TAILIEUCHUNG - Microeconomics for MBAs 48

Microeconomics for MBAs 48. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 14 Business Regulation 14 Regulation of Destructive Competition Another argument for government regulation is based on the existence of destructive ruinous or cutthroat competition. In direct contrast to the natural monopoly situation where there is a shortage of competition the destructive competition argument centers on a surplus of competition. In industries specialized as to location or purpose where there are high sunk costs in assets coupled with low operating costs short-run bouts of intensive and perhaps destructive price cutting may emerge. Presumably excess capacity triggered cutthroat competition in the early days of railroads. Competition among electric utilities who must transmit power through wires could mean several sets of power lines running down city streets creating an environmental mess. This may be an argument for a government protected and regulated monopoly on the transmission of electricity but it has no bearing on the need for regulation of the generation of electricity. The interstate pipelines for gasoline products are regulated but there is competition among producers and refiners. Even if there were only one refiner it would have to base its pricing decisions on what other firms might do if it tried to extract monopoly profits. The generation of electric power can be organized in a similar way. Duke Power which serves parts of North and South Carolina has proposed such a reorganization. As one of the nation s most efficient producers of electricity Duke stands to expand its market share under a competitive system. Regulation of prices is sometimes advocated as a safety measure. Some firms for example airlines and nuclear power companies under competitive pressure to control costs may cut corners on safety. Regulation that keeps prices above competitive levels can induce such firms to compete in other ways in terms of food quality size of seats or flight safety for instance. Thus regulation can be seen as a means of correcting an

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