barriers to entry are created by government. For example, maybe there's a barrier to entry because of firm has a patent. In that case, there's a reason for the barrier to entry it. It gives the firm a reason to a reward for innovation and coming up with new ideas. The patent will expire in a few years, so the government doesn't need to fight that right now. It could be a situation where the monopoly is created by economies of scale or by the nature of that particular industry. 

Think of a really big company that runs the electricity grid, like the State Grid Corporation of China. There are big economies of scale in running a big power grid. It would be very hard for a small company to come along and set up a bunch of small electric grid companies to compete. And it'd be very costly to do so. So in cases like this, the government might regulate the prices charged by the firm in various ways to make sure the firm doesn't earn extraordinarily high profits or bump up prices too high. But that doesn't mean the firm other than that there's maybe not much you can do about competition. 

However, there can be situations where the barriers to entry are created by the behavior of the firms. And in these cases, the government might want to step in. For example, what if firms try to merge together so they can form a much bigger firm and not compete with each other, so they can charge higher prices and make higher profits? Well, the government might want to block that. Or what if firms don't actually merge together? They just have an agreement, not compete. For example, maybe some firms will only compete in some provinces, but not in others, or maybe the firms they agree that they won't cut prices. 

The government might want to step in and try and block such actions. These kinds of actions where the government encourages competition between firms are sometimes called competition policy, or sometimes they're called anti-monopoly policy. You'll sometimes hear them called anti-trust policy also. About 100 to 120 years ago in the US,there were many large scale mergers in the US economy, where many, many firms all merged together to form monopolies in a number of industries. Now, at that time, firms that combined in this way were in a form of corporation that was called a trust.

So if you ever read about anti-trust policy, it was the policy used to break up those large trusts. It means the same thing as anti-monopoly policy. Let's now move to our second point anti-monopoly laws in China. The development of anti-monopoly laws in China is fairly recent, which isn't any surprise if you think about China's recent history. After all, well into the early nineteen nineties, most our urban Chinese workers worked for state-owned firms. The government was setting the prices of these firms and deciding how they would operate. And so those were the rules that were followed. 

But when a lot of these state-owned companies became private, a lot of them were relatively small scale firms and they had competitors already in place. There was lots of competition and some perhaps close to perfect competition, lots of monopolistic competition. And so there wasn't any big need for the government to worry about the level of competition. Also, China's economy has been growing so rapidly over time that there's been lots of natural change in disruption, lots of new firms, lots of shifting. But in the last twenty years or so, we started to have more situations where Chinese firms were potentially acting in ways that raised concerns about competition. 

And so China passed its first anti-monopoly law in 2008. At that time, China set up three main government agencies to address these issues. The Ministry of Commerce had what was called the Anti-monopoly Bureau, and its main job was to review proposed mergers between different firms and other business agreements which would create large companies. The basic idea was that if two companies wanted to merge and that merger would be larger than a certain minimum size, they needed to notify the Chinese government in advance of the transaction and get clearance before it happened. 

The government could say yes it's fine or no, or could say okay but with certain conditions, for example, the government could say, “okay, you two companies can merge, but you need to sell off one slice of the business so that slice the business remains as an independent competitor.” Or you could say“it's okay to merge in these provinces because there's good competition already in those provinces, but you can't merge in these other provinces because there's not enough competent there.”So the Anti-monopoly Bureau decided on hundreds of proposed mergers and acquisitions each year, most of them are okay, but always take a look to make sure. The second main agency created in 2008 was through the National Development and Reform Commission. It had a Price Supervision and Anti-monopoly Bureau, and the main focus there was on price related anti-competitive behaviour. 

For example, what if a bunch of companies get together and all agree not to cut prices? Or what if a big supplier tries to pass a rule saying that its product cannot be resold below a certain price? Or what if a big company cuts prices, drive smaller firms out of the market, and then raises the price again. This is what we called dumping or predatory pricing in our earlier discussion of international trade topics. And all of those would raise concerns about whether the government should step in. The third agency created in two thousand and eight was the State Administration for Industry and Commerce started an ant-monopoly and anti-unfair competition bureau. 

Now the main focus here was on non-price related monopolistic behavior. So for example, you could imagine that firms agreed to limit the quantity they produce, with the idea that by limiting the quantity supplied in the market, that would push up the price. Or you could imagine firms that divide up the market, they might say we sell in this province, you sell in that province, or I won't bid on this contract, you don't bid on that contract. There are situations where someone might restrict technology in a way that would hurt competition. 

So all of these issues, mergers and acquisitions， price related anti-competitive behaviour, non-price related anti-competitive behaviour, these are problems for anti-monopoly authorities all around the world. In the US and Europe it's also true that if large companies want to merge, they need to notify the government in advance. If it seems likely to limit competition, government will stop that merger from happening. It's also true that companies cannot get together and agree to raise their prices or cut off technology or supplies to certain buyers and all those same issues. 

But in China, a problem emerged over a few years that there was overlap between these three different agencies. After all,the idea of all anti-competitive behaviour is kind of the same. It's to help charge higher prices and earn higher profits and there are a lot of ways this could happen,which can overlap with each other. But these three different agencies had slightly different rules, some were more aggressive than others and enforcing the rules they had different fines and it was potentially kind of confusing. In addition, the State Council had an Anti-monopoly Commission that also set certain rules for all three of these organizations I just mentioned. So in March,2018 China decided just to merge these three anti-monopoly agencies into one, the State Administration for Market Regulation which reports to the State Council. 

It's also true that some parts of anti-trust law allow companies in China to sue each other in court, and that power stays the same under the new law. The concerns about these different kinds of anti-competitive behavior have not changed. The basic idea of anti-monopoly law hasn't changed. It's just merged together to clarify and unify the enforcement of that law. This takes us to our third point,the role of markets and the role of government. When talking about competition and the role of markets and the role of government, it's common to hear people say something like “so what's better, economic competition or government regulation? ”

And I hope one thing you get out of this lecture is that that question is a little bit too simple. There are lots of times when firms that are in theory, competing with each other, will act together to avoid competition, because they would rather raise prices and get higher profits. Now this dynamic has been around for a long time. I've mentioned Adam Smith a few times who wrote a book, the Wealth of Nations back in 1776, and more than two hundred years ago, Adam smith wrote,“ People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends with a conspiracy against the public or some contrivance to raise prices. ” 

This happens with modern firms, too. One of the most famous international anti-trust cases in recent years involved companies in the US, Japan, and some European countries, who were in the market for making different kinds of vitamins that were often then added to food, either for people or in some cases for animals. Now, in many of these cases, company executives were actually meeting in hotel rooms at different cities around the world and planning how much they would raise prices and how they would divide up the market. In one of these cases, the US government actually had recording devices in the room. 

So we have recordings of an executive from a US company called Archer Daniels Midland telling all the other firms in the room they all needed to raise prices on selling a certain product. And this executives said to them, “our competitors are our friends, our customers are the enemy.” Now from the company’s point of view, that executive was right. Competitors are your friends if you all raise prices together and customers are the enemy, they want you to charge lower prices. That's why getting together with all the other companies is illegal. That's why this particular executive ended up going to jail. 

Now, of course, there will be complaints when the government acts to encourage competition. There will sometimes be complaints the government did not do enough, and it allowed anti-competitive practices to continue. There will other times be complaints that the government acted too aggressively, and especially in a global economy, foreign companies will sometimes feel they're not being fairly treated by the anti-monopoly rules in other countries. But that's just part of what happens when any government regulation occurs. 

Now, I'm here with a few review questions. Do people who run businesses want more or less competition? What are some ways that a business might act to limit the competition it faces? And how have China's anti-monopoly laws changed over time? In the next lecture, we'll look at some questions about competition that come up with some of the big digital technology companies, like Alibaba, Baidu and Tencent. 

I'm Timothy Taylor. Thank you for listening to Himalaya.