Market Failiure And Competition Policy.

Economics is an interesting subject with a range of applications. An example would be competition policy (anti-trust) which in the UK is the responsibility of the Competition Commission. This relates to the possible abuse of market power. In orthodox neoclassical theory (microeconomics) this is defined in terms of market structure, essentially focussing on the degree of concentration in the market. Markets with fewer large firms such as oligopoly and monopoly as the extreme case are the focus for such policy interventions.

OK policy has evolved into two strands:

First a prohibition regime which defines certain types of conduct illegal, for example firms sharing information regarding prices. This is deemed to be anticompetitive and firms face fines of up to 10% of their annual turnover examples of this are public school fees and supermarkets sharing price information of dairy products.;

Second an approach based on market investigation where the firms conduct is evaluated in order to determine whether there are adverse effects on competition. Fines are not imposed here but recommendations may be made by the Commission, for example the decision to make BAA sell Gatwick airport.

There are economists who take a different view of how markets work and therefore reject this so called market failure approach to government intervention. Based on Libertarian ideas the "Austrian School" views the working of markets in a different way stressing the discovery of opportunites, rewarded with profits, as an essential feature of the market process. The normal state of affairs in markets according to this approach is disequilibrium and discoordination, contrast this with orthodox view reflected in the models of perfect competition and monopoly. In the Austrian view there is no rationale for government intervention due to market failure.

For information on UK policy visit the Competition Commission website.

For market failure any economics textbook will discuss the problems of market failure such as monopoly, externalities and public goods. For an introduction to the Austrian approach read the first few chapters of SC Littlechild, "Fallacy Of The Mixed Economy." the policy discussion is out of date but for an explanation of the basic approach it is fine.