Category: Competition

Introduction

All over the globe, different firms or companies experience challenges of competition from enterprises owned by the state. In a country like China, the companies that are owned by the state usually get some benefits in certain areas. These beneficial areas include taxation, and subsidies.

With respect to this, the state owned enterprises are able to compete with the privately owned enterprises in the sense that they are able to get a lot of profit thus placing them in a good position to compete in the international market. Furthermore, enforcement of regulations is also included.

Regulations enable the control of imports and exports in a country. These business regulations have created greater opportunities for China in the international market (Robinson, 1).

China and the world market

Development in China started in 2001. This is after China became a member of the World Trade Organization. During this time, China started to appear in the records of the FDI. The World Trade Organization (WTO) enabled it to do away with the non-tariff barriers.

This has enabled China to expand its market territories internationally. WTO also offered rights to foreign companies to transact businesses. In addition, conditions of foreign investment were changed enabling foreign investors to invest in China (Rugman & Collinson 618).

The ability for China to access the WTO is of very little significance to the US. China entering the WTO had a symbolic and a tangible end regarding any option to the global adoption of capitalism.

Since its membership in the WTO, the Chinese participation has portrayed some kind of socialism. This has been an expectation by many. The growing economy and the access to the markets in America has been part of socialism (Beeson 731).

In the past quarter of a century, the economy of China has been increasing by almost 10% every year. This has been as a result of several factors. These factors include; the strength and the practices of the Chinese businesses. This has culminated to domestic changes in China.

Besides that, it has some implications internationally. In the recent years, the market had been flooded with products bearing the ‘made in china’ label. Also, the overseas Chinese firms have expanded greatly (Pan 8).

The increased exports have resulted to higher incomes. On the other hand, this ways for other countries enabling them to export their products to the growing Chinese market.

Production in China depends on the increasing importation of inputs. There has been high demand for importation of the consumer goods and food. Also, importation of metal-based products has also increased (Kiely 356).

Global financial crisis in 2008 which is as a result of mortgage crisis in the US, contributed a lot in the present China. The crisis led to decrease in the overseas’ demands. It also led to Chinese enterprises receiving fewer orders from outside the country.

The increase of the raw materials cost saw production cost escalate. Also, the high cost of labor and inventory had an effect on the cost of production. This resulted to poor working environment for many enterprises (Pan 6).

China has been able to have high accumulation of capital. This is from the foreign money it earns from the export of the products manufactured in the country. This has enabled it to have a rise in its shares of the world GDP. China has been able to manufacture worlds export for more than 25 years. The amount of exports in China has always on the increase every other year.

China accounts for the largest fraction of imports in Europe and North America. The shares on the office equipments are also on increase. China has the capability to produce more sophisticated goods. This development has increased rapidly within the recent years (Glyn 92).

Through advanced technology and industrialization, China has been able to compete very well in the international market. Chinese build their industries and equip them at very high speed. This has geared to the increased manufacturing rate.

The industrial revolution in China is at high speed compared to that which occurred in the west. Majority of the products are manufactured for companies in other countries. This is from the designs and patents offered by these companies.

The foreigners make a lot of profit from this (Hay para.4). In China, long supply chains are common. Multiple contractors are used and its only trust that holds these parties together. In case the process breaks down, it becomes hard to know who is on the wrong (Hay para.5).

China has the largest production of coal and aluminum. With this high production, the aluminum industry has far much advanced. Due to the advanced technology, production is on large scale.

This accords China a competitive advantage leaving a wide gap between it and other competitors in the world. Many countries with low technology import their utensils from China thus adding to the economy of the country (Rugman & Collinson 617).

Auto industry

The motor vehicle industry in China is one of the major players in the globe. This is after Japan and Germany. The exports of autos in china are growing at very high rates. According to the minister of commerce, China targets at lifting its export of the motors sold globally to 10% yearly. Also, country’s manufacturers focus China’s domestic market (Teslik, para.4).

The rapid growth of the motor industry has given other well established manufacturers a surprise. These manufacturers include Asia and Japan. South Korea is also included. China’s auto industry development has challenged the regional competitors due to the advanced technology and cheap vehicles.

Also, it has shown a tendency of bring problems to the multinational firms like the US carmakers. U.S has been well known for its advanced technology but it has been unable to compete with China in the motor industry. There is a likely hood of China focusing its export to countries within its closest range of economy. This focus is to enable it have a wider market for its products (Rugman & Collins 34).

Comparing with the auto industry, the aero industry is a bit hard to sail through due to the challenges China goes through. Since 1960, Brazil has been the only known manufacturer. It could make more than one aerospace in one month. Since the aerospace industry in China is growing at a higher rate, goals have been set to increase its competitiveness.

Up to date, China has only managed to manufacture small planes due to the lack of adequate technology. In addition, China manufactures helicopters and transport planes which do very well in the local and the international market. Furthermore, sophisticated warplanes are also manufactured in China. In the year 2007, China announced that they had plans of making planes with large and wide bodies.

This was to bring competition in the manufacturing industry. China is not aiming at competing with Boeing and Airbus in the high capacity plane market. Currently the country lacks the technology required to build wide-bodied planes (Teslik, para.5).

As for now, China targets on making parts of the autos and the aerospace since little cost is incurred in the process of transportation. The country targets on exporting the parts and not the assembled autos. The rate of export of the parts in China is growing on daily basis due to the high demand.

The argument is on when it comes to the transportation of the products. Transportation of parts is considered to be easier since many of them can be stacked in a container consequently, leading to reduced cost of transport (Teslik, para.6).

Aerospace industry

China is also a major player in the manufacturing of aircraft-parts. All of the aircrafts manufactured by Boeing has parts from China. The director of one of the consulting firm aims at airline competition. He also focuses on air port competitiveness. He argues that production of parts shows some sense for Boeing. This is due to the fact that Chinese manufacturers consider the risk of production (Teslik, para.8).

Textile and apparel industry

The textile industry in China is considered as the biggest globally. This is in terms of textile and garment exportation. China has the capacity to export millions of tones yearly of the textile products. Most of the products are marketed in the UK high street shops. There has been an indication that in a few years time, the market share will increase. The highest number of industries in China is privately owned.

Also, foreign investment is common (Chan & Xiaoyang, 11). A Shift to a socialist market economy has transformed the ownership of textile industries. The ownership has been changed from state ownership to privately owned firms. The textile industry in China has more than 4 million employees. The textile exports are mainly designed by foreigners. The garments are mainly made of imported materials.

The industry manufactures clothes targeting the mass markets. The clothing for the mass market is of moderate and low prices. In china, only few industries manufacture clothes of high quality since they target individuals within different classes.

According to statistics, the apparel industry in China was ranked second in terms of export in the year 1995. The market of textiles has increased in China which is as a result of developed economy. The economy improvement is due to the economic reforms which China has undergone. A lot of money has been spent on the consumer goods and this is a result of growth in income (Rugman &Collins 23).

Electricity industry

The electricity industry in China has undergone a lot of transformations since 1985. The first reform concentrated on bringing competition due to liberalization of the industry in the developed countries. A state power corporation was formed in 1997. The functions of the administration were separate from those of the business. To enhance competition in the industry, the corporation was divided into two sectors.

These sectors are the power generation and distribution sectors. This was part of the reforms that were done in 2002. The reforms aimed at liberating the power market. After the reforms pilot program was set, the program was conducted and it aimed at selling the electrical power on wholesale. In the North and East China, the respective regional power companies buy power individually (Robinson 45).

By 2003, the East China’s GDP contributed 31.8% of the whole country. This had a lot of impact on the country’s economy. Two types of power produced in this region are thermal and hydropower. Thermal power accounts for the highest percentage of the total supply. Monthly transactions were conducted for power export. This was done according to peak and off peak period.

For the future of the power industry in china, the government has emphasized on construction of power generation centers. For the development of the industry, a power generation scheme has been put into use. This scheme has resulted to different production costs among the producers. In 1996, foreign investors were able to sell almost four times that of the local producers.

With this regard, there is no competition when bidding for the wholesale prices. In china, increases in prices are only allowed for the retailers. This is done only when there is an effect due to increase on fuel prices. Rational electricity billing methods should be put into practice to deal with the current problem in the power industry. In addition, standards and rules should be set as a way of dealing with the crisis (Nolan 34).

Conclusion

To promote competition in the industries, china has developed labor laws. These were developed in 2008. These laws have been made based on the European style labor codes. This law protects the workers since the employer can not dismiss an employee without any legal reason. Also, the law ensures that the employees have contracts as per the law (Global labor strategies 37).

Works Cited

Beeson, Mark. “Comment: Trading places? China, the United States and the evolution of the international political economy”: Review of international political economy, (16) 4.Octomber 2009, pp. 729-741.

Chan, Anita. & Xiaoyang, Zhu. Disciplinary labor regimes in Chinese factories. 2003. Web.

Glyn, Andrew. Finance globalization and welfare. London: Oxford university press. 2005.

Global labor strategies. Why china matters: Labor rights in the era of globalization. 2008.

Kiely, Ray. ‘Poverty’s fall’/China’s rise: Global convergence or new forms of uneven development? A journal of contemporary Asia. (38) 2008, pp.353-372.

Nolan, Peter. “China and the global business revolution”: Cambridge journal of economics. (26).2002, pp.119-137.

Pan, Chengxin. “What is Chinese about Chinese businesses? Locating the ‘rise of china’ in global production networks”: journal of contemporary China.18 (58), 2009, pp. 7-25.

Robinson, Peter. International business: Winter, (xxxii) 2011.

Rugman, Alan. Collins, Simon. International businesses. London: Pearson education (nd). Print.

Teslik, Lee. , China’s motor vehicle and aerospace industries. Web.

Balance of trade is a measure of a nation’s monetary value of imports and exports within a specified period of time. It is also defined as the difference between the value of payments and receipts involving two trading countries. A country experiences surplus trade when value of exports exceeds value of imports. Conversely, a country is said to experience deficit trade if the value of imports exceeds that of exports. It is rare for any country to experience an absolute balanced trade.

Most countries attempt to improve their economy in order to avoid negative growth that always leads to trade gaps. It is apparent that a few factors frequently emerge, which consequently affect the level of trade balance either negatively or positively. These factors include cost of production, which merely depends on a number of aspects including capital, labor, taxes and land. Other factors affecting balance of trade include exchange rates, tariffs and taxes imposed on exports and imports, trade restrictions, availability of raw materials and other inputs required in production as well as availability of foreign currency to pay for the foreign goods and services (Thompson, 2006).

Merchant trade balance is majorly concerned about the measure of visible trade such as sale and purchase of vehicles and computers. In most cases, international trade involves trading in physical goods. A country can measure merchant trade balance by subtracting services from the total goods and services. When value of goods sold by a given country exceeds the value of purchases then the economy of a country is said to experience growth. Having a growth is beneficial considering that the value of currency of a specified country would have great demand, hence enabling its currency to appreciate. If a currency appreciates, it would mean that purchasing foreign goods would be much cheaper. On the other hand, a country is expected to experience negative growth if goods imported exceed the value of the goods exported. This means that a country will most likely face depreciation. Depreciation will negatively affect a country’s economy because it would need domestic currencies to purchase foreign goods.

Balance of services refers to measurement of payment and receipts for services, which include consultant services, patent services and tourism among other services. If a country acquires much of these services from a trading partner than it is offering then it stands a higher chance of plunging into a deficit trade. However, it may experience surplus if it would be able to offer more services to trading partners than it would be acquiring them. Surplus trade in services most probably helps a country to grow economically while deficit trade may interfere with a country’s resources. A country will as well have a surplus economy if the total income on exports ensuing from the sale of both goods and services surpasses the value of imports within a given period of time (Thompson, 2006).

Balance on investment income concerns the measure of income earned by residents from property owned by foreigners in the domestic economy. The term also covers income earned by foreigners from properties invested in their countries by a trading partner. Investment income includes both dividends earned from shares and interest paid on debts. If income earned by residents from foreign investments in the domestic economy exceeds that of income from properties invested abroad, one would say a country is facing surplus trade. A surplus trade in terms of investment income would mean that an economy is susceptible to expansion. It is therefore advisable that residents should be encouraged to invest in shares owned by foreign companies. If one considers balance on goods, services and income, it would mean that if interests and dividends received from both foreign bonds, shares, interests and dividends made to foreigners, and value of exports received from goods and services, a country would be said to have a surplus economy. This would be more beneficial to a country considering that its economy will most likely expand without struggles (Thompson, 2006).

Balance on current account pertains to the measure of the sum of balance of trade, the net factor income and the net transfer payments. The balance of trade is calculated as exports less imports of goods and services. The net factor income covers dividends and interests while transfer payments will include remittances made by individuals to family members overseas as well as government grants and charities received or made to other countries. Current account always involves goods and services that are currently utilized. If the sum of current account results to a positive value, a country would be facing growth while it would be suffering negative growth if the sum of the current account turns out to be negative.

Unlike current account, which considers only income earned from either foreign ownership of domestic assets or domestic ownership of foreign assets, capital account incorporates the change in value of assets ensuing from the sale or borrowing of assets. Perhaps, capital account can be broken down to include direct foreign investment, reserve account, portfolio investment and other investments. Direct foreign investment refers to investing in long term assets such as buildings. Portfolio account includes purchasing shares and bonds. On the other hand, reserve accounts refer to sell and purchase of foreign currencies while other investments would include deposits into bank accounts over and above loans granted by banks. The flowing of income into a country resulting from the sale of assets leads to surplus trade while the outflow of money ensuing from the sale of assets results to deficit trade (Thompson, 2006).

Reference

Thompson, H. (2006). International Economics: Global Markets and Competition. Hackensack: World Scientific Publishing.

Introduction

In economic theory, market failure is the insufficiency by the free market to allocate goods and services, which is caused by individual pursuit. There are several factors that are linked with market failure. These factors are lack of competition in the markets, public goods, asymmetries in information, problems in principle agents and externalities. In Germany, it is the role of the competition authorities to correct market failures and facilitate competition (Griffiths & Wall 2011, p. 235-67).

Lack of competition is one of the factors that affect the market, and when there is poor competition in the market the result is market failure. It has been said that competition has effect on everybody in the market, which include the businesses, customers and the general economy. It is thus very important for the competition authorities in Germany to facilitate competition in the markets (George 2000, p. 70). The competition authorities in Germany include the federal cartel office, European commission and the federal network agency.

Correcting market failure

There are different views at to the causes of market failure. However, whichever the cause of market failure, the competitive authorities in Germany come in as bodies that correct it to boost competiveness (Steven 2007, p. 331-358). When significant market power is held by small group businesses as seen in the case of German Lufthansa airlines, allocation of resources becomes ineffective. On the other hand, the goods and services should not be public goods (Francis 1998, p. 351-79).

An effective market is that which has efficiency in the allocation of its resources. Failure to this results in market failure. The Germany competitive authorities strive and have an effective market where the values of the individuals are reflected by their own choices. In this kind of market, firms are able to maximize their profits through their own choices. In order to correct market failure, competitive authorities make sure that the exchange in the market is not affected by the individual businesses, and market exists for all goods and services. Having made sure that exchange prices at the market are not affected by the individual businesses and that are markets for all goods, there is competitive in the market, markets are complete and resources are efficiently allocated (Gregory, Kneebone, McKenzie & Row 2002, p. 157-58).

Uncompetitive mergers are blocked by the competitive authorities through the Germany European commission and FCO merger laws that regulate the way and conditions in which firms merge with each other. This is a competition law that controls the acquisition of market power by the firms on the free markets in the country. To regulate mergers and acquisition, competition laws are used to avoid the concentration of economic powers in a few parties (Piris 2010, P.12). This objective is achieved through prediction of the conditions of the potential market that would occur after the merger to find out whether the merger would hinder effective competition (Mankiw 2009, p. 10-12). The authorities therefore review the merger, dominance and block anti-competitive activities by businesses (Ronald 2007, p. 386-405). The policies have both antitrust policy, and policies to impact business behaviour, performance of the economy and the structure of the market (Rouse and Barrow 2008, p. 2-16).

Competitive laws put in place by the competitive FCO correct market failure by preventing misuse of markets power. The policies make sure that competitors increase to prevent a few firms from controlling the prices. The authority also makes sure that market transactions are not reduced by asymmetrical flow of information between the sellers and the buyers. To correct market failure further, the competitive authority enacts laws that will prevent negative externality like in the case where a firm causes costs to the society through its production. Policies are aimed at creating equal opportunities and redistribution of wealth to realize wealth distribution without having to alter markets (Joseph 1989, p. 197-203). More importantly, the authorities inform the public about competition issues for the public to act. Policies are well designed to interact effectively with trade, and enacted to reduce externalities by giving correct prices to the producers and consumers. The Germany European commission for example, ensure that trade measures is put in place to reduce negative externalities (John 2008, p. 1-9). Therefore, the competition authorities set rules within which the markets operate. The interest of the authority is on the outcomes of the market, and how the resources are distributed in the different firms in the market. The distribution of goods and services should benefit the wider society. All products in the market that cause negative effects to the market are discouraged.

The office of fair trade in Germany has a role in making consumers satisfied by the practices in the markets. To achieve this goal, it ensures that the companies are in a competitive environment openly. It tackles behaviors that are anticompetitive, and makes sure that the companies are not restricted from competing with each other. The FCO advises the government continually on what it needs to do when faced with competitive issues along side those of the consumers. There is an advocacy team whose role is to strengthen the relationship between the government and stakeholders, and make sure that there is sustained competition in the market and promote it (Kenneth 1999, p. 1-16).

European commission in Germany is an institution representing the interests of the European Union, and sets proposals to formulate European laws. This institution implements the policies and assesses them later. The European commission also controls merger through enforcement of regulations and prevents power abuse that may result from dominance position by Germany businesses. Germany is a European member state where European competition laws apply. In 2003 for example, the European Union commission determined the issues in the Germany economy (Peterson & Michael 2006, p. 152). Sometimes, in the Germany markets there could be illegal unilateral conducts described by the European commission. Such practices such as unfair purchase and other unfair trading activities are prevented. This is done to defend a very strong competition in the Germany markets. Abuse of market power is known to affect the Germany markets since it reduced the market competition. Through European commission, the policies are passed to ensure that competition is maintained in the single markets. In its role as a competitor regulator, the commission prevents antitrust, approves mergers and breaks up cartels (Posner 2001, p. 68).

The framework created by the authorities makes sure that the markets have fair and open competition. It sets rules and regulation that govern the conduct of each firm and individuals. The rules are therefore enforced to make sure that the market operates effectively. Firms are prevented from exploiting market power through a framework for competition and consumer laws. This further makes sure that there is protection for the consumers from unfair business practices in the market. There is proper regulation of the markets to protect the consumers through creation of effective regulations to generate positive outcomes.

The competitive laws put in place make sure that firms do not make anti competitive agreements. They also prevent the dominant firms from using their strengths to hinder the outcomes of the markets. For example, unlike the case of Lufthansa airlines, there are firms that enter into the market and charge higher than the competitive prices. Those mergers predicted to lessen competition are also prohibited by the laws. The consumer laws put in place makes sure that the consumers are free from scams and that abusive and bad practice does not exist to affect the consumers. The consumers have rights that guarantee them security from the acts of traders thereby making the traders to act honestly (Joseph 1998, p. 3-22).

Facilitating competition

The federal cartel office is responsible for regulating competition in Germany. To achieve the objective of maintaining competitiveness in the market, the body enforces competition law available in Germany. These laws maintain competition in the markets by making sure there are no anti competitive practices by the companies. The office scrutinizes the business practices always. The competitive laws are put in place to maintain competition in the markets with Germany.

Through competition, the firms improve their efficiency internally and reduce costs. This is very beneficial to the consumers since they are at a position to get the goods and services at a lower price. Through reduction of prices, more consumers are attracted making the firm gets access to a large market share. Competition makes firms get incentives and adopt new technologies thereby minimizing their costs.

Organizations invest in innovation through the provision of incentives brought about by competition. Through innovation, firms improve the quality of their products, which are either existing or even create new products that suits the needs and requirements of the consumers. A competitive economy also prevents inefficiency in management since as a result of competitive pressures the firms look for more efficient ways they can manage their businesses (Clark, 1990, 241-56).

The German federal cartel office (FCO) also makes sure that mergers are substantive, and will enhance competition in the market. For example, in July 2011, the FCO came up with a substantive merger control paper that would be used for consultations “Draft Guidance on Substantive Merger Control”. The FCO has shown very strong records in enforcement of control measures. The draft by the FCO guides on how the office will assess mergers. The new approach in the draft is more inclined to the analysis of the economy. The FCO focuses on whether the merger will bring about competition in the market (Richard 2003, p. 53-7).

In the draft guidance, the office had distinguished between the different mergers; vertical, horizontal and conglomerate mergers. The merger control is to make sure that competition is effectively controlled to protect the long-term interest of the consumers. When competition is controlled, competitors are also protected since mergers may affect the competition functioning. More specifically, the draft guidance favours vertical merger because they are less pronounced and do not affect competition since the competitors number is maintained.

In its role to maintain competition, FCO has for example started investigation into the contracts the corporate clients were offered by Lufthansa (a Germany leading airline), and whether these contracts has forced the clients to give out information on pricing of the competitors to get negotiated discounts. This was an anti competitive practice that the competitive authority had to investigate and put an end to for the Germany markets to remain competitive. The country’s largest airline wanted to introduce low pricing in the market to remain the only one in the market. The situation created in this scenario shows abuse of powers that Lufthansa had since it dominated the market. Their prices do not meet the standards of the available operating costs. The FCO had to come in and ban the low price strategy by Lufthansa. However, there was a guarantee of competition in the market since Germania and Lufthansa airline fought for the prices and clients, and customers benefited a lot (Cohen 2011).

The authority sets a framework followed by the market to influence the outcomes of the market, and competition in the market is protected to let consumers exercise their choices (MacKenzie 2002, p. 157-8). Hardcore cartels offences such as price fixing, limiting production and market allocations are protected by competition laws (Helm 2006, p. 169-185).

The federal network agency is also competition authority body in Germany that enforces rules and regulations that protect market powers from abuse. This authority is involved in telecommunication sector, the energy and railway, and the postal services sectors. This agency creates market economy and economic freedom in the country. In a market where there is abuse of market power, the economy of the country is at risk, and this needs to be controlled. To prevent this, the federal network agency takes into account the anti- cartel actions to make sure there is no full monopoly, and consumers are not manipulated. The agency regulates telecommunication markets, and manages the radio frequency spectrum in radio communication. The agency has set rules put in place in tendering of minute control reverse to facilitate the control reverse market access for the new entrants in the markets. This will make it flexible to gain access, and improve competition in turn. The agency wants to implement the new rules by December 2011 while other regulations that concern automatic activation of block offers will be done in 2012.

Competition policies are put in place with an aim of increasing efficiency in the allocation of resources, there by correcting market failure. Through the policies, the country specializes in the production of goods and services they have comparative advantage in. The competitive authorities cooperate with others in other countries to come to an understanding involving mergers from across borders where competition frameworks could be different.

The Germany government wants to achieve social and economic outcomes in markets through effective measures. This guarantees consumer protection. The Germany government has established agencies that are responsible in controlling market power for the country to grow economically. The country had focused on maximizing the welfare of people through competition to benefit the consumers.

Conclusion

The Germany government wants to achieve social and economic outcomes in markets through effective measures. This guarantees consumer protection. The Germany government has established agencies that are responsible in controlling market power for the country to grow economically. The country had focused on maximizing the welfare of people through competition to benefit the consumers.

Market failure has been prevented to allow efficient provision of goods and services as per the demands of the consumers. As previously discussed, there are factors that lead to market failure, and these factors are public goods, market power, externalities and problems in the dissemination of information on competition and consumer issues to the government and the general public. There is an agreement that free markets will not be responsible for the production of certain public goods and services since once a good has been produced, the general public benefits from it making it difficult for the individuals to pay for it. In adherence to the policies set, the wider cost of goods or services is not included in the cost of production of an individual firm, or in the individuals cost of consumption. For example, firms are not responsible for pollution and end up producing at the expense of the society. The information problems should be avoided by making the consumers certain about the products in the markets and their quality. The competitive authorities in Germany therefore empower the consumers in their decision-making about a product by for ensuring that goods are well labeled. The competition law present prevents the suppliers from abusing the market power to harm the consumers.

While correcting market failure, the competitive authority assesses the impact of the interventions on competition in the markets. It looks at whether the interventions put in place affect the likelihood of the entry or exit from the market. It also looks at how the interventions affect the competition directly through regulation of prices and products or indirectly by reducing firm’s incentives. Additionally the authority determines whether its intervention will affect the ability of the consumer to exercise choice. To attain its goal of increasing competition in the market, the competitive authority assesses its intervention strategies before it implements during the development of policies. This way the ultimate policies help the authority to realize their goal thereby benefiting everyone in the markets; the firms and the consumers.

Recommendations

The competitive authorities in Germany should enforce strict laws for the markets to better utilize the market powers without causing any harm to the consumers. The merging of firms should also be more assessed to only allow merging of businesses that will increase market competitiveness and consumer satisfaction. This will also manage the use of market powers. Continual dissemination of information to the government and consumers about the consumer and competition issues is fundamental in making sure that there will be correction of market failures, and lead to facilitation of competition in the markets. Always, it is important to assess an intervention to correct market failure and facilitate competition. This will allow for alternative options that will see to it that competition is not affected. Ways that influence the behavior of the consumers and instrument that change the behavior of the business should be considered by the policy makers. The effectiveness of an intervention to correct market failure and facilitate competition should be evaluated using progress checks done in a timely manner. It is important to be creative in finding other alternative interventions that will not restrict competitions like others.

References

Clark, M. (1990) Towards a Concept of Workable Competition. American Economic Review, 30 (2): 241–256.

Cohen, A. (2011) Germany Launches Probe into Lufthansa Corporate Contracts. Web.

Francis, M. (1998) The Anatomy of Market Failure. Quarterly Journal of Economics, 72(3) pp. 351-379.

George, D. (2000) Global economy, global justice. ND: Routledge. P.70.

Gregory, M., Kneebone, R. McKenzie, K. &, Row, R. (2002) Principles of Microeconomics: Second Canadian Edition. United States: Thomson-Nelson.

Griffiths, A. & Wall, S. (2011) Economics for Business and Management, (3rd ed). Financial Times, Prentice Hall.

Helm, D. (2006) Regulatory Reform, Capture, and the Regulatory Burden. Oxford Review of Economic Policy 22(2):169-185.

John, O. (2008) Market failure. The new Palgrave dictionary of economics, 2, 1-9.

Joseph, E. (1998) The Private Uses of Public Interests: Incentives and Institutions. Journal of Economic Perspectives, 12(2), 3-22

Joseph, E. (1989) Markets, Market Failures, and Development. American Economic Review, 79(2), 197-203.

Kenneth, J. (1999) The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non-market Allocations. Analysis and Evaluation of Public Expenditures: The PPP System, Washington, D.C., Joint Economic Committee of Congress. PDF reprint.

MacKenzie, D. (2002) The market of failure myth. Ludwig von Mises Institute.

Mankiw, N. (2009) Brief Principles of Macroeconomics. South-Western, Cengage Learning.

Peterson, J. and Michael, S. (2006) Institutions of European Union. ND, EU Press.

Piris, J. (2010) Lisbon Treaty. Cambridge, Cambridge University Press.

Posner, R. (2001) Antitrust Law (2nd ed.). Chicago, University of Chicago Press.

Richard, W. (2003) Competition Law, 5th Ed. ND, Lexis Nexis Butterworths.

Ronald, H. (2007) The nature of the film. Economica, 4 (16), 386–405.

Rouse, A and Barrow, F. (2008) School Vouchers: Recent Findings and Unanswered Questions. Economic Perspectives, 32(3), 2-16.

Steven, G. (2007) The Hesitant Hand: Mill, Sidgwick, and the Evolution of the Theory of Market Failure. History of Political Economy, 39(3), 131-358.

The concept of limiting competition is a practice used to balance market opportunities for different participants to maintain a balance in commodity-money relationships. Chambers and O’Reilly (2021) define this approach as negative, explaining their position by evaluating unnecessary government interventions “and increasing economic rents” (p. 5). When considering this concept within the interest group model of regulation, one should pay attention to the effectiveness of appropriate disincentives, such as restrictions on market entry, prices, or output, which affect stakeholders differently. These restraining methods are only relevant in the case of a real imbalance, but in traditional market relationships, a particular interest group always benefits more from such practices than others.

Regulating the interests of different stakeholders is possible in case of benefits for each of the interested parties. For instance, Fleming (2019) notes that any deterrents are justified when customer welfare is the key objective of restrictive measures. However, when taking into account the distinctive interests and capabilities of market participants, the restriction on potential development is fraught with the inevitable loss of leadership positions in front of competitors. The interest group model of regulation is based on the opportunity for different actors to organize and influence decisions taken at the political level (Fleming, 2019). Therefore, by analyzing the concept of limiting competition within this model, one can assume that vulnerable participants remain unavoidably, despite the efforts of the majority. The interests of consumers, in this case, do not play an essential role since the initiators of the targeted policymaking activities set the task of satisfying their business interests. Thus, the interest group model of regulation cannot ensure equality in development opportunities in an environment where the concept of limiting competition is promoted.

References

Chambers, D., & O’Reilly, C. (2021). The economic theory of regulation and inequality. Public Choice, 1-16.

Fleming, A. (2019). Anti-competition regulation. Business History Review, 93(4), 701-724.

Description

In this book the author tries to develop an alternative to the conventional price theory. In doping so, he elucidates the problems with the conventional model and hoe the new model has helped to eliminate those issues. The author brings forth the question of an entrepreneur who acts as an agent in competition and shows how a perfect competition situation is led to become imperfect.

Kirzner tries to portray the different theories of prices and develop a new model of the same to eliminate the problems in the orthodox theory. Price theory in conventional microeconomics tries to explain relationships among observed market phenomena. The two alternative approaches of market theory that we come across in microeconomics are the orthodox neoclassical theory, developed mainly by Marshall, Robinson, Chamberlin and Walras and the Austrian market process theory that is proposed by Kirzner in the book “Competition and Entrepreneurship”.

The book aims to the following:

1. questions the usefulness and the adequacy of the equilibrium analysis, including Robinson-Chamberlin theory of imperfect competition,
2. offers a redefinition of the concept of monopoly and competition within the context of entrepreneurial activity,
3. revamps the theoretical concept of advertising and product differentiation in light of the model he developed,
4. Develops a new standard of economic welfare based on condition of knowledge rather than on the orthodox model of allocation of social resources standards and action.

The methodology adopted by Kirzner is a descriptive analysis of the prevalent theories and finding the issues involved in them. He does not make use of mathematics to analyze his model. He basically objects to the methodology of (Robinsonian) equilibrium analysis in which competition and imperfect competition are defined as situations. According to these theories, in a competitive market, buyers and sellers of homogeneous products are many and possessed of perfect knowledge of demand and cost functions. In such a model of perfect availability of information, Kirzner argues that “each individual knows with certainty what to expect, his plans can be completely explained interms of economizing, of optimal allocation, and of maximizing…” (p. 37). Thus the choice solution is implicit in a set of givens.

Production is the conversion of resources (inputs, factors, producer goods) into products (outputs, consumer goods). In a market with production, individuals can be grouped into resource owners, producers and consumers. Producers are entrepreneurs who buy resources from resource owners and sell them (in the form of a product) to consumers. Even if a producer owns one of the resources himself, he must ‘buy’ that resource from himself in the form of opportunity cost (what he could sell it for in the market). Production is arbitrage (entrepreneurship), the exploitation of price differences.

Production is inherently entrepreneurial and competitive, and cannot be monopolized. The situation of a single seller then must be analyzed taking into account whether the position is the result of offering the best opportunities to the market or the result of monopolized resource ownership. Monopolized resource ownership can be the result of competitive entrepreneurial activity.

Entrepreneurship requires no resources to be initially owned, and “pure” entrepreneurship (a mental tool) is exercised only in the absence of resource ownership.

Orthodox theory interprets human behavior as economizing (maximizing, allocative, “Robbinsian”). Individuals apply given means to given ends, and the best course of action is implied in these data. Changes in the means and ends are exogenous.

Market process theory interprets human behavior as human action, a wider view which includes the perception of means and ends. The orthodox individual is a mere calculator. “Mises” homo agens, on the other hand, is endowed not only with the propensity to pursue goals efficiently, once ends and means are clearly identified, but also with the drive and alertness needed to identify which ends to strive for and which means are available.” (p. 34).

The entrepreneurial element of every human action is “alertness to possibly newly worthwhile goals and to possibly newly available resources.” (p. 35) With perfect knowledge, the entrepreneurial element would be unnecessary, but in the real world, knowledge is imperfect.

Economic analysis can be simplified by separating decisions into entrepreneurial and economizing elements. “Consumers” and “resource owners” economize, and “entrepreneurs” display alertness (in real life, of course, an individual will fall into all the categories).

“Producers” are both entrepreneurs and economizers at different stages of production. If the producer contributes an input (for example, managerial skills), he is economizing. In deciding which inputs to hire and which outputs to produce, he is an entrepreneur. As entrepreneur the producer decides what he believes to be cost and revenue functions; as economizer the producer uses those judgments to select a production process. The initial decision to purchase inputs is entrepreneurial; once the inputs are acquired the decision to actually produce (or to change the initial plan instead) is the decision of a resource owner.

Profits result from resource ownership or from entrepreneurship. Owners’ profit results from an exchange, and is the difference between the value of what is received and the value of what is given up. Entrepreneurial profit is the difference between the price paid and the price received; nothing is given up. Profit is usually the result of more than one decision, and so can be viewed as either owners’ or entrepreneurial depending on which decision is being analyzed.

Capitalists are resource owners. A production process that takes time requires capital, that is, resources advanced by owners who agree to receive payment (with interest) at a later date.

Orthodox theory concentrates on the “firm” as the decision-maker in production, and firm’s behavior maximizes profit. In market process theory, the firm is the result of a partially-completed entrepreneurial decision, being basically an entrepreneur who has already acquired some resources. ‘Profit-maximization’ is not used to interpret firms’ behavior. The producer as resource owner maximizes the value of his resources, but as entrepreneur is alert to new uses for his resources.

The corporation poses a problem for orthodox theory because ‘control’ (managers) is separated from ‘ownership’ (capitalists or stockholders), so that profit may not be maximized. In market process theory, there is no problem. If the managers receive only their wages, they are hired resources; if they in addition extract other (possibly non-monetary) benefits from their position, they are acting also as entrepreneurs; if instead, they steal benefits, then revenue will not cover costs and they will be fired.

Entrepreneurship is not merely the possession of knowledge of price differences; such knowledge can be hired, in which case the one who does the hiring is the entrepreneur. Hiring itself can be hired (a personnel manager), in which case the one who hires the hirer is the entrepreneur. The entrepreneur is the one with the ultimate knowledge, the one who does the ultimate hiring, the one who decides to bring all the inputs together to produce an output.

Entrepreneurship is the ability of individuals to learn from market participation. This alertness to opportunities sets the market process in action, generating changes in individual plans, eliminating price differentials.

The objective of orthodox theory is to determine market equilibrium, generating numerical values for prices and quantities at which transactions are made. Orthodox theory analyzes the effects of exogenous change and policies in terms of their effects on equilibrium. Equilibrium is the “one set of planned activities” that allows all planned transactions to be carried out. (Kirzner, p. 4).

The objective of market process theory is to “understand how the decisions of individual participants in the market interact to generate the market forces which compel changes in prices, in outputs and in methods of production and the allocation of resources.” (p. 6).

Market participants make decisions (plans), many of which anticipate other participants’ actions. With imperfect knowledge, at the end of a given period, many individuals will find that their plans could not be carried out (too optimistic) or were carried out but failed to take advantage of more beneficial opportunities (too pessimistic). Through market participation, individuals see others’ actual decisions (often in the form of prices); gaining knowledge that causes them to revise their plans. This market process occurs even without change in the “data” or underlying conditions of trade.

With perfect knowledge, individual plans will be made so that none fail (from being too optimistic or pessimistic). The market process ceases (no adjustments occur), and equilibrium exists.

Analysis

Kirzner’s criticism of neoclassical equilibrium feature is based on his assertion that mainstream always assumes perfect competition and perfect knowledge. The Marshallian supply and demand curve simply reflects self-interested sellers looking for higher prices in order to offer more quantities for sale, and self-interested buyers looking for lower prices in order to purchase more quantities. Market participants conduct this bargain hunting with as much as their own knowledge, but no insistence of perfect knowledge.

In orthodox theory, competition and monopoly are situations; the theory models various market structures in equilibrium, labeling them ‘competitive’ or ‘monopolistic.’ The model of perfect competition is “the situation in which every market participant does exactly what everyone else is doing, in which it is utterly pointless to try to achieve something in any way better than what is already being done by others, and in which, in fact, it is not necessary to keep one’s eyes open to what the others are doing at all.” (p. 90) An obstacle to competition is any deviance from the assumptions of the perfect competition model.

The layman’s definition of competition is the opposite, a rivalrous process of trying to do better than one’s competitors. The market process theory’s definition of competition is closer to the layman’s; competition is “the active process of offering the market opportunities which one believes are better than those others are able or willing to offer.” (p. 96).

In market process theory, an obstacle to competition is anything that prevents participants from offering opportunities to the market (restricted entry). The only possible barriers to entry are the use of force (including government restrictions) and monopolized access to some resource. Pure entrepreneurship is always competitive because it requires no resources.

In orthodox theory, monopoly is a firm’s monopoly over a product. The concepts of the firm and the industry are essential, and substitutability of products raises problems. Monopoly is present whenever a firm faces a downward-sloping demand curve. Monopoly is inefficient because it causes a smaller output to be produced than perfect competition would. Welfare appraisal requires looking at immediate allocation of resources.

In market process theory, monopoly is a resource owner’s monopoly over a resource. The mere fact that a producer is the sole producer of a given product, or that a producer faces downward-sloping demand, does not imply monopoly. A sole producer without sole access to a resource is under as much competitive pressure as anyone else. A monopolist could even face horizontal demand (for example, if he does not realize that the product produced with his monopolized resource is a superior one). At the entrepreneurial level, the demand curve is not a given, and so its shape is irrelevant. The industry and the firm are irrelevant to competition and monopoly, and competition and monopoly are irrelevant to the firm (which is an economizer).

Monopoly is inefficient in market process theory is it causes a resource to be underutilized. Welfare appraisal must consider the long-term effects of the monopoly on the market process. Monopoly does not capture profits, but rents. The monopolist need not product using his resource; he could instead hire out to the market (receiving a higher price than if he were not a monopolist).

Quality is an economic variable as much as price and quantity. Product differentiation may exist at any point simply because the market is not in equilibrium (just as more than one price may exist at one time), and not because of any lack of competition (as is claimed by orthodox models of imperfect competition). The orthodox model of monopolistic competition is inherently flawed because it assumes both product differentiation (leading to profits) and free entry (which should eliminate profits).

The results of assessing monopoly often depend on whether the short- or long- run is examined. Monopoly can result from initial endowments created by the institutional setting, in which case profits and disadvantages should be attributed to the institutions. Monopoly can be the result of entrepreneurial effort, in which case profits can be attributed either to the monopoly position (short-run view) or to the entrepreneurial effort (long-run view). A quasi-monopoly can be the result of an entrepreneur being the first to exploit an opportunity when entry takes time; in this case the entrepreneur has a temporary monopoly while others begin to assemble the resources to compete, and this monopoly can be viewed the same way as the entrepreneurially-gained monopoly.

Kirzner’s assertion that neoclassical always insists on instantaneous equilibrium as a market phenomenon is not completely true. Neoclassical economists introduce market and natural prices to explain non-equilibrium condition and equilibrating tendencies of the market.

With perfect knowledge, everyone knows which offer is best, so that competition ceases, and equilibrium exists. With imperfect knowledge, profit opportunities exist in the market. All such opportunities consist of price differentials; a good (or bundle of inputs) can be bought at a lower price than it (or its product) can be sold. Entrepreneurship is alertness to unnoticed price opportunities. Entrepreneurs exploit these opportunities, and through competition with each other, eliminate them. The market process is inherently entrepreneurial because individuals learn from their participation in the market.

With perfect knowledge, there is no scope for competition or entrepreneurship. The theory of perfect competition, which assumes perfect information, has no relation to competition (the process), except possibly as the result of competition, after the process has completed its course.

Evaluation

Kirzner’s model as developed has shown that the assumptions on the basis of which the theories of competition and monopoly are based upon are insufficient and draws analysis away from reality. So his model as described in the book is based on the “market process” rather than “market equilibrium. (p. 212) He further asserts the importance of ‘welfare maximization’ and ‘social allocation’ which has been overlooked in the previous models. But once we look closely at the neoclassical market approach, we discover its many similarities with the Kirzner’s equilibrating tendencies of the market and its rivalrous competition condition. What surprises us is the lack of explanation from the neoclassical about the imaginative and creative forces of the market that has to destroy the old and build the new in order to maintain the equilibrating tendencies character. Therefore we conclude that the Austrian market process in general and the Kirzner’s entrepreneurial discovery specifically, instead of contrasting, actually complement and enrich the neoclassical and the mainstream approach.

Reference

Kirzner, I. M. Competition and Entrepreneurship, Chicago: University of Chicago, 1973.

Introduction

Economic theories have tried to ascertain the factors that can explain the need for foreign trade and the evolution of trade patterns. Economists have tried to provide various rationales for trade. David Ricardo believed that the presence of technological differences between countries leads to a comparative advantage. According to the Heckscher-Ohlin model, factor endowments such as labour, capital, and natural resources, leads to a relative situation that forms the trade patterns. More recent trade theories opine that larger countries with a strong economy will have an edge in exporting the goods that are consumed more in the domestic market (Chinn 2004). According to this theory, the trade cost is the greatest obstacle to trade. On the other hand, there are economists who believe that the quality of socio-political situation of a country influences its trade pattern. Evidently, there are numerous factors that have been considered as an influence on trade of a country. In this paper, I will look into the trade pattern of the United States with its top ten trading partners and ascertain what factors could have influenced them.

US Trade

For the analysis of the US trade data, we consider the countries with the largest amount of trade volume with the US. These countries are highlighted in the following table. The table shows that the largest amount of trade volume of the US is with Canada and the rest are given in the order of their amount of trade. The partner countries with the first ten highest trade volumes from 2009 through 2015 are considered for the analysis. The main export partners of the US are Canada, China, Mexico, Japan, Germany, South Korea, United Kingdom, France, Brazil, and Saudi Arabia. In percentage terms from 2010 to 2015, the US trade with Canada has been a large 22.5% of the total trade volume. Table 1 shows that trade with the top three countries has been a whopping 60% of the total trade volume from 2010 through 2015. Therefore, the main trading partners of the US undoubtedly are Canada, Mexico, and China. The other seven of the top ten countries have 26.05% of the total trading volume.

Table 1: List of Countries with Total Trade Volume in Descending Order (Own Calculations)

The percentage of exports to the total exports and that of imports for the top ten countries is presented in the following figure (see Figure 2). The graph shows that in 2015 for all the top ten trading partners, the exports has been more than the imports. This indicates that the US has a trade deficit in their trade balance.

Figure 1 shows the trade balance for the top trading partners of the US from 2010 to 2015. Trade balance is the difference between the bilateral exports and imports. A positive trade balance indicates a trade surplus while a negative balance shows trade deficit. The figure shows that all the top ten trading partners, except Brazil, have shown a negative trade balance from 2009 through 2015. Thus, the US has a trade deficit in trade with all the countries, except Brazil. The bilateral trade balance for most of the trading partners is negative, which is an area of serious concern for the policymakers. The bilateral trade balance has been highest for China. Further, it is observed that the trade balance for all the bilateral trades have increased except in Canada where there has been a minor decline in 2015. This indicates that the bulk of the total trade with China is imports and not exports. Therefore, the US market acts as a consumer.

The study of Figures raises one potent question – what is the reasons behind the widening gap between export and import in the US? It is essential to understand why the trade deficit in the country’s bilateral trade with countries like China, Mexico, Germany, and South Korea has continually increased. The factors responsible for the bilateral trade deficit are ascertained in the paper.

Analysis

The analysis concentrates on the trade deficit with the countries that show the highest trade imbalance and then it is extended to the other nine countries. In this case, we will study China as the primary bilateral trade partner as it shows the US has the highest trade deficit with the country. Though, the reason for the bilateral trade deficit may be different for different trading partners, but the main issue of the lack of exports to the countries and the need to import is almost same. Hence the study of one country can easily be generalised for other trading partners.

An analysis of the historical trade balance of goods and services from 1960 through 2015 shows that the balance for services and goods trade has been positive in the US till the early 1970s (see Figure 3). However, the services sector started becoming stranger since the 1970s and the trade balance for goods started to become negative. This shows that more goods are imported in the US. The gap has increased significantly since 2005 (US Census Bureau 2016). Why there has been a widened gap in the two balances? One plausible explanation is the fall in manufacturing in the US. As goods are products manufactured or produced in the country, the data shows that there has been a fall in the amount of tradable goods. The reason for this decline can be two-fold – first, a fall in production and a second a rise in domestic demand for the goods provided production remained the same. Evidently, there has been a gap in the production and export. There has been a fall in manufacturing output in the US, which has reduced the amount that can be exported. The widening gap between goods and services trade balance indicates that there has been a fall in the demand for the goods in international markets produced in the US. The rising trade deficit of goods has become the primary reason for the rising trade deficit of the country. What might be the reason that could contribute to the fall in demand for US-made goods in the international market? One reason for this rising imbalance is the proliferation of Chinese-made goods in the international market. This is discussed in greater detail in the following paragraphs.

China is so important in the study of US trade patterns because the US trade balances have shown a deficit of more than a decade. The study of the top trading partners from 2010 to 2015 shows that the trade balance has been largest in the case of China. More specifically, it has been more than 45% of the total trade balance of the US. This shows that the trade deficit with China has been a strong influence in creating a deficit in the overall trade deficit. It was 45.2% in 2009 and has increased to 49.5% in 2015 (See Table 2). That is why it is essential to understand the reason for the increasing gap in the export and import in the bilateral trade between the US and China.

Table 2: US Trade Balance with Bilateral Partners as a Percentage of Total Trade Balance

Trade with China has resulted in skewed trade balance for the US (Bown et al. 2005). The reason is the rise in imports from China. When we look at the comparative advantage trade theory presented by Ricardo, it is observed that it is more profitable to produce in a country where labour is cheaper (Bown et al. 2005). For instance, if we want to produce a sports shoe, it is cheaper to produce in China because labour is cheaper. Thus, low cost of labour reduces the production cost, thus, making production more profitable. In case of sports shoe manufacturing, the US-based manufacturers have shifted their manufacturing bases from the US to China, thus, reducing their manufacturing cost. However, these sports shoes produced in China are then imported to the US as fresh products, thus, increasing trade imbalances with China (Bown et al. 2005). The trend has been mostly in the manufacturing sector. Now let us consider the causes for the high trade deficit between the US and China. The main goods that are imported from China by the US are consumer goods, machinery, and clothing (Autor, Dorn & Hanson 2013; Amadeo 2016; Chinn 2004). Many US-based manufacturers send raw material to China where the vendors produce the products at a lower cost (Baily & Bosworth 2014). However, the materials that are exported to China are priced lower than the finished products that are imported from China, thus, creating the trade imbalance. The cost of production in China is lower due to the lower standard of living and higher value of US dollar (Amadeo 2016).

Autor et al. (2013) have shown that the Chinese labour market has been a serious factor that has affected US manufacturing and ultimately US imports. Thus, trade from labour-intensive country like China has resulted in a trade imbalance in the US. They point out that in the 1990s, the US trade with low-income low-wage countries has been just 9% of the total trade. However, in 2000 it had increased to 15%, which then increased to 28% in 2007, with China contributing to 89% of this growth (Autor et al. 2013). Thus, import competition for the US industries has continually increased.

Krugman (2010) points out that the undervalued Chinese currency has resulted in its advantage as a desired country for outsourced manufacturing. Krugman argues that China has deliberately kept the Renminbi undervalued in order to increase its attractiveness as a manufacturing destination, and has been manipulating their exchange rate in order to gain competitive advantage in international trade.

The relationship between Chinese exchange rate and the US trade balance has been studied by Yue and Zhang (2013). The argument presented by Yue and Zhang is that if the trade deficit of the US was caused solely by the low exchange rate of the Chinese currency, then the deficit should have reduced when there is a rise in the exchange rate. However, this does not happen, showing that the Chinese exchange rate is not responsible for the US trade deficit. Their study shows that there is no specific relation between the rise in the trade deficit with China and that with the fall or rise in the exchange rate of China and the US. Similar results have been found in the study conducted by Yuan (2014). Yuan argues that the American economists blame Chinese imports as the main reason for the trade deficit of the US. However, he has shown that even if there were no imports from China the US economy will still have trade deficit. The fact remains that China is a major importer and a main cause of the trade imbalance in the US.

Mann and Plück (2007) point out that the income and relative price elasticities in the US, which differ by trading partner and commodity. The results show that there has been a persistent trade difference between the US and its trading partners depending on the commodity that is exported or imported and the reason is the difference in price elasticities of the products.

Conclusion

The study shows that the top ten trading partners of the US in Table 1. The study also shows that the main reason for the trade deficit of the US is the disadvantage it gains from its high exchange rate value. Further, the other reason that we have shown is the decline in the goods export in the US, which is presumably due to the fall in the manufacturing in the country (Baily & Bosworth 2014). Thus, the gap between goods and service trade shows a potential reason for the large trade deficit. Further, the study of the top ten trading partners of the US shows that even though Canada is one of the largest trading partners, China affects the trade deficit more than any other country for the trade volumes with China is mainly comprises of imports from the country. To summarise, the factors that affect the US trade for the top ten trading partners are exchange rate and relative labour cost.

Reference List

Amadeo, K 2016, ‘Why Is the U.S./China Trade Deficit So High?’, The Balance, Web.

Autor, DH, Dorn, D & Hanson, GH 2013, ‘The China Syndrome: Local Labor Market Effects of Import Competition in the United States’, American Economic Review, vol 103, no. 6, pp. 2121-2168.

Baily, MN & Bosworth, BP 2014, ‘US Manufacturing: Understanding Its Past and Its Potential Future’, The Journal of Economic Perspectives, vol 28, no. 1, pp. 3-25.

Bown, CP, Crowley, MA, McCulloch, R & Nakajima, DJ 2005, ‘The US trade deficit: Made in China?’, Economic Perspectives, vol 29, no. 4, pp. 2-18.

Chinn, MD 2004, ‘Incomes, exchange rates and the US trade deficit, once again’, International Finance, vol 7, no. 3, pp. 451-469.

Krugman, P. 2010, ‘Taking On China’, New York Times, Web.

Mann, CL & Plück, K 2007, ‘Understanding the U.S. Trade Deficit’, in RH Clarida (ed.), G7 Current Account Imbalances: Sustainability and Adjustment, University of Chicago Press, Chicago, pp. 247-281.

US Census Bureau 2016, Foreign Trade, Web.

Yuan, T 2014, ‘The U.S. Trade Deficit with China: An Excuse’, in SpringerBriefs in Business, Springer, Heidelberg, Germany, pp. 77-94.

Yue, K & Zhang, KH 2013, ‘How Much Does China’s Exchange Rate Affect the U.S. Trade Deficit?’, The Chinese Economy, vol 46, no. 6, pp. 80–93.

Monopolistic competition is a situation in the market where there are multiple sellers with similar but differentiated products. These products are substitutes as they perform similar functions with the point of difference manifested in terms of branding, packaging, or any other form of differentiation capable of attracting consumers.

This type of competition in the market is also characterized by easier market entry and exit for operators. The existing operators have cut their own niches and do not resort to restrict new market entries as they in no way present challenges to their market shares. The operators are also free to set the prices of their products irrespective of the competitors’ moves or reaction as the competition is based on non-price related factors (Deneckere and Michael, 1992).

Monopolistic competition is best represented by the motor vehicle market. In a situation where there are many manufacturer selling cars, they will each have their own market segments depending on the nature of the differentiating factors they have incorporated into their products. The basic function performed by these cars is to move the users from one point to another. However, there are users who will prefer either fast, comfortable, four wheel drive, or even different colors for their cars. The manufacturers will differentiate the cars according to these factors in order to gain competitive edges to attract particular customers.

In figure one above; the operator is initially experiencing high demand which is represented by the average revenue curve. As more competitors gain market entry, they will offer substitutes to the operator’s goods. Assuming the operator’s product is not differentiated further the new demand will now be at the marginal revenue curve showing a decrease in demand due to loss of customers to competitors.

External costs and benefits

These are the third party effects that arise in the course of production and consumption of output and which are not accounted for. This is simply because they are felt by individuals outside the market in terms of the spill over effects. External costs are those that are incurred by parties outside the market for which they are not compensated for. On the other hand external benefits are those that are enjoyed by parties outside market and for which they do not pay for (Murty and Robert, 2005).

External costs can take the form of pollution by an industry caused by emission of toxic gases into the atmosphere. When this happens, there are various consequences that are felt by third parties. The toxic gases lead to acidic rain which corrodes iron roofs as well as destroying forests. Furthermore they also harm the ozone layer which leads to exposure to direct sun rays that can result in skin cancer. These costs are incurred by parties that did not participate in the initial activity that caused them (Pannell, 2008).

On the other hand, external benefits can best be explained by the effects that research and development programs have on people’s lives. Normally very few people engage in or contribute to research programs. In the event that these programs yield quality innovations, the effects will be felt by the entire market should the researchers chose to make them public or decide to capitalize on them. A research program that introduces an energy saving electrical appliance presents benefits to third parties that were not involved in the program.

In the above diagram, the price of the commodity in the market is represented by P1 and quantity consumed is Q1. at this level, the market mechanism fails to recognize the extra costs that are not charged to consumers but passed to society in terms of pollution. The optimal price should be at P2 to acknowledge these costs to society. At this level the quantity consumed ought to be Q2 which is less than what is consumed. The shaded region represents the total loss to society.

A mixed economic system

Mixed economies also known as dual economies are those that have blended the functioning of private enterprise with control by the government. The private entrepreneurs are free to engage in activities in the market at their own discretion. Their actions are however controlled, and not coerced, by the government to ensure the efficient functioning of the system in the form of regulations and taxes (Mixed economy a failure, 2011). In such economies the government might also have the monopoly in some areas that are essential for the public good but not profitable for private entrepreneurs such as conventional education, health care, and postal services.

Like many other developed economies, the US is a perfect example of a mixed economy system. There is the spirit of free enterprise with many multinationals such as Apple Inc, the Coca Cola Company, PepsiCo, and Intel based in the country. The production capacities are mainly owned by the private sector individuals. Furthermore these individuals’ activities are governed by the government through its various agencies that are concerned with upholding regulations and collecting taxes.

In fig. 3 the government is represented by the central circle. This shows its regulatory efforts to the other activities such as infrastructure, transport, health, education, and house market which are undertaken by the private entrepreneurs. The government oversees all these activities are well undertaken to ensure that they are functioning well.

Price elasticity of demand and supply

Price elasticity of demand and supply can generally be defined as the market reactions to the changes in commodity prices. It is categorized mainly into two price elasticity of demand and price elasticity of supply.

Price elasticity of demand is the buyers’ reaction to changes in the price of commodities. Generally price of commodities and demand are inversely related except for luxuries and necessities. When the percentage changes in demand are larger than the changes in price the demand is elastic (Graves and Robert, 2006). When they are less that the percentage change in price, the demand is inelastic. The nature of the buyers’ reactions or changes in demand will mainly depend on the type of good in question. Luxurious items have inelastic demand simply because their consumers have high disposable income which can accommodate the changes. Necessities also have inelastic demand as they are crucial in life and consumers cannot do without them, changes in prices cannot deter their consumption. On the other hand normal goods have elastic demand as they are not important for survival and consumers can do without them if not seek substitutes.

The demand for normal goods such as televisions can be used to show this relationship. When the prices of televisions decrease consumers will increase their levels of consumption while on the other hand they will decrease their consumption when the prices increase. The demand for food which is a necessity will remain unchanged when the prices change which signals their inelasticity.

Price elasticity of supply shows the reaction of output to the changes in prices of commodities (Tom, n.d.). The level of output and price of commodities are directly related as suppliers often increase their output level in the market when the commodity prices are high. Therefore price elasticity of supply is elastic as the price changes lead to changes in output level. When the prices of cars increase in the market, motor companies such as Toyota and General Motors will increase their supply in the market in order to satisfy this high level of demand as well as make higher profits. On the other hand when the prices decrease, they will reduce their supplies into the market as the demand can be satisfied by the available if not less supply.

In fig. 4, D1 represents the P1Q1 which are the price and quantity respectively at the initial price level. When the price drops to P2 the quantity demanded on the resultant demand curve increases to Q2. At the initial demand curve the quantity consumed could have been Q3 which represents equal percentage change in demanded. But at Q2 the change in price has caused less change in quantity which shows inelastic demand for the product.

Opportunity cost

Opportunity cost in economics refers to the value of the foregone alternative (Magni, 2009). It is not regarded in the financial statement but is used in the decision making process. In a majority of cases relating to choice, there are often numerous alternatives that can be selected. In the event that they are mutually exclusive one has to settle on only one of them. By selecting a particular alternative, one has to let go of the others that are available. Therefore a rationale decision maker is one who will reduce the value of opportunity costs when settling on an alternative.

This can be shown in a farmer who has one acre of land and has two crops in mind; wheat and corn. The one acre of land can produce 500 sacks of wheat or 700 sacks of corn if he decided to grow the latter. Assuming that the price of a sack of wheat and that of corn is same, the farmer will rely on opportunity cost to make a decision. His profits will be much higher when he decides to grow corn as opposed to wheat. A decision to grow corn will have a low opportunity cost which is the value of wheat whereas a decision to grow wheat will have a high opportunity cost which is the price of corn.

Fig. 5 shows the relationship between two commodities, food and clothing. Their consumption is mutually inclusive which implies a trade off between the two products. When the consumer settles for point B, the food is 80 units whereas clothing is 120 units. In the event that the consumer could have instead opted to choose point C he would have consumed 115 units of food and 95 units of clothing. The difference between these two points is 35 units for and 25 units of clothing. This shows a 7:5 trade off respectively. The opportunity cost for increasing food consumption is therefore 7/5 whereas that of clothing is 5/7. It is therefore more economical to consume more clothing than food as the opportunity cost is less.

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Magni, Carlo Alberto. “Opportunity Cost, Excess Profit, and Counterfactual Conditionals.” Frontiers in Finance & Economics 6.1 (2009): 118-154. Business Source Complete. EBSCO.

“Mixed economy a failure.” Gale: Opposing Viewpoints in Context. EBSCO.

Murty, Sushama, and R. Robert Russell. “Externality Policy Reform: A General Equilibrium Analysis.” Journal of Public Economic Theory 7.1 (2005): 117- 150. EconLit with Full Text. EBSCO.

Pannell, David J. “Public Benefits, Private Benefits, and Policy Mechanism Choice for Land-Use Change for Environmental Benefits.” Land Economics 84.2 (2008): 225-240. EconLit with Full Text. EBSCO.

Tom, Finkbiner. “Supply, Demand and Price Elasticity.” Journal of Commerce (n.d.): ProQuest: ABI/INFORM Complete (XML Gateway). EBSCO.

Market structures

Perfectly competitive markets have a large number of small firms acting independently. In addition, firms produce homogenous products, there is the ease of entry, and all market participants have perfect market information. (Layton, Robinson & Tucker, 2009). On the other hand, monopolistic competition is characterized by a large number of small firms and buyers, differentiated products, free entry and exit, and intensive advertising (Hubbard, Garnett, Lewis & O’Brien, 2010). Lastly, oligopoly market structure is characterized by few but large firms, barriers to market entry or exit, strong mutual interdependencies, aggressive advertising, and undifferentiated (Hubbard, Garnett, Lewis & O’Brien, 2010).

Real-life examples

The cement manufacturing industry in Australia is a good example of an oligopoly market. Companies in this industry include Adelaide Brighton Cement, Cement Australia, and Boral. They produce identical products and come together when making pricing decisions (Cement Industry Federation, 2014). The greengrocer retailers in Sydney, Australia, are good examples of a perfectly competitive market. They offer homogenous products and have no barriers to entry or exit in the market. On the other hand, the soft drinks companies in Australia are monopolistic. These companies include Schweppes, Berts Soft drinks, Coca-Cola, and Lion Pty among more others.

Long-run equilibriums

Monopolistic firms make supernormal profits in the short-run. Supernormal profits provide an incentive for new firms to enter the market. As the new entrants continue to enter the market, the quantity supplied increases as the market price decreases. This goes on until the firms start to make normal profits. This is the point where the MC=MR. It is at this point that a monopolistic market is said to have reached its long-run equilibrium. The graph below illustrates the monopolistic market long-run equilibrium (Hubbard, Garnett, Lewis & O’Brien, 2010).

In a perfectly competitive market, economic profits provide an incentive for new firms to enter the market. This causes an increase in the supply of the product in the market. The increased supply causes the market price to fall. The market price falls until the firms in the market start to make economic losses. At this point, the firms are making zero economic profits. In the long-run, the economic losses make the firms to exit the market. This is the point where MR=MC=D=P. The graph below illustrates the long-run equilibrium in a perfectly competitive market. (Hubbard, Garnett, Lewis & O’Brien, 2010).

Oligopolistic firms use prices to remain competitive in the market. When a single firm increases its prices, other firms maintain their prices. The demand for goods falls after the prices are increased, and hence affects its revenue. The oligopolistic firms then decrease their prices, causing others to follow suit. An equilibrium quantity and price are achieved at the kink. This is the long-run equilibrium of an oligopolistic market (MR=MC) (Hubbard, Garnett, Lewis & O’Brien, 2010).

Consumer outcome

The monopolistic competition offers the best outcome for consumers. First, it is associated with innovative behaviours (Gillespie, 2013). Firms have to differentiate products to gain a share of the market. The consumer benefits because high-quality products are made available at competitive prices.

Producer outcomes

A perfectly competitive market offers the best outcomes for producers (Gillespie, 2013). The free entry in the market increases the demand for inputs. Producers produce the inputs in mass. In the end, they enjoy the decreased costs of production and increased revenues.

Real GDP components

The net export component is the first real GDP component, which is discussed in the article. According to (Jackson, Mclver & Bajada, 2007), net export refers to the difference between exports and imports of an economy. In 2013, the Italian exports were forecasted to increase by an annual rate of 2.1%. This was anchored on the increase in demand for the Italian goods by the non-EU trade economies. On the other hand, net imports declined by -1% in 2013.

Private consumption is the second component of the real GDP. It refers to the market value of goods and services purchased by households and firms (Jackson, Mclver & Bajada, 2007). The annual percentage change in private consumption in Italy was expected to shrink by -2.0% in 2013 due to the declining household disposable income. Third, public consumption component of real GDP refers to the current and capital spending by a central government. In 2013, the annual percentage change in public consumption in Italy was expected to decline by -2.0% (European Commission, 2013).

The investment component of the real GDP refers to either public (government) or private (households and firms) investment in instruments within an economy (Jackson, Mclver & Bajada, 2007). The investment in Italy was expected to decline in 2013 due to the tight financing conditions that were experienced in the country. The gross capital formation that was projected to decline by -3.0% attributed to a -2.4% decline of equipment investment (European Commission, 2013).

Private and public consumption and investment determine the domestic demand for goods and services. Domestic demand was forecasted to decline by -2.0%. On the other hand, net exports were forecasted to contribute to the annual change in GDP by 0.9%. The aforementioned components resulted in -0.1% annual change in GDP.

AD/AS model

Model explanation

The model above represents a full-employment equilibrium of the Italian economy (Jackson, McLver, McConnell & Brue, 2007). The equilibrium price level is $109 billion, and the real GDP is $1000. On the other hand, the potential GDP is $1150 billion. The real GDP is less than the potential GDP. This results in a recessionary gap of $150 billion.

Fiscal policy

There will be an excess supply of labour in the economy if a fiscal policy is not pursued. This will lead to unemployment and a decline in costs and wages. To address this problem, expansionary fiscal policy tools such as transfer payments, taxes, and government purchasing can be used to close the recessionary gap (Jackson, McLver, McConnell & Brue, 2007). An increase in government purchasing and transfer payment, coupled with tax cuts, will increase disposable income within the economy. This will stimulate consumption, hence shifting the AD to the right.

Self-correction

In the long-run, there will be an economic self-correction to close the recessionary gap. Wages and other production resources will decline (Arnold, 2010). Resource market imbalance will also be eliminated. The short-run AS will increase. The intersection of SRAS, AD, and LRAS will determine the equilibrium point. The economy will be at full employment at this point. The intersection point is the long-run equilibrium. The graph below represents this scenario.

The outcomes of self-correction are good because fiscal or monetary policies can cause business cycles that may be worse than the current situation. In addition, these fiscal or monetary policies may be prone to time and variable lags, and hence destabilize the economy of a country. Therefore, there is no need for monetary or fiscal policies (Arnold, 2010).

List of references

Arnold, RA 2010, Macroeconomics, South Western Cengage Learning, Mason, OH.

Cement Industry Federation 2014, Australia’s Cement Industry. Web.

European Commission 2013, European economic forecast winter 2013, European Economy, No. 1. Web.

Gillespie, A 2013, Business economics, Oxford University Press, London.

Hubbard, RG, Garnett, AM, Lewis, P & O’Brien, AP 2010, Essentials of economics, Pearson, French Forest, Australia.

Jackson, J, Mclver, R, & Bajada, C 2007, Economic principles, McGraw Hill, North Ryde, Australia.

Jackson, J, McLver, R, McConnell, & Brue, S, 2007, Macroeconomics, McGraw Hill, North Ride, Australia.

Layton, AP, Robinson, TJC & Tucker, IB 2009, Economics for today, Cengage Learning, South Melbourne, Australia.

People are very concerned with the rise in prices. Sometimes it is difficult to control this rise and goods that were cheap yesterday may be expensive today. The rise of prices influences all economic spheres and there are certain factors that cause it.

This rise also influences the prices of tickets for Broadway Shows. The tickets have risen 31 percent since 1998. According to Hal R. Varian, there are certain dynamics of pricing tickets for Broadway Shows. The rise in prices may be caused by a great number of discounts. It should be noted that people attending Broadway Shows belong to different social classes and have different salaries. There are rich people who buy the tickets whether they cost $30 or 60$. Their visit of the show does not depend on its price. They buy expensive tickets not to queue up for the cheaper ones. There are also poor students and unemployed people who cannot afford themselves such expensive tickets and they use different discounts provided for these groups of people. It should be taken into account that tickets in a theater-like the tickets on a plane are highly perishable as far as there are not two opportunities to sell these tickets. If the tickets are not sold they cost nothing.

Sports tickets have nearly the same situation. According to Charles Stein when the supply is limited and demand increases the prices rise and people are ready to pay more than these tickets really cost. The process of reselling tickets is known as SCALPING. People who want to watch the game do not regret their money and they are ready to buy sports tickets at any price. Some people make a business from scalping. They buy tickets beforehand and sell them more expensive. In this case, the prices for the tickets cannot be controlled. This process is known as PRICE DISCRIMINATION.

Sometimes, the rise of prices is caused by MONOPOLISTIC COMPETITION. Jeff Jacoby provides a good example connecting with the prices for bottled water. When tap water has become undrinkable people begin to buy bottled water. In the situation of MONOPOLY, when there is only one vendor who has stable MONOPOLY’S PROFITS the prices are unchanged. With the occurrence of another vendor who increases the price for the water wanting to have more profits, the first vendor also has to increase the price and as a result, the prices rise as a result of MONOPOLISTIC COMPETITION. There is a certain rule in the rise of prices. When demand intensifies, the prices rise and as prices rise suppliers work harder to meet demand. For example, some hotels used the situation to make money when people whose houses were destroyed with Hurricane Charley needed a place for overnight stay. Taking into account that these people need shelter and they were ready to pay the last money hotels increased the prices for rooms. As a result, these hotels were blamed in price gauging.

There are certain rules that control such situations at the market. This means of control is called PRICE CONTROL. Nevertheless, these means of control may hamper economic development. For example, an “anti-gauging” law in North Carolina considers it illegal to sell goods “at a price that is unreasonably excessive under the circumstances”. This law limits price rise but it makes it unprofitable for other countries to sell goods to North Carolina.

From the above said we may conclude that there are different factors that cause the rise of prices. Sometimes the rise of prices is justified and sometimes it is illegal but people use different means to make money and even the grief of other people does not stop them.

Introduction

Competition refers to contention or struggle to gain superiority in a commercial setup thus creating rivalry among parties. A competition policy aims at promoting competition for the welfare of consumers. The competition policy of the EU was established in Treaty of Rome in 1957 and is governed by articles eighty one to eighty nine. In addition, the merger regulation or Council Regulation 139/2004 also governs the EU competition policy.

The policy’s rationale is to enable companies to have equal level of competition it every European Union Member State. The competition policy acts as a guide to the European Commission in assessing its decision making.

Therefore, this has enabled EU to become powerful to guide competition strategies over firms. EU has gained power over price fixing, dominance of firms and trade agreements. The policy is facilitated by European Court of Justice and Directorate-General for Competition which is the part of the European Commission. EU member states have to adhere to the rules and cooperate through the aid of European Competition Network (ECN) (EU, 2004).

They do this by offering essential information on decisions and cases, coordination of investigations and documenting evidence. With the help of ECN, EU is able to attain an effective mechanism through which it is able to counter firms involved in breaching the competition policy. The main aim of ECN is ensuring that the EU competition law is consistently applied in all member states. It has continued to pursue and prosecute firms that breach competition law (McCormick, 2008).

The competition policy has enabled the EU to acquire power over takeovers, mergers, state aid, and cartels. It has achieved a single market operation in Europe through transparency, compatibility, and fairness in standardizing its regulatory framework. Its competition policy strengthens its leadership and enables it succeeds in open market operations among its member states. Its free market policy has had its impact and has developed and gained a world wide relevance.

Single European Market policy significantly affects the conduct of businesses in Europe and other parts of the world as well. Competition policy has profound meaning globally especially for increased linkages and multi-jurisdictional mergers that has existed between the United States and Europe through businesses cross-ownerships (McCormick, 2008). Moreover, the economic integration has seen the rise in the Europeans living standards.

The paper discusses major EU competition policy such as merger control, antitrust, monopolies and state aid limitation as well as it impact to its member states and international trade associations. The EU legislation encompasses trade associations since they are the foundation in which information is gathered. The European Commission could subject the trade association to even up to a hundred percent fine of previous financial year’s total turnover acquired if involved in breaching EU competition policy.

EU Competition Policy

Monopolies

Large firms may dominate the markets and abuse other firms since they have a higher economic strength which enables it to take actions inconsiderate of consumers or competitors. It is this reason as to why EU considers it illegal for firms to take advantage of their dominance to abuse others.

It may taken several forms which include exploiting consumers due to unreasonably high prices, charging unreasonable low prices to kick out competitors from the market or make it hard for them to venture the market, trade ,partners discrimination and putting trading conditions that are unjustified on partners.

This is prohibited by the EU competition law was illustrated by the Microsoft case which was accused by European commission of data overcharge which is essential for its competitor. Microsoft was restrained by European Commission from abusing its position to suppress others in the market and penalized it heavily for the breaching of law.

Cartels

A cartel refers to a group comprising same companies that are independent and join to divide markets control, prices and puts limits to competition. Cartel participants may not need to offer new products or even provide quality services because they can rely on agreed market share. Eventually, consumers may have to pay more for products or services that are of less quality. For this reason, cartels are illegal according to EU competition law. Since they are illegal, they are more secretive and hard to point out.

The EU competition law disregards restrictive agreements which include price fixing, exclusive distribution, predatory pricing, and all anti-competitive strategies which adversely affect Single market operations. Cartel policy entails vertical and horizontal agreements between companies present in the supply chain. The European Commission has engaged min about thirty five cartel decisions and fines imposing on firms in the recent past (McCormick, 2008).

State Aid

A state aid is governmental support which may facilitate a firm to gain unfair advantage with respect to its competitors. The competition policy regulates the handouts from the government that are aimed at facilitating firms to gain unfair advantage over other companies thus distorting competition among the member states. Government holdings, guarantees, tax reliefs, fiscals, and grants are examples of State aid and are considered illegal.

If state intervention has an effect on trade among members of the union, is selective on particular sector or companies, and distorts competition, then, it is illegal according to EU Competition law. All the same, State aid, is not prohibited if it is geared to support public policies e.g. industrial regeneration. The European Commission investigates and assesses legality of all state aids. In case a state aid is declared as illegal, the European Commission then orders the involved member state to recover those finances (Roger & Eleanor, 2006).

Mergers

Mergers involve combining practices of other companies to allow a company to have declined production cost or efficient development of a product. They enhance consumer benefits and competitiveness in the market by offering products that are of higher quality at reduced prices.

Nevertheless, there are mergers that are aimed at reducing market competition by dominating it which harm consumers by less innovation and higher prices. The Single Market created by European Union offers increased competition as well as globalization which attract mergers. They are allowed only when they facilitate European industry competitiveness and do not impede it. This in turn is reflected in the lifestyle of EU member states that gain a higher living standard (McDonald & Dearden, 2005).

It is the responsibility of the European Commission to approve mergers, joint ventures, as well as acquisitions engaged by firms with defined and certain turnover to avoid monopolies or market dominance for a Single Market.

This is facilitated by the Council Regulation 139/2004 which controls the mergers, joint ventures and acquisitions proposed for firms with more than EUR 5 billion globally or that of EUR 250 million in the single market. European Commission assesses possible impacts and avails solutions for the involved parties. Most of the mergers are however approved in most instances and only a few are disapproved.

For instance, the European Commission disapproved a merger involving Honeywell and General Electric in 2001 which are US based companies in n Europe. EU had a parallel jurisdiction on the businesses irrespective of them being approved by American Authorities based on n the fact that the merger would create a horizontal monopoly which would stifle competition (Mario, 2009).

Impact of EU Competition Policy

Extraterritoriality

In essence, the Competition policy is applicable to member states of European Union. However, extraterritoriality guidelines were established to encompass the firms which have no affiliates in EU Single Market. The principles enable firm’s prosecution in a case where their anticompetitive engagements have effects on EU market irrespective the country the firm operates. For instance, the case involving the wood Pulp in nineteen eighty eight implemented the extraterritorial guidelines.

Companies from Canada, US, Spain, Portugal and Norway had colluded on prices thus breached Competition Law of the EU which affected its Wood Pulp Market. Defendants argued that EU had no mandate over the countries since they were not member states. However, European Court of Justice disregarded the claims based on the effect of price collusion not nationality or location. The competition law emphasize that what is essential is not the location of the agreements taken bit the place it is implemented (Mario, 2009).

Trade Associations

The sectors that are prone to breaching EU Competition law includes first, Information exchange which involves collection of statistical information, opinion exchange, market research, benchmarking and economic assessment. This may lead to more market transparency and may enhance competition through lower prices and improved products. It is the responsibility of trade associations to ensure transparency levels don’t exceed thus exposing vital and confidential, information in relation to transactions and member companies.

Secondly, when comparing and sharing member’s best practices, it is the role of trade associations to ensure that experiences exchange may not eventually lead to coordinated market practices by members such as similar pricing. Third, trade association members may agree on aspects that may breach EU competition policies during a meeting which may lead to fining of the association for enhancing a forum in which there results to infringement.

It is therefore the role of trade associations to facilitate avoidance of suggestions or spontaneous remarks which may suggest a joint market practice. Forth, the trade associations may offer recommendations that may result to a uniform market conduct from members facilitating infringement of policies guiding competition as stated by the EU. Fifth, Association may offer discriminative rules to its members which, may prohibit of restrict termination of membership or access to membership triggering competition concerns.

Finally, it is the role of trade associations to update its members on developments and issues essential in the industry. The association may make statements which might cause members to terminate business operation with particular parties. It may be taken as boycott by European Commission which may be a case of infringement of competition law (Roger & Eleanor, 2006).

Trade associations should be well aware that they could be fined a hundred percent of overall turnover gained in previous fiscal year due to breaching competition law as stipulated by the European Union. Global marketplace is beneficial, but may as well result to challenges while trying to comply with foreign jurisdictions which may be very costly. Impact of EU competition policy is experienced globally.

Liberalization

Opening up monopolized markets such as energy, transport, telecommunication, and postal services to competition is referred to as liberalization. Member States of EU enjoy international competition which allows the consumers to have a diversified choice of products and services.

Competition has enabled consumers to enjoy lower prices, new, improved, and efficient products, as well as services making the overall economy competitive. There has been a freedom of choice enjoyed by consumers which n raise their living conditions. This would not have been achieved if the consumers are harmed by unfair competition existing in the market.

New markets opened provide public services under regulations aimed at protecting consumers. Single Market as a major EU achievement but has to be reregulated by enforcing more rules. Consequently, among other advantages, low cost airlines have emerged in Europe due to the European commission opening the airline sector to competition.

These services are affordable and are enjoyed by European consumers. In addition, the European Commission’s intervention in liberalizing the market has benefited the consumers in Germany and France by allowing them to benefit from the now competitive gas market (McDonald & Dearden, 2005).

Conclusion

Competition is essential in enhancing economic growth given that it ensures that companies operate more efficiently. Moreover, competition policy, being a cross-border aspect, running it at European level is essential and significant in progress of globalization. However, competition may exploit some essential industries such as nuclear power, healthcare, and defense and therefore it should not be encouraged in these cases.

Moreover, the European Commission has engaged fiercely in pursuit of those cases that are beyond its jurisdiction which n eventually dilutes European Union’ s authority. Finally, the extra costs for businesses and taxpayers are uncalled for which are incurred while the EU engages in assessment of problems. All the same, healthy competition is crucial in generation of new products, services, and strategies by firms.

The EU competition policy involves strict adherence to rules for fair competition and encourage innovation and ensure that consumers acquire quality and affordable products. It is the role of the European commission to control trade amongst the members of the European Union. It achieves this by imposing heavy penalties on the parties involved in breaching of its competition laws and keeping on guard to ensure the laws are followed.

In a free-market, competition is inevitably high and businesses may look for strategies to avoid it by trying to kick competitors out. In that case, the European Commission has acted as a referee ensuring that there is fairness in the market. Other firms may combine forces in the market to harm consumers or else reduce competition.

The European commission examines them and their motive and either approves or disapproves them. The European commission has significantly been instrumental in market liberalization which enables consumers to access services at ease and with affordability. Is of great importance that there is fairness in competition for all member states. The free trade and liberalization of market may trigger the state to promote national industries by offering g them public resources.

This may end up disfiguring effective and fair competition for member states firms which eventually cause harm to the economy, a reason why state aid is closely monitored by the European Commission. Therefore, the role of EU competition policy in the economy cannot be ruled out and should be emulated by other trade unions across the world to encourage the process of globalization and economic growth (EU, 2004).

Reference List

European Union (EU). 2004. EU Competition Policy and the Consumer. Luxembourg: Official Publications of the European Communities. Web.

McDonald, F. Dearden, S. 2005.European Economic Integration. United Kingdom: Prentice Hall Financial Times.

McCormick, J. 2008. Understanding the EU: A Concise Introduction. 4th ed. England, United Kingdom: Palgrave Macmillan.

Mario, T. 2009.The European Union and Global Governance. New York: Routledge, Taylor & Francis e-library.

Roger, C. and Eleanor, M. 2006. New Developments in UK and EU Competition Policy. United Kingdom: Edward Elgar Publishing Limited.