Regulation of Markets

2 Key excerpts on "Regulation of Markets"

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  eBook - ePub

  The German Economy

  Beyond the Social Market

  • Horst Siebert(Author)
  • 2014(Publication Date)
  • Princeton University Press

    (Publisher)

  CHAPTER EIGHT Regulation of Product Markets

  The Regulation of Markets is an important aspect of German economic policy. We have already seen how it affects the labor market, including the considerable impact that the social security system and social welfare have on unemployment. The institutional setup of other important factor markets, the market for financial and physical capital, and the market for human capital, are still to be discussed. Environmental policy, the topic of the next chapter, is another relevant aspect of regulation, one that is somewhat idiosyncratic to Germany. In this chapter we consider the regulation of the product market. This relates to product market restraints that firms have to take into account and to the impact of these regulations on the economy. It also relates to the interdependence of product and factor market regulation. Establishing restraints for producers is one form of government intervention in product markets; the other—quite opposite—government activity is opening up markets and keeping them open. The latter aspect deals with the privatization of public monopolies and the establishment of new property rights for the network industries and competition policy. Here, as in state aid, the European Union plays a major part in defining the framework of the product markets.1

  ATTITUDES TOWARDS REGULATION

  Germany has a history of regulation. Traditionally, the government has played a strong role in setting the institutional rules and implementing them. Administrative law, police law, and business law with respect to licensing of products, machines, and buildings have developed their own systematic philosophy, from which it has followed more or less naturally to extend such a frame of reference into additional regulations. Things have to be orderly. In spite of the devastating experience of central planning and of utmost regulation in eastern Germany, with a loss of economic and personal freedom, quite a few Germans, probably a good majority of them, have a paternalistic view of the state as overseer and solver of problems. This is in stark contrast to the basic assumption that the cornerstone of the institutional setup of a democratic society is individual liberty, which should be restrained only if the freedom of one individual hurts the freedom of another. When these attitudes prevail, and when the state is seen as being paternalistic, looking after its citizens like a pater familias

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  eBook - ePub

  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  Economics emphasizes the principle of comparative advantage and the value of free trade. Comparative advantage suggests that all countries should allocate their efforts to those goods or services for which development efforts are most productive at the margin. In some cases, protecting or encouraging domestic production, through mechanisms such as subsidies, can impose excess costs on certain sectors or on the broader society. Any potential benefit associated with the subsidy should be compared with the potential distortion created by the government subsidy and the efficiency of the transformation between products. Basic economic principles focus on avoiding the distortion associated with the relative pricing of products because of the underlying transformation process. Similarly, restricting foreign ownership or imposing capital flow restrictions can provide some protection to a domestic economy, but these come at a cost.

  Interestingly, whereas in a global context an implicit regulatory goal of government may be to restrict competition from other countries, in a domestic context a regulatory goal is to promote competition (this goal can alternatively be viewed as monitoring and preventing activities that restrict or distort competition). There are several dimensions to this goal. Regulatory approval is typically required for mergers with and acquisitions of major companies. Regulators can effectively block a merger or acquisition, or suggest remedies to resolve a perceived issue (for example, divestiture of particular segments of the businesses to resolve an antitrust issue). When there are competing bids, the actions of the regulator can effectively decide the outcome based on the regulator’s assessment of the effects of each bid. Considering the expected response of regulators on competition or antitrust grounds is a central aspect to the evaluation of mergers and acquisitions. An important question to consider, as is done by the regulators, is whether the merger will lead to the monopolization of particular markets and, if so, whether there are ways (such as by divestiture of specific geographic, product, or other segments) to avoid the particular problem.

  Competition and antitrust laws also typically prohibit abusive and anticompetitive behavior, such as collusion on prices by companies that dominate a market. Some of the types of behavior that are problematic (beyond mergers that create monopoly power) include exclusive dealings and refusals to deal, pricing discrimination, and engaging in predatory pricing. In response to antitrust issues, regulators not only may impose monetary sanctions but may require companies to alter their business (for example, divest portions or change operating/marketing practices).

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