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Defense of Competition vs. Control of Competition

July 4, 2018 1:36 pm A+ / A-

PUNTO DE VISTA ECONÓMICO – Following the Law of Defense of Competition, the government forced the company Molinos to sell one of its pasta brands. The argument is that Molinos has concentrated market power and faced a price-fixing policy (monopoly) instead of being a price taker (perfect competition). According to the newspaper El Cronista note, the government did not miss the comment that this types of measures are common in the United States and Europe.

If this is the law, more than defending competition seems to be a law about control of the competition. The law and the government seem to confuse the degree of competition of a market with the model of perfect competition. In the model of perfect competition, there is a large number (n -> infinite) of small competitors that offer goods that are perfect substitutes. Given this, each small producer is a price taker. The prices are defined by the market, not the producer. While I will not expand on this post, it is worth remembering that the small company as a price taker is mathematically inconsistent with the assumptions of the same model.

At the other extreme is the case of monopoly, where the only producer can increase profits by decreasing production and raising the sales price. This, however, produces a loss of efficiency (deadweight loss).

What is perfect in the first model is not the degree of competition, but the economic efficiency. In equilibrium, there is no loss of efficiency. It is not appropriate, however, to use this model as a reference for the perfection of a competitive market, where deviations from it are imperfections to be corrected by the government.

The number of suppliers in the market is also a result of the market. The cost structure, for example, defines how many producers enter a market. If there are few producers (concentration in the eyes of the government) it does not mean that there is no competition or that the market suffers from any failure. Competition in the market is increased by reducing taxes, removing regulations, and removing protections, not increasing the number of producers through legislation. In the case of natural monopolies, or network goods (contestable markets), the optimum number of suppliers may well be one.

Greater contribution to competition would be to deregulate the market or terminate protected areas such as those of Tierra del Fuego. Or maybe the government can set a goal to reach the top-10 economic freedom in the world, instead of persisting in the bottom-10.

It is true that similar laws and initiatives exist in Europe and the United States. This in itself, of course, is not a valid argument. However, the initial motivation of these laws (at least in the United States) is based on arguments of the Public Choice, not in companies that set prices in disagreement with what the government considers appropriate. The motivation to avoid large companies is to limit problems such as the capture of regulatory entities (Gary Becker). Whether this is agreed or not, the intention is to prevent companies from acquiring a size that allows them to control the government by limiting competition. It is not a matter of prices, it is a matter of corruption. This is not, however, the government’s argument.

By confusing competition with the number of producers instead of the absence of regulatory obstacles, the government ends up transforming what should be a competition defense law into a law regulating competition. Is the government, not the market, which ultimately defines what is and what is not a competitive market. Perhaps it’s not an accident that the political motivation has led the government to apply this law in the food market, where the inflation that Cambiemos fails to control produces disenchantment in its electorate. Instead of creating conditions of competition, the government tries to dictate the result of the competitive process.

 

Written by Nicolás Cachanosky

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