{"id":5,"date":"2019-09-04T06:17:36","date_gmt":"2019-09-04T06:17:36","guid":{"rendered":"http:\/\/lawp05.epgpbooks.inflibnet.ac.in\/2019\/09\/04\/chapter-1\/"},"modified":"2022-01-11T04:37:10","modified_gmt":"2022-01-11T04:37:10","slug":"introduction-to-economics-of-competition-law-part-i","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/lawp05\/chapter\/introduction-to-economics-of-competition-law-part-i\/","title":{"rendered":"Introduction to Economics of Competition Law Part-I"},"content":{"raw":"
\"epgp<\/a>\r\n<\/span><\/div>\r\n \r\n\r\n \r\n\r\n \r\n

Introduction<\/strong><\/p>\r\n \r\n

The paradigm of development today is one of competition with a human face. The basics in economic understanding, viz. Demand and supply are guided by consumer surplus and producer surplus respectively. The many facets of demand and supply are understood with the antitrust analysis. This in turn is geared towards achieving consumer welfare along with total welfare.<\/p>\r\n \r\n

The module has explained the economic benefits of Competition Law along with the details on Demand and Supply like the elasticity of demand and supply, objectives of the firm and its profit maximising behaviour , welfare concepts from individual to social welfare keeping in mind the price discrimination and consumer welfare in the context of monopoly market power.<\/p>\r\n \r\n

Learning Outcome<\/strong><\/p>\r\n \r\n

The module is a good beginning to understand the nuances in the Competition Policy and Law as given in the chapters on this subject. Economic analysis of the human behaviour as producer and consumer are well treated in this module<\/p>\r\n \r\n

1.1 Economic Benefits of Competition Law<\/span><\/strong><\/p>\r\n \r\n

Competition in the market benefits all the participants. But the failure of the market players to adhere to the ethics of the market requires the understanding of resolving the issues to benefit everyone.<\/span><\/p>\r\n \r\n

Competition enables consumer surplus to the consumers; profit maximisation to the producer\/seller and revenue to the state leading to the overall growth and stability of the economy.<\/span><\/p>\r\n \r\n

The benefit of competition provide goods to consumers at competitive prices. It also provides them with new and innovative products. The demand then gets diversified and the consumer satisfaction is enhanced with multiple varieties of products available in the market. The lifestyle of the people gets changed and move towards higher levels of satisfaction.<\/span><\/p>\r\n \r\n

The producer is also the consumer of raw material and energy resources; telecommunication services; the computer technology\u2019; infrastructure requirements for manufacturing and storing. Competition also has a positive impact on efficiency and productivity in the pursuit of getting competitive advantage. Innovation is possible with technology based production. High standard is aimed at in the quality of the products while enjoying the benefits of economies of scale.<\/span><\/p>\r\n \r\n

To the economy, competition fosters restructuring of the sectors of the economy influencing market demand, product uses, costs, technologies and the like. The demand for capital for enhanced business activity forces the generation of capital requirements and does the interlinking of the various economic activities in the country from production to distribution and to final consumption. In short the micro economic behaviour of producer surplus and consumer surplus ultimately end in the creation and sustenance of aggregate demand and aggregate supply essential for growth with stability of the economy.<\/span><\/p>\r\n \r\n

1.2 Concepts of Demand and Supply<\/span><\/strong><\/p>\r\n \r\n

Demand and Supply are the two pillars of market and all the theorising of economics are built up on them. From Micro economic analysis of simple demand and supply to the Keynesian aggregate demand and aggregate supply, economic theorising has enlightened the audience, of the discipline of economics.<\/span><\/p>\r\n \r\n

1.2.1 Demand<\/span><\/strong><\/p>\r\n \r\n

Wants are turned into demand at a price\u00a0<\/span>Economic theory holds that demand is dependent upon-taste and ability to buy. Taste determines the willingness to buy a good at a specific price. Ability to buy is determined by money at hand. Demand is generally at a price and popularly understood as the Price\u00a0<\/span>Elasticity of Demand. The following diagram shows the downward sloping demand curve with reference to the relationship between price and the quantity demanded. It is presumed that all the other factors such as taste of the consumer, income of the consumer, availability of substitutes, price of the substitutes and the like remain constant, when only the price and the quantity demanded are compared.<\/span><\/p>\r\n\"\"\r\n

\r\n\r\n \r\n

Demand curves generally have a negative slope.<\/p>\r\n

Demand curves slope downwards due to<\/p>\r\n

1.The law of diminishing marginal utility<\/p>\r\n

2.The income effect<\/p>\r\n

3.The substitution effect<\/p>\r\n \r\n

\u2022 Demand is determined by<\/p>\r\n

\u2022 Income<\/p>\r\n

\u2022 Prices of substitutes<\/p>\r\n

\u2022 Prices of complements<\/span><\/p>\r\n

\u2022 Advertising<\/span><\/p>\r\n

\u2022 Population<\/span><\/p>\r\n

\u2022 Consumer expectations<\/span><\/p>\r\n

\u2022 The Demand Function<\/span><\/p>\r\n

\u2022 Quantity demanded is a function of:<\/span><\/p>\r\n \r\n

Qxd = f(Px , PY , M, H,)<\/span><\/p>\r\n \r\n

\u2013\u00a0 Qxd = quantity demand of good X.<\/span><\/p>\r\n \r\n

\u2013\u00a0 Px = price of good X.<\/span><\/p>\r\n \r\n

\u2013\u00a0 PY = price of a substitute good Y.<\/span><\/p>\r\n \r\n

\u2013\u00a0 M = income.<\/span><\/p>\r\n \r\n

\u2013\u00a0 H = any other variable affecting demand1<\/span><\/p>\r\n \r\n

Consumer Surplus is defined as the difference between what the consumer is willing to pay and what he actually pays instead of going without a thing. This is the measure of surplus satisfaction and Marshall called it as \u2018Consumer Surplus\u2019. The summation of the consumer surplus is the total consumer welfare in the society. Consumer Surplus thus measures the difference between the ability to pay and the willingness to pay of the people, a foundation on which the welfare analysis of consumer behavior is built. In the diagram given below, the portion above the equilibrium price represents the consumer surplus as given in the shaded area.<\/span><\/p>\r\n \r\n\r\n\"\"\r\n

1.2.2 Supply<\/strong><\/p>\r\n \r\n

In the general economic analysis,Supply is at a price and directly proportional to the increase in price. Since profit making and profit maximization are the basic goals of production and supply price increase is an incentive to produce more and supply. The market supply curve is upward sloping from the origin, as the quantity increases with the rise in price.<\/p>\r\n \r\n

Market Supply Curve2<\/strong><\/p>\r\n \r\n

Decisions to supply are largely determined by the marginal cost of production. The supply curve slopes upward, reflecting the higher price needed to cover the higher marginal cost of production. The higher marginal cost arises because of diminishing marginal returns to the variable factors.3<\/p>\r\n \r\n\r\n\"\"\r\n

\r\n\r\n \r\n

Factors that bring about upward shift in the Supply are:<\/p>\r\n \r\n

\u2022 Input prices<\/p>\r\n

\u2022 Technology or government regulations<\/p>\r\n

\u2022 Number of firms<\/p>\r\n

\u2022 Substitutes in production<\/p>\r\n

\u2022 Taxes<\/p>\r\n

\u2022 Producer expectations<\/p>\r\n

\u2022 The Supply Function<\/p>\r\n

An equation representing the supply curve:<\/p>\r\n \r\n

QxS = f(Px , PR ,W, H,)<\/p>\r\n

\u2013\u00a0 QxS = quantity supplied of good X.<\/p>\r\n

\u2013\u00a0 Px = price of good X.<\/p>\r\n

\u2013\u00a0 PR = price of a related good<\/p>\r\n

\u2013\u00a0 W = price of inputs (e.g., wages)<\/p>\r\n \r\n

\u2013\u00a0 H = other variable affecting supply4<\/span><\/p>\r\n \r\n

Change in Quantity Supplied<\/span><\/p>\r\n\r\n<\/div>\r\n\"\"\r\n\r\n\"\"\r\n\r\n\"\"\r\n

\r\n\r\n \r\n

Market Equilibrium<\/p>\r\n

Balancing supply and demand<\/p>\r\n

\u2013\u00a0 QxS = Qxd<\/p>\r\n

Price Restrictions<\/p>\r\n

\u2022Price Ceilings<\/p>\r\n

\u2013\u00a0 The maximum<\/em> legal price that can be charged<\/p>\r\n

\u2022Price Floors<\/p>\r\n

\u2013\u00a0 The minimum<\/em> legal price that can be charged.<\/p>\r\n

\u2013\u00a0 Examples:<\/p>\r\n

\u2022Minimum wage<\/p>\r\n

\u2022Agricultural price supports5<\/p>\r\n

1.2.3 Importance of Supply and Demand effects in Antitrust Analysis Werden (1981, p. 721)6 argues that:<\/p>\r\n

A market for antitrust purposes is any product or group of products and any geographic area in which collective action by all firms (as through<\/p>\r\n

5 www.unc.edu<\/p>\r\n \r\n

6\u00a0 WERDEN, G.J., 1981. \u201cThe Use and Misuse of Shipments Data in Defining Geographic Markets\u201d, Antitrust Bulletin, Vol. 26, No. 4 (Winter), pp. 719-737.Collusion or merger) would result in a profit maximizing price that significantly exceed the competitive price.<\/span><\/p>\r\n \r\n

1.3.1 Elasticity of Demand<\/span><\/strong><\/p>\r\n \r\n

The law of demand states that as the price of a good falls, the quantity demanded rises.<\/span><\/p>\r\n \r\n

The responsiveness or sensitivity of quantity demanded to a change in price is measured by the Price Elasticity of Demand.<\/span><\/p>\r\n \r\n

Price Elasticity of Demand is defined as, the Ratio of the percentage change in quantity demanded of a product or resource, to the percentage change in its price.<\/span><\/p>\r\n \r\n

Ed = % Change in Q demanded of product X to % Change in Price of product X<\/span><\/p>\r\n \r\n

We use percentage change rather than absolute change because: 1. the choice of units can mislead us, 2. by using percentages we can compare consumer responsiveness to changes in prices of different products.<\/span><\/p>\r\n \r\n

1.Consider a bag of popcorn. If the price is reduced from Rs.3 to Rs.2, and quantity demanded increases from 60 to 100, it makes a difference how we measure the change in price. (60-100)\/(3-2)=-40, while (60-100)\/(300-200)=-2\/5. Whether we measure in coins or rupees makes a big difference in how we perceive demand sensitivity. To avoid that, we use percentage change.<\/span><\/p>\r\n \r\n

2.If we wish to compare sensitivity of popcorn with sensitivity of airplane tickets, using simple differences doesn\u2019t help when a rupee change in popcorn is a bigger change than a rupee change in the price of a plane ticket<\/span><\/p>\r\n \r\n

Degree of Elasticity<\/span><\/p>\r\n \r\n

Elastic Demand \u2013demand for a product is elastic if its price elasticity is greater than 1. (resulting percentage change in quantity demanded is greater than the percentage change in price)<\/span><\/p>\r\n \r\n

Inelastic Demand \u2013 demand for a product is inelastic if its price elasticity is less than 1. (resulting percentage change in quantity demanded is less than the percentage change in price)<\/span><\/p>\r\n \r\n

Unit Elasticity \u2013 The elasticity coefficient of demand or supply is equal to 1. (percentage change in quantity is equal to percentage change in price)<\/span><\/p>\r\n \r\n

Perfectly Inelastic Demand \u2013 Quantity demanded does not respond to a change in price. Perfectly Elastic Demand \u2013 Quantity demanded will go from 0 to infinity at a particular product price.<\/span><\/p>\r\n \r\n

Determinants of Price Elasticity of Demand<\/span><\/p>\r\n \r\n

1.Substitutability \u2013 the greater the number of substitute goods that are available, the greater the price elasticity of demand (more substitute goods = demand is more sensitive to price). Eg- there is not a good substitute for insulin, therefore it is relatively inelastic demand; however, there are many substitutes for Lays chips, therefore, demand is relatively elastic.<\/span><\/p>\r\n \r\n

2.Luxury versus Necessity \u2013 The more a good is considered a luxury rather than a necessity, the greater is the price elasticity of demand. Eg. Heating, Food, water are all considered necessities, therefore demand is inelastic.<\/span><\/p>\r\n \r\n

3.Proportion of Income \u2013 The higher the price of a good relative to consumers\u2019 incomes, the greater the price elasticity of demand. Eg. Price of Television (and Television being a luxury item)<\/span><\/p>\r\n \r\n

4.Time \u2013 demand is more elastic when the period is longer. Eg. if the price of a Coca Cola goes up, the consumer may not switch to Pepsi at first, but the more time one has to pay the higher price, the more he will try Pepsi and to determine whether Pepsi or other substitute products are good enough.<\/span><\/p>\r\n \r\n

Price Elasticity of Supply<\/span><\/strong><\/p>\r\n \r\n

The ratio of the percentage change in quantity supplied of a product to the percentage change in its price. (The responsiveness of production to a change in price of a product or resource) Es = Percentage change in quantity supplied of product to the Percentage change in price of product X<\/span><\/p>\r\n \r\n

We can consider a firm\u2019s supply elasticity according to the time period, namely, market period, short run and the long run.<\/span><\/p>\r\n \r\n

1.3.2 Cross Elasticity of Demand<\/span><\/strong><\/p>\r\n \r\n

Cross Elasticity of Demand measures how sensitive the consumer demand for one product to the change in the price of the related substitute. The ratio of the percentage change in quantity demanded of a product to the percentage change in the price of the substitute.<\/span><\/p>\r\n \r\n

Exy = Percentage change in the quantity demanded of product X to the Percentage change in the price of product Y<\/span><\/p>\r\n \r\n

Positive coefficient indicates that the two goods are substitutes. A negative coefficient indicates that the goods are complements. A zero or near zero coefficients indicate that the two goods are independent .<\/span><\/p>\r\n \r\n

1.3.3 Income Elasticity of Demand<\/span><\/strong><\/p>\r\n \r\n

Income Elasticity of Demand is the degree to which the consumer demand responds to a change in income. The ratio of the percentage change in the quantity demanded of a good to a percentage change in the consumer income is the Income Elasticity of Demand.<\/span><\/p>\r\n \r\n

Ei = Percentage change in quantity demanded of a product to the Percentage change in income.<\/span><\/p>\r\n \r\n

A positive coefficient indicates that the good is a normal good. A negative coefficient indicates that the good is an informal good7<\/span><\/p>\r\n \r\n

1.3.4 Demand-side substitution<\/span><\/strong><\/p>\r\n \r\n

Demand-side substitution takes place when consumers switch from one product to another in response to a change in the relative prices of the products. If consumers are in a position to switch to available substitute products or to begin sourcing their requirements from suppliers located in other areas, then it is unlikely that price increases will be profitable. Therefore, it is necessary to progressively include in the relevant market the products to which consumers would most likely switch in response to a relative price rise, repeating the exercise at each stage until a collection of products is reached that is worth monopolising.<\/span><\/p>\r\n \r\n

When examining the likely responses of consumers, it is the response of the <\/span>marginal<\/em>consumer<\/em>, not the<\/span> average consumer <\/em>which is important. Therefore, a small but significant number of consumers (generally 5 to 10 percent) switching to another product when there is a price increase is considered a sufficient condition for both goods to be defined as forming part of the same relevant market. Therefore, the existence of a group of consumers who would never switch in response to a relative price increase is not by itself sufficient to conclude that the relevant market should be defined narrowly.8<\/span><\/p>\r\n \r\n

1.3.5 Supply-side substitution<\/span><\/strong><\/p>\r\n \r\n

In the absence of the ability of the consumers to react to price increase producers may be able to do so by increasing their supply to satisfy the demand of such consumers. It will become unprofitable if other producers respond to an increase in the relative price of the products supplied by a given supplier by switching over their production facilities to produce the given product or the group of such products. In this case, such producers with the ability for supply-side substitution are to be included in the relevant market.<\/span><\/p>\r\n \r\n

1.3.6 Application in antitrust analysis<\/span><\/strong><\/p>\r\n \r\n

Both demand-side and supply-side forces may constrain the price that a firm can profitably sustain. On the demand side, the constraint comes from the degree to which consumers would reduce their purchases of the product or products at issue in response to a price increase. On the supply side, the constraint comes from the degree to which other firms would initiate or increase production or distribution of the product(s) in response to a price increase. Performed correctly, both approaches generally lead to the same conclusion about whether a firm possesses monopoly power as long as they are performed correctly. However, incorrect application of the Merger Guidelines approach has led researchers to draw erroneous conclusions about the competitiveness of a market.<\/span><\/p>\r\n \r\n

1.4.1 Cost Concepts and functions<\/span><\/strong><\/p>\r\n \r\n

Cost of production is defined as the aggregate of price paid to the factors used in the production of a commodity.<\/span><\/p>\r\n \r\n

Cost concepts are used:<\/span><\/p>\r\n \r\n

For accounting purposes; and<\/span><\/p>\r\n \r\n

For analytical purposes such as economic analysis<\/span><\/p>\r\n \r\n

Business Cost is defined as the actual or real cost, namely all payments and contractual obligations made by the firm and is used for calculating business profits.<\/span><\/p>\r\n \r\n

Opportunity cost is the income foregone for the current best use of a resource. For example, If a firm is producing mobiles then the accounting costs are the costs incurred for making the mobiles.<\/span><\/p>\r\n \r\n

Economic costs include the cost of making the mobiles as well as the opportunity cost. Suppose, if this firm could lease its office and the plant for say Rs.10 lakhs then that is the opportunity cost. Economic costs include the costs of producing a product as well as the opportunities forgone by producing the given product.<\/span><\/p>\r\n \r\n

Explicit and Implicit costs \u2013 Explicit is the actual money expenses recorded in the books of accounts.<\/span><\/p>\r\n \r\n

Cost not appearing in the accouning system is Implicit costs. E.g. opportunity costs.<\/span><\/p>\r\n \r\n

Explicit + Implicit costs = Economic costs<\/p>\r\n

Actual costs refer to real transactions,<\/p>\r\n \r\n

Discretionary costs are not strictly necessary for current production but correspond to strategic goals (e.g. improving the firm's image through advertising, institutional campaign).<\/p>\r\n \r\n

Attributed costs are the computed values from accountancy that are conventionally attributed to products as part of the process trying to establish profitable prices by appropriate routines.10<\/p>\r\n \r\n

1.4.2 Production costs<\/strong><\/p>\r\n \r\n

Production costs are usually classified according to their responsiveness to different levels of production attained in a product from material to matter.<\/p>\r\n \r\n

The time period is taken into account when considering the fixed cost and variable cost. The short term or the long term may be defined depending on the nature of the product under study. For perishable goods even one hour may be taken as a short period and the long term may be taken as even a day.<\/p>\r\n \r\n

Fixed costs are those costs which remain fixed in the short run, namely, infrastructure, machinery and the like. They are not responsive to production levels. For instance, the cost of renting a machinery is a fixed cost, since usually the contract fixes it for a certain period of time independent of the income earned of it in its use in a given establishment.<\/p>\r\n \r\n

If there are only fixed costs, the total cost will remain fixed, shown as horizontal straight line to the X axis.<\/p>\r\n \r\n\r\n\"\"\r\n

\r\n\r\n \r\n

Variable costs<\/p>\r\n \r\n

All costs are variable in the long run. The firm has the capacity to expand its infrastructure, machinery, capital and the like in the long period. The variable costs increase with higher levels of production . Total costs show an upward sloping curve which means the cost grow up with increased production.<\/p>\r\n \r\n

Short \u2013run costs<\/p>\r\n \r\n

Total cost consists of Total Fixed Cost and Total Variable Cost (TFC and TVC)<\/p>\r\n \r\n

TFC is the total fixed cost of all the inputs which are fixed in the short run<\/p>\r\n \r\n

TVC is the total variable cost of all the inputs which are variable in the long run<\/p>\r\n \r\n

(note that all inputs are fixed in the short run and all inputs can be variable in the long run. Inputs can be adjusted or contracted\/expanded in the long run)<\/p>\r\n \r\n

AFC is the Average Fixed Cost and it is the cost of all fixed inputs per unit of output AFC=TFC\/Q<\/p>\r\n \r\n

AVC is the Average Variable Cost and it is the cost of all variable inputs per unit of output AVC=TVC\/Q<\/p>\r\n \r\n

Average cost enables the measurement of the profitability, if the price is higher than the average cost, higher is the profit in a given unit of production.<\/span><\/p>\r\n \r\n

Marginal Cost(MC)=change in TC to change in Q. Marginal costs indicate by how much the total cost changes because of the addition to the production level by one more unit.<\/span><\/p>\r\n \r\n

When there are only fixed costs, marginal cost will be zero: any increase in production does not change costs.<\/span><\/p>\r\n \r\n

Long- run costs<\/span><\/p>\r\n \r\n

Long run total cost(LRTC) is the cost of all inputs in the long run, using the least cost method of producing any given output level.<\/span><\/p>\r\n \r\n

Long run average cost (LRATC) is the cost per unit in the long run, using the least cost method of producing any given output level. LRATC=LRTC\/Q<\/span><\/p>\r\n\"\"\r\n\r\n\"\"\r\n\r\n\"\"\r\n

\r\n\r\n \r\n

1.4.3 Investment Cost<\/strong><\/p>\r\n \r\n

Investment cost, the definition of which is an asset or an input purchased with the expectation that it will generate income or it will appreciate in its value in future . In finance,an investment is a monetary asset purchased that the asset will provide income in the future or appreciate and be sold at a higher price.<\/span><\/p>\r\n \r\n

1.4.4 Incremental Cost<\/span><\/strong><\/p>\r\n \r\n

Incremental or marginal costs come from changes in a given activity. Manufacturing more parts or changing the hours of a service\/ business open would cause incremental costs to accrue. Variable costs are incremental because they vary with activity. If employees are paid hourly and work more hours, labour costs will increase incrementally.<\/span><\/p>\r\n \r\n

1.4.5 Sunk Cost<\/span><\/strong><\/p>\r\n \r\n

Sunk costs, also known as fixed costs, are the costs already incurred For example, if a hospital installs a sophisticated medical equipment, whether there are people trained to use it or patients required treatment with that equipment or not , the money spent or rent payable remain the same. Money spent on R&D are also sunk costs if the outcome is successful or not or usable or not.<\/span><\/p>\r\n \r\n

Sunk costs represent barriers to exit. A firm which has incurred high sunk costs will have difficulties in deciding to exit the market even if it sees good opportunities outside. Conversely, a firm deciding to enter into a certain business has to consider with a particular attention, the sunk costs. Sunk costs, in this perspective, represent barriers to entry.<\/span><\/p>\r\n \r\n

1.5.1 Concept of a Firm<\/span><\/strong><\/p>\r\n \r\n

A firm is a unit of an industry. Marshall calls it a Representative firm. That is, a firm represents the characteristics of a given industry. In general, every firm is a profit maximising firm in pursuit of remaining in the business. It tries to keep the average cost at the minimum for a higher margin of profit. However the profit making prospects of a firm is dependent on the competitive conditions in which it works. For example in the Imperfect competition due to the enormous number of firms operating in the industry, the competition is severe and therefore the margin of profit is also limited. In the case of Monopoly, the firm may reap a high level of profit due to the monopoly market power.<\/span><\/p>\r\n \r\n

The firm's existence is subordinated either to the shareholders or to all stakeholders. The shareholder theory, envisages value maximization (for shareholders) as the primary objective<\/span>. <\/span><\/p>\r\n \r\n

That is maximization of a firm\u2019s equity, - the present value of expected benefits (cash flows) that the shareholders can expect from the firm. According to this definition, a firm\u2019s value can be maximized only when expected benefits are maximized in the long-run. Profits are not the best proxy of what investors can benefit from a firm. From the perspective of the shareholder value maximization, expected future (free) cash flows are a far more important measure of a firm\u2019s performance.12<\/span><\/p>\r\n \r\n

In the other hand, the primary objective of a firm from the perspective of all its stakeholders (i.e., shareholders, employees, customers, suppliers, creditors, local community, state and others), the primary objective would be defined more broadly, as the interests of stakeholders differ and cannot be expressed using a standard measurement.<\/span><\/p>\r\n \r\n

1.5.2 Profit Maximization Pricing<\/span><\/strong><\/p>\r\n \r\n

Profit maximization is the short run and the long run objective of any firm in a competition for survival and growth. To obtain the profit maximising output, profit is equal to total revenue (TR) minus total cost (TC). Profit maximising output: Under Perfect competition MC=MR=P<\/span><\/p>\r\n \r\n

Other market forms MR(P)>MC<\/span><\/p>\r\n \r\n\r\n1.6 Concept of Welfare<\/span><\/strong>\r\n\r\n \r\n\r\n1.6.1 Consumer Welfare<\/span><\/strong>\r\n\r\n \r\n

Consumer Welfare is defined as the maximisation of consumer surplus of the whole economy, realised through, \u2018direct and explicit\u2019 economic benefits received by the consumers of a particular product as with reference to its price and quality. The consumer welfare model\u00a0<\/span>12\u00a0 Dolenc et al: What is the Objective of a Firm ? Overview of Theoretical Perspectives. http:\/\/www.hippocampus.si\/ISBN\/978-961-6832-32-8\/contents.pdf<\/span>13\u00a0 ibid\u00a0<\/span>is built of the prevention of abuse of dominance in competition It is relevant in socio-political and legal implications. Consumer welfare standard is the basis of different policy decisions in competition law enforcement especially in merger cases. .<\/span><\/p>\r\n \r\n

1.6.2 Social Welfare(Total Welfare)<\/span><\/strong><\/p>\r\n \r\n

The welfare of the society is the summation of the utility maximisation of all the individuals in the society. It is not the greatest happiness of the greatest numbers or the majority rule, but everyone in the society is able to maximise the utility from their consumer behaviour. That the market and the state provide to the individuals a quality life for their sustenance. In welfare economics social welfare is theoretically reached through various approaches, but the complexity of human behaviour does not enable, to reach a single welfare situation due to the differences in value judgements and inter personal comparison of utility.<\/span><\/p>\r\n \r\n

Competition policy increases overall material and its ultimate goal is to increase overall economic efficiency giving the consumers a fair share in total wealth. While society\u2019s total welfare is usually the ultimate goal of competition policy it is rarely its exclusive goal. Competition policy usually focuses on a specific reconciliation of the overall interest of society with the particular interests of consumers. The difference between competition policies lies in the particular way in which they reconcile these\u00a0<\/span>interests. Whether a given competition policy strives to achieve pure economic goals, in particular economic efficiency, or whether it includes non-economic goals, like income distribution, diffusion of economic and political power or fostering business opportunity, as well depends on the economic goals of the political system it is part of.<\/span><\/p>\r\n \r\n

Three approaches are possible. First, competition policy may ignore consumer interests and focus solely on total welfare and economic efficiency. Second, it may recognise the immediate and short-term interests of consumers as the primary aim of competition policy. Third, competition policy might recognise consumer welfare as an essential long-term goal where the immediate interests of consumers are subordinated to the economic welfare of the society as a whole.14<\/span><\/p>\r\n \r\n

1.6.3 Producer Surplus<\/span><\/strong><\/p>\r\n \r\n

14\u00a0 www.clasf.org<\/span><\/p>\r\n \r\n

Producer surplus measures the benefit to sellers participating in a market. Producer surplus is measured as the difference between the market price and the cost of production, as shown on the supply curve. For the market, total producer surplus is measured as the area above the supply curve and below the market price, between the origin and the quantity sold.<\/span><\/p>\r\n\r\n<\/div>\r\n\"\"\r\n

\r\n\r\n \r\n

1.6.4 Price discrimination and Consumer Surplus<\/strong><\/p>\r\n \r\n

Price discrimination occurs when a business, or usually a monopolist charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs.<\/p>\r\n \r\n

Conditions necessary for price discrimination are, price elasticity of demand or precisely elastic or inelastic demand and segmentation of the markets to prevent consumer switching<\/p>\r\n \r\n

Peak and Off-Peak Pricing<\/strong><\/p>\r\n \r\n

Peak and off-peak pricing and is common in the telecommunications industry, leisure retailing and in the travel sector.<\/p>\r\n \r\n

At off-peak times, there is plenty of spare capacity and marginal costs of production are low (the supply curve is elastic)<\/p>\r\n \r\n

At peak times when demand is high, short run supply becomes relatively inelastic as the supplier reaches capacity constraints. A combination of higher demand and rising costs forces up the profit maximising price.<\/span><\/p>\r\n \r\n

Third Degree (Multi-Market) Price Discrimination<\/span><\/p>\r\n \r\n

This is the most frequently found form of price discrimination and involves charging different prices for the same product in different segments of the market. The key is that third degree discrimination is linked directly to consumers\u2019 willingness and ability to pay for a good or service. It means that the prices charged may bear little or no relation to the cost of production.<\/span><\/p>\r\n\"\"\r\n

\r\n\r\n \r\n

The market is usually separated in two ways: by time or by geography. For example, exporters may charge a higher price in overseas markets if demand is estimated to be more inelastic than it is in home markets.<\/p>\r\n \r\n

In the peak market the firm will produce where MRa = MC and charge price Pa, and in the off-peak market the firm will produce where MRb = MC and charge price Pb. Consumers with an inelastic demand will pay a higher price (Pa) than those with an elastic demand who will be charged Pb.<\/p>\r\n \r\n

The internet and price discrimination<\/strong><\/p>\r\n \r\n

The rapid expansion of e-commerce using the internet is giving manufacturers unprecedented opportunities to experiment with different forms of price discrimination. Consumers on the net often provide suppliers with a huge amount of information about themselves and their buying habits that then give sellers scope for discriminatory pricing. For example Dell Computer charges different prices for the same computer on its web pages, depending on whether the buyer is a state or local government, or a small business.<\/span><\/p>\r\n \r\n

Two Part Pricing Tariffs<\/span><\/p>\r\n\r\n