Competition and its role in market economy

T he firm’s managers, workers and providers try to get hold of higher salaries and conditions than those that would prevail under competition conditions. T his situation leads to an undesirable result that the firm produces at inefficient costs and society incurs in a net welfare loss because the costs of production are higher than those that would prevail under competition conditions. The inefficiencies and distortions caused by a monopoly are the same as those occurring when a market is cartelised, that is, when competitors engage in horizontal agreements to fix prices, restrict output, allocate markets or rig bids. I t is widely accepted that horizontal practices harm the economy and therefore affect its development. There are people who believe monopolies may be positive for economic development by providing protection to certain activities in order to enable their development. H owever, experience has shown that, although this protection does attract investments, the monopolised firm never attains efficiency or competitiveness.

T he cost of this protection is thus absorbed by the rest of the economy, that loses global competitiveness. There are also some people who consider that competition is unfeasible in certain sectors because it precludes firms from attaining scale economies (natural monopoly argument). A ccording to the modern approach, implemented in the telecommunications sector world wide, competition may be introduced by establishing specific regulation on the facility section of the activity. T his approach also considers that it is inconvenient to multiply investments in those segments where the facility may be used under competition conditions. C

onsequently, by applying competition policy together with an efficient regulation, a balanced and competed development may be achieved in those sectors facing network economy problems. Some others argue that the so called «predatory nature» of competition precludes the development of certain sectors. T his is simply unbelievable. T here are no cases where competition has been proved to be intrinsically destructive. Monopolies have also been considered positive in the belief that they support the activities and competitiveness of a domestic firm in international markets by creating a «national champion». T

his argument has two failures. A domestic consumer needs to pay high monopoly prices in order to subsidise the firm’s sales abroad. T his is unfair and causes economic distortions and inefficiencies, thereby reducing the rest of the economy’s competitiveness. O

n the other hand, domestic industry’s competitiveness abroad is unreal because it only occurs as a result of the cross subsidy. F inally, monopolies are also seen as a means to obtain fiscal incomes. T he easiest way to understand how competition policy fosters economic development in a dynamic context is by analysing its impact on four elements considered when making investment decisions: income, costs, profitability and risk.

C ompetition policy facilitates market access by new competitors thereby enabling the generation of productive infrastructure and incomes. I t does so by tackling predatory and other anticompetitive practices that an agent endowed with market power may carry out or the barriers that a monopoly may impose on market access or an authority may impose in order to protect incumbent firms. A s to costs, competition policy also fosters investments by promoting lower prices for inputs and capital goods. F or example, increased competition in telecommunications enhances efficiency throughout the economy.

I t is therefore vital to consolidate competition in the telecommunications sector in order to impulse economic development nation-wide. T he third element to consider is profitability. C

ompetition policy plays a two-fold role in this matter. O n one hand, competition in the financial sector is necessary for domestic investors to have access to sufficient financial resources at competitive interest rates. O n the other hand, profitability grows when incomes increase and investment costs fall. C

ompetition policy helps reduce investment risks by facilitating decision-making. I t makes the game’s rules transparent for investors and it is part of «good governance», that provides legal certainty regarding the observance of investor’s property rights and that economic institutions are designed to support free market access. Competition may be seen as a process of rivalry among firms for the marketplace. T his rivalry may manifest itself in various ways: lower prices; enhanced quality; the development of new products with enhanced features to satisfy consumer’s needs; and the development of new production techniques that allow producers to supply better quality products at lower prices, among other. A

monopolised market lacking contestability would unlikely result in continuous improvement and innovation since the monopolist, facing no rivals, has no incentives to keep the interest of its captive consumers. Sometimes competition leads to the process of «creative destruction», by means of which an inefficient firm disappears from the marketplace and another firm, more fit to adapt itself to current and future market needs, takes its place following a process analogous to Darwin’s evolution. T his explains why any attempt to protect a failing firm in order to sustain employment actually poses a risk on the economy’s capacity to generate employment. E ventually, the firm will experience bankruptcy and in the meantime the prevailing unfair competition conditions impede the development of new firms. I n brief, competition works as a fuel for economic dynamism. T

he more fuel is injected through competition, the faster the economy grows. L imiting competition therefore reduces the economy’s vitality. Competition policy also spurs economic development by providing the institutional support needed for markets to operate efficiently and so to enable their contribution to economic progress. W ithout a competition legislation, the risk an investors faces that an economic agent forecloses market access or unduly displaces firms from the marketplace is larger. L ikewise, an effective merger review policy confers firms certainty that an excessive market concentration, that may affect the value of their original investment, will not be allowed. Competition policy instruments contribute to economic development in line with their particular features. T

he first of these, merger review, empowers the competition authority to sanction and block operations that would endow the merged firms with market power that may jeopardize competition. H owever, the goal of merger review is not to discourage investments, therefore only operations pertaining to existing investments or assets are subject to review and may be blocked, new investments or investment increases are excluded. T his preventive power allows the competition authority to avoid the acquisition of competitors in order to create a monopoly and ensures market participants that mergers that facilitate anticompetitive practices will not be allowed.

E conomic development is thus fostered by reducing the risk faced by investments and by guaranteeing the economy’s competitiveness. I n order to ensure merger review does not hinder business or become an excessive burden on firms, the competition authority must enforce its powers in a timely fashion and with judgement, so as to block or condition only those operations that deserve to. The second competition policy tool is the investigation of monopolistic practices.

T he competition authority sanctions those practices that harm economic efficiency and distort markets, and thus hinder the process of economic development. C ompetition advocacy is the third instrument. B

y protecting the competition process, the competition authority reduces the risk that other authorities or economic agents introduce anticompetitive measures that may affect the dynamics of the domestic economy.3 The level of competition in RussiaProblems of lack of competition are widely discussed in the literature. As the reasons of the similar phenomenon it is possible to name a high share of public sector in economy, existence of administrative and infrastructural restrictions, unreasonable state preferences for separate managing subjects. In technological backwardness of our manufactures the weak competition is guilty. E very fifth enterprise in the Russian Federation doesn’t feel a competition in the branch at all, about 30% of firms compete exclusively with compatriots, and only less than 40% of firms battle really — both to domectic producers, and with foreigners. P icture 3.1 -% of firms facing more than 5 competitors for their main product LineIt turns out that technical progress gets accustomed only in the competitive markets. F rom ten leaders on mid-annual growth of cost of production assets five concern competitive branches. The competition develops in due course into an oligopoly, and «race of arms» stops.

I t is no wonder that the markets of cigarets, juice, coffee, each of which is supervised by a handful of the large companies, have shown negative dynamics on a dale of fixed capital in actives. T he tobacco sector (-10,3%) where the basic investments have been made at a stage of section of the market between the largest tobacco corporations BAT, Philip Morris, JTI and Gallaher in 1990th years «has especially caused a stir» .Picture 3.1 -% of firms considering foreign competition as very important when deciding to innovateIn 2010 of Ministry of economic development and trade of Russia allocated priority directions of a competitive policy: the organization and carrying out of monitoring of a condition of the competitive environment and conditions of enterprise activity in the Russian Federation; the statement of regional programs of competition development and an estimation of efficiency of a regional competitive policy in subjects of the Russian Federation;activization of an information policy on advancement of values of a competition, realization of the program of training to the competitive policy of heads of federal and regional authorities;competition development in separate branches and in the separate markets;introduction of system of an estimation of regulating influence of regulatory legal acts on a condition of the competitive environment;antimonopoly law perfection;formation of supranational system of protection of a competition within the limits of Uniform economic space of Russia, Kazakhstan and Belarus. Solution in development of competition in a number of sectors of the Russian economy: Consumer crediting issuing a Decree of the Government of the RF providing forprocedure of selecting lendersPreparation of the RF Government Decree «On eligible agreements"Iron and steel industryjoint market study of economic concentration in the industry by Ministry of Industry and Trade and FAS and making suggestions on structural measuresNon-government pension plans andmanagement of pension savingschanges in the FL"On investment funds for financingSavings part of labor pension"Defense industryrevealing the facts of excessive pricing for materials suppliedMandatory medical insurancedevelopment of FL «On mandatoryMedical insurance"Transfers of funds of physical personsby non-banking institutions•Development of the FL «On accepting transfers» and amending Article 13.1 of the FL «On banking activity"Advertisementintroducing changes in the CodeOn administrative and legalresponsibilityRetail tradeDraft Law «On state regulation of tradingActivityHousing constructioninvolving idle landsubsidizing building infrastructure of land parcels reimbursable subsidizing of regions for formation of land ParcelsConclusionCompetitive markets operate on the basis of a number of assumptions. W hen these assumptions are dropped is a move into the world of imperfect competition.

T hese assumptions are discussed belowEconomists assume that there are a number of different buyers and sellers in the marketplace. T his means that we have competition in the market, which allows price to change in response to changes in supply and demand. F urthermore, for almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. I n a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price.

I n some industries, there are no substitutes and there is no competition. I n a market that has only one or few suppliers of a good or service, the producer (s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods.

A monopoly is a market structure in which there is only one producer/seller for a product. I n other words, the single business is the industry. E ntry into such a market is restricted due to high costs or other impediments, which may be economic, social or political.

F or instance, a government can create a monopoly over an industry that it wants to control, such as electricity. A nother reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resourceIn an oligopoly, there are only a few firms that make up an industry. T his select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry. T he products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces.

T here are two extreme forms of market structure: monopoly and, its opposite, perfect competition. P erfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes.

P erfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. T hus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. F or example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits. M

arket economy mechanism works based on demand and offer. T o fulfil this role, its setting up must take place in a normal competitive environment. T he normal competitive environment as defined by the present research is determined by the following coordinates: a. The existence of more producers, and, therefore of more buyers, condition that eliminates the probability of any monopoly, or other forms of dominant position on the market;b. The existence of the diversification of the types of a considered homogenous product, condition that offers the possibility that potential participants manifest various options on upstream or downstream market, with whom producers and distributors have a market economy relationship;c. The price decision belongs exclusively to economic agents, thus the government having no interventions in order to set prices at a nominal level;d. The role of the state in limiting its regulation behaviour, in the sense of adopting laws regarding companies' discipline on the market, and supervising their behaviour in order to eliminate anti-competitive practices;e. The tendency to stabilize prices, a phenomenon that proves the existence of the two sides of the market: demand and offer, and their meeting under competition that allows for their balancing through the free price, that in the case is an equilibrium price;f. The welfare of the final consumers is ensured by the quantitative, qualitative and structural (diversified) existence of the goods on the market, according to the utility recognized by the consumers. These coordinates that define the normal competitive environment are found inthe end in the welfare of the consumer. To develop competition it should be used competitive policy. C oncern with competition policy emanates from recognition of the powerful, positive incentives embodied in the functioning of effective markets.

I t is designed, in common with competition laws elsewhere, to ensure that market remains effective, to ensure that the process of competition is not undermined by the competitive process itself, by, in other words, the accumulation of private economic power that occurs through the competitive process. M erger regulation is a key aspect of competition law — in fact by helping to maintain competitively structured markets merger regulation limits the necessity for invasive intervention later on. N owadays there is lack of competition in Russian economy. I t is slow down the development and innovation process because company does not have competitor.

T hat’s why it is necessary to elaborate the competition policy and develop competition with the support of state. Literature listRethinkA. Russia’s draconian competition law Russian gazeta, 2010Island of competition in Russia//

http://blog.e.mba.ru/blog/management/468.htmlZukova T. Innovation// Russian gazeta, 2010. № 5107 (28)The level of competition in Russia is not enough// Russian gazeta, 2010. № 5404 (16)Yashnik A. Competition in Russia// Problems of moden economyб 2010. № 3Guriev S. Russia’s Economy: Are We Returning to the Soviet Model?// Economics< 2010. № 11Compensation and development//

http://www.idrc.ca/en/ev-122 762−201−1-DO_TOPIC.htmlEconomics Basics: Monopolies, Oligopolies and Perfect Competition//

http://www.investopedia.com/university/economics/economics6.aspCharacteristics of Monopolistic Competition

http://welkerswikinomics.wetpaint.com/page/Oligopoly+and+EfficiencyR. L arry Reynolds Economics: An outline// Asian Social Science June, 2008Charles C. F

ischer What Can Economics Learn From Marketing’s Market Structure Analysis? R obert P. L eone, and Allan D. S hocker, 2001. «Market Structure Analysis: Hierarchical Clustering of Products Based on Substitution-in-Use.» Journal of Marketing 45 (Summer): 38−4.