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MODULE 9
THE ROLE OF GOVERNMENT

I. Introduction

This module entitled The Role of Government is all about the different functions of the
government and their roles in business; their influence to consumers and businesses;
and the importance of competition in the economy as a whole.

II. Objectives
At the end of the end of this module, students should be able to:
1. Explain the different economic functions of government;
2. Understand the role of government in business;
3. Discuss the influence of government to consumers and businesses; and
4. Discuss the importance of competition in the economy as a whole.

III. Lecture

THE ROLE OF GOVERNMENT

"Every individual ... neither intends to promote the public interest, nor knows how much
he is promoting it... he intends only his own gain, and he is in this as in many other
cases, led by an "invisible hand" to promote an end which was no part of his intention."

The above quotes is taken from the bible of Economics, "The Wealth of
Nations" written by Adam Smith. For a time, the invisible hand came to represent
forces in the market at work. This was the basis for theorizing that for the broader
economy, government intervention is not wholesome. Everyone, it is believed, promotes
the overall good through the pursuit of individual welfare without intervention.

However, there are conditions to be met for the market and market forces to succeed.

1. There is full efficiency of market - no externalities. In the packaging and

labeling of products, third party assurances, usually government agencies and
regulations are necessary to ensure labels are truthful.

2. Externalities - These happen when buyers and sellers do not shoulder the cost
for the economic impact or costs of their business decisions and choices. The
environment damage caused by factory emissions is a glaring example. Regulators are
needed to make sure that such by products are handles properly and the cost of
disposal borne by the manufacturers. Without government interventions, manufacturers
get away with these damages inflicted in the government.

3. Public Goods - In business, the essential characteristics of a product to be

commercially successful is exclusivity. A service or a good should benefit directly only
those that pay for it. However, there are services that do not fall under this category and
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labelled as public goods. Not everybody pays the road users but we all pass through
the roads.

4. Market Power - When a few firms unduly exert monopolistic power in a market,
government interventions may be needed in case of public utilities like transportations,
communication and electricity.

Principles of Subsidiarity
The duly instituted government must play a very at a very active role in building a
more just, equitable and progressive economic society. It must be forever vigilant in
preventing the greedy elite from exploiting the poor. It must be ready to take over certain
indispensable economic activities that private individuals cannot perform or that are very
crucial to be left in the hands of the private sector.

The government must recognize however that it only has subsidiary role. It
cannot be the leading character in the drama of economic development. It assumes
only a supporting role. The leading roles in development must be given to society itself.

Consumer Protection
Several laws were enacted to protect the consumer against unfair trade practices
through the enforcement of laws in consumerism and all trade laws, rules and
regulations such as the following:

1. Laws in fraudulent advertising mislabeling or mishandling.

2. Rules and regulations governing the conduct and promotion of sales of goods and
services.
3. Price Tags Law
4. Business Name Law
5. Bulk Sales Law
6. Broker's Law
7. Fire Extinguishers Law
8. Accreditation Decree (P.D. 1155)
9. Seven Basic Consumer Right
a. The Right to Safety - this refers to the consumer's right to be protected
against the marketing of goods which are dangerous to health.

b. The Right to Choose - this means the consumer has the right to have
access to a variety of products and services at competitive prices and in the case
of government in private monopolies, to have an assurance of satisfactory quality
and service at fair prices.

c. The Right to be Informed - It is the customer's right to be protected

against dishonest, deceitful, or grossly misleading information, advertising,
labelling or other practices and to be given the facts needed by him to make an
informed choice.

d. The Right to be Heard - this is the right of the consumer to be assured

that his interest will receive full and sympathetic consideration in the
promulgation and execution of government policies.
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e. The Right to Consumer Education - the consumer has the right to

consumer education to enable him to act as an informed consumer throughout
his life.

f. The Right to Compensation against Damage - the consumer has the

right to compensated when, because of mistake, negligence or evil intent, he is
victimized by misinterpretation or shoddy goods or services. Free legal aid is
available for the aggrieved consumer and for small claims, he may resort to
arbitration as prescribed by law.

g. The Right to a Clean Environment - The consumer has the right to

freedom, equality and adequate conditions of life in an environment that permits
a life of dignity and well-being. He is in turn required to protect and improve the
environment for the present and future generation.

Government's Role in the Economy

While consumers and producers make most decisions that mold the economy,
government activities have a powerful effect on the economy in at least four areas.

Stabilization and Growth. Perhaps most importantly, the government guides the
overall pace of economic activity, attempting to maintain steady growth high levels of
employment, and the price stability. By adjusting spending and tax rates (fiscal policy) or
managing the money supply and controlling the use of credit (monetary policy), it can
slow down or speed up the economy's rate of growth - in the process, affecting the level
of prices and employment.

1. Roles of the Government

a. One role of government is to correct problems of market failure associated with public
goods, external costs and benefits, and imperfect competition.

b. Government intervention to correct market failure always has the potential to move
markets closer to efficient solutions, and thus reduce dead weight losses. There is, no
guarantee that these gains will be achieved.

c. Government may seek to alter the provision of certain goods and services based on a
normative judgement that consumers will consume too much or too little of the goods.
Goods for which such judgements are made are called merit or demerit goods.

d. Governments redistribute income through transfer payments. Such as redistribution

often goes from people with higher incomes to people with lower incomes, but other
transfer payments go to people who are relatively better off.

e. Providing a stable institutional framework.

f. Promote effective and workable competition.

g. Correct for externalities.

h. Ensure for economic stability and growth.

i. Provide for public goods.

j. Adjust for undesired market results.

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2. Economic Functions of Government 2.1 Maintain legal and social

framework

a. Create laws and provide courts.

b. Provide information and services to help the economy function better.

c. Establish a system of money.

d. Define and enforce property rights.

e. Regulate contracts

f. This function helps ensure innovation and, as a result, economic growth

2.2 Maintain Competition

a. Create and enforce antitrust laws

• Antitrust laws - rules that prevent businesses from working together to control
too much of an industry or set pric es.

• Note: it is difficult and expensive to detect unfair competition

b. Regulate natural monopolies

• Natural monopoly - industries in which there are not enough consumers to

support more than one producers.

Example: Electricity or water

b. This function keeps producers responsive to consumers.

c. This function improves efficiency and competition, and as a result,

innovation and economic growth.

2.3 Providing Public Goods and Services

a. Providing goods or services that markets are unwilling or unable to provide -
Example: National defense, Roads.

b. There are costs and benefits of all government actions

c. Problem of free riders - people who use the product but don't pay for it.

2.4 Redistributing Income

a. Taking tax money and giving it back out in the form of services, safety nets, and public
goods.

b. Higher income tax rates for those who make more money

c. Social security

d. Aid for dependent children

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e. Medicare and Medicard

2.5 Correcting for Externalities

a. Externality - a spill-over something that occurs as a result of the production process
that affects those outside of the market.

b. Taxes collected to pay for cleanup such as environmental cleanup.

c. Subsidies to encourage positive externalities such as education

d. Subsidy - A government payment that supports a business or market.

2.6 Stabilizing the Economy

a. The government plans of taxing and spending plans and controls the money
supply to try and influence the rate of inflation, reduce unemployment, and promote
economic growth.

3. Government's Role in Markets

Government can affect markets either through direct participation (as a market
maker or as a buyer or supplier of goods and services), or through indirect participation
in private markets (for example, through regulation, taxation, subsidy, or other
influence).

Government frequently has a choice between traditional instruments and market-

based approaches. These are pros and cons associated with all types of government
intervention. Many, if not most, intervention can have unforeseen consequences. Failure
to address indirect costs and possible spillovers can result in a less effective policy and
impose unnecessary economic costs.

Government intervention can also inadvertently benefit regulated industry rather

than the wider public (regulatory capture), promote inefficiency because of restricted
competition or underplay the role of consumers by concentrating purely on the supply-
side of the market. In general, measures that directly limit competition in the market will
not be the best instruments.

4. Role of Government in Business

Permission
Most businesses need to register with a state government to operate.
Corporations need a charter, and other forms of businesses, such as limited liability
companies or partnership, need other forms of registration. The function of this
registration is usually to define the financial liability the owners of the company have. It
limit the risk to the amount they have invested in that particular organization.
Registration also allows the government to monitor companies to execute its other
functions in the business world.

Contract Enforcement
Businesses contract with other businesses. These contracts may be complex,
such as mergers, or they may be as simple as a warranty on supplies purchased. The
government enforces these contracts. Companies bring one another to court just as
individuals do. An oral agreement can constitute a contract, but usually only written an
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agreement is probable. If one party fails or refuses is obligation under a contract, a

company will turn to the legal system for enforcement.

Consumer Protection
The government's role in business includes protecting the consumer or customer.
When a vendor fails to honor the guarantee, the purchaser has recourse in the law.
Likewise, when a product cause harm to an individual, the courts may hold the vendor
or manufacturer responsible. Labeling is another requirement the government imposes
on marketers.

Employee Protection
Many state and federal agencies work to protect the rightd of employees. The
Occupational Health and Safety Administration is an agency under Department of
Labor.

Environment Protection
When a marketing transaction impacts a third party - others besides the
marketers and purchaser - the effect is called an "externality". The third party is often
the environment. Thus, it is the government's role to regulate industry and thereby
protect the public from environmental externalities. Whether the government is effective
in this role is a matter of much discussion. The Gulf oil spill of 2010 has been cited as
evidence of lax oversight.

Taxation
Government at all levels tax businesses, and the resulting revenue is an
important part of government budgets. Some revenue is taxed at the corporate level,
then taxed as personal income when distributed as dividends. This is in no way
inappropriate, since it balances the tax burden between the company and individual
allows the government tax more equitably.

Investor protection
Government mandates that companies make financial information public, thereby
protecting the rights of investors and facilitating further investment. This is generally
done through filings with the Securities and Exchange Commission. Whether federal
regulation has been adequate is a matter of much debate.

Government as an Influencer

Influencing consumers
Government may intervene in markets to change consumer behavior where such
behavior has adverse effects on society or because of fears of adverse consequences
for the individual consumer over the long-term. An example of such behavior is
excessive alcohol consumption which has been linked with antisocial behavior and
health risks and imposes significant costs to the police and the health care system.

Behavioral economics is increase providing evidence that consumers do not

always behave in rational way in the sense of traditionally implied by economic models.
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This suggests the Government can play an important role in making markets function
better by increasing consumers’ participation and engagement in markets.

Influencing businesses
In relation to business behavior, there may be cases where encouraging self-
regulation by firms in an industry is seen as an alternative to direct regulation. Self-
regulatory and consumer approaches may work alongside formal regulation.
Government may also wish to intervene to coordinate private sector activities where
information necessary for investment decisions is not available. Individual private firms
typically make their investment decisions based on the information available in the
markets, and in some cases their returns will be linked to the investment decisions of
other firms. Lack of information and uncertainty regarding investments decision may
mean that a firm may under-or-invest and in some cases a firm may not invest at all.

ROLES OF THE GOVERNMENT IN THE CONSUMER BEHAVIOR

REGULATIONS
Some degree if regulation is essential for modern markets to function. Buyers
and sellers need to have confidence that the contracts they sign will be upheld and that
property rights are clearly defined.

Regulation can have beneficial effects for society. It often provides important
protection, for instance regulations that protect the health and safety of workers.
Regulations also has a potentially important role in protecting consumers.

Regulation typically consists of a set rule administered by the Government to

influence the behavior of businesses and, consequently, economic activity. In the sense
the term regulation captures a wide range of Government actions, from primary
legislation setting enforced by specialist and sectoral regulators.

Subsidies and Taxation

Taxes are primarily a source of revenue for Government to fund its activities and
services. Taxes can be indirect and levied on transactions, such as VAT, that do not vary
with the income or status of the consumer, or direct such as income tax, which varies
with income and other characteristics, such as whether a person has children.

Common types of subsidy include direct grants, tax exemptions, capital

injections, equity participation, soft loans, and guarantee.

Tax and subsidies can be used to influence the incentives and behavior of private
firms. There are several reasons why taxes and subsidies might be used in this way,
including:

1. To address market failures: common examples include the subsidy of education,

innovation and low-carbon and environmentally friendly goods or the taxation of
pollution.

2. To address cyclical difficulties: subsidies might be used to temporarily support

companies in financial trouble, particularly when their collapse would have wide-ranging
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systematic consequences (such as the recent support for the UK banks) or when firms
are generally financially viable but temporarily cannot access finance.

3. To achieve wider social objectives: The government may choose, for reasons of
equity, to subsidies disadvantaged regions, areas, or groups. Equally, taxes can be
used to redistribute income between groups.

Key Points for Policy Makers

Both taxes and subsidies change the behavior and incentives of firms, so may
well have ab effect on competition and market outcomes.

Taxes
Typically, taxes tend not to raise significant competition concerns, because they
apply generally and are not targeted at particular firms in some cases where taxes are
specific. A benefit using taxation over other policy measures is that revenue raised can
be used to reinforce policy objectives. In comparison, raising the minimum price of a
product,, while having a similar consumers to firms rather than from consumers to
Government.

Subsidies
Subsidies can have important effects on competition, particularly where they
have a differential impact on firms in a market. Whether or not a subsidy falls within the
scope of European state aid rules, Government should make sure that benefit of giving
aid outweighs the potential cost distorting competition. The first risk to competition is
that the subsidy increases the potential for anti-competitive behavior by firms. This
might be the case if the subsidy results in the recipient firm significantly increasing its
market share to a level where:

1. It can act independently of competitive constraints.

2. There is consolidation among competitors that either reduces competition or increase

the risk of collusion, or

3. Entry barriers are raised so that potential future competition is prevented.

A second risk is that the subsidy might undermine the mechanisms that ensure
efficiency in the market.
Alternatively, competitors not in receipt of aid could be forced to leave the market, or
forced to take drastic action to ensure short-term survival at the expense of long-term
prosperity.

A subsidy is more likely to cause competition concerns if it is designed to be very

large, be provided to only one or a few firms in the market, affect the recipient's average
rather than fixed costs, or occur more than once. Subsidies will generally cause less
distortion if there is strong competition in the market. Distortions are most likely to be
significant if the market is concentrated, there are barriers to entry, and the firms in the
market are of markedly different sizes, products are not highly differentiated or if firms in
the market compete on R&D.
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Subsidies in the Downturn

Government subsidies to struggling firm may be particularly important in the
current economic climate. Such subsidies typically helps failing firms through an orderly
liquidation or provide assistance for struggling firms to restructure in order to survive in
the longer term. During the recent financial crisis Government subsidies played a
particularly important role in avoiding systemic collapse of the banking system.

There are significant risks to competition from this type of intervention.

Recessions allow the economy to scale down or cease inefficient and wasteful activities
and allow resources and skills to be redirected to other activities that have greater
potential for growth (so called creative destruction).

The Role of Competition

Competitions:

1. Drives firms to improve their internal efficiency and reduce costs. Cost
minimization allows firms to deliver the same goods and services to consumers. But at
lower prices. This will attract a greater number of consumers and the firm will gain a
larger market share.

2. Provides incentives to firms to adopt new technology. Early adoption of

technology and/or develop new techniques and processes helps firms minimize their
costs.

3. Provide incentives to firms to invest in innovation. Investment in innovation allows

firms to improve the quality of their existing products and/or develop new products and
services to better suit the changing needs and preferences of consumers.

4. Reduces managerial inefficiency. Competitive pressures from other firms and

new entrants lead firms to look for better, more efficient ways to organize their business.
Lack of effective competition could lead firms and managers to operate with inefficient
business models and technology as firms are unlikely to lose profits.

Competition is not just about the behavior of firms within a given market.
Significant benefits are derived from the entry or the threat of entry by new firms and the
exit of inefficient firms. New firms bring with them new ideas and better, more efficient
ways of producing goods. They also create incentives for existing firms to improve their
performance and develop their products, in order to avoid losing market share and
being forced to exit the market. Reducing entry and exit barriers can therefore be a
powerful mechanism in driving and maintaining competition. Over the long term,
competition, through improving firm-level efficiency and incentivizing investment in
innovation. Generates higher rates of productivity growth resulting in increased
economic growth and greater prosperity.

What is Competition Law?

Competition law refers to the framework of rule and regulations designed to

foster the competitive environment in a national economy. It consists of measures
intended to promote a more competitive environment as well as enactments designed to
prevent a reduction in competition.

What is Competition Policy?

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Competition policy broadly refers to all laws, government policies and

regulations aimed to promote, advance and ensure competitive market conditions by
the removal of control, as well as to redress anti-competitive results of public and
private restrictive practices.

What are the Goals of Competition Policy?

1. To promote economic efficiency, which comprises three (3) components:

a. Productive efficiency - firms uses the least cost production techniques to

produce maximum possible goods and services from given inputs.

b. Allocative efficiency - resources are channeled to those sectors where they are
the best utilized in order to produce goods and services that are valued most highly
consumers.

c. Dynamic efficiency - firms arrive to maintain their competitiveness by investing

in research and development, innovation, marketing and management to keep abreast
of the changes in technology, preferences and products.

2. To correct market failure.

3. To enhance consumer welfare.

4. To achieve higher economic growth.

5. To promote competitiveness in both domestic and foreign market. What are the
basic market structures in which the degree of competition affects prices, outputs and
profits?

6. Perfect competition - an ideal or extreme form of competition. It occurs when a

market consists of many firms selling an identical product to many buyers. Any firm
that wishes to do so can enter or leave the market.

7. Monopoly - a market with a sole supplier of a good, services or resource for which
there is no close substitute. In addition, there are barriers to entry of new firms.

8. Natural monopoly - arises from natural barriers to entry (such as a unique source of
supply) or situation in which one firm can supply the entire market at a lower than two
or more firms could offer.

9. Monopolistic competition - similar to perfect competition, but rather than firms

producing identical products, these are many firms competing against each other by
producing similar but slightly different products.

10. Oligopoly - is characterized by a small number of firms where quantity sold by

anyone firm is influenced by its choice in respect of strategic variables (such as
prices, product design, research and development, advertising, and sales locations)
and these choices are strongly influenced by other firms in the industry.

What is Market Failure?

Market failure occurs when the market is unable to achieve an efficient and
equitable allocation of resources.
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What are the Sources of Market Failure?

1. Public Goods - which if provided to one consumer, if freely available to all

consumers.

2. Income distribution - the market will not necessarily ensure equitable distribution of
incomes. This may motivate government to introduce policies to redistribute wealth
through measures, i.e., income taxes and social security benefits.

3. Monopoly - the operations of monopoly or natural monopoly often results in misuse of

market power and inefficient allocation of resources, which reduce community welfare.
For this reason, governments generally regulate monopoly and enforce laws
preventing cartels. This type of market scenario is a major rationale for a
comprehensive competition policy.

4. Externalities - arise when confers a benefit (like the benefit of education or

immunization) or imposes a cost (pollution) on a third party, without the cost or benefit
being included in the market price of that activity.

5. Information Asymmetries - in theory, buyers and sellers in a competitive market

have complete knowledge about a product or service characteristics and quality.
Information asymmetries between producers and consumers can lead to market
failure and reduce community welfare.

What are the Competitive Conduct Rules?

1. Competitive Conduct - describes the decision-making processes of firms in a

competitive market, where price, quantity and profit choices are dictated by overall
market conditions and these are not unduly influenced by the actions of one or more
large firms. In essence, competitive conduct describes firm behavior under conditions of
perfect competition.

2. Competitive Conduct Rules - are government's response to the absence of

perfect competition in a market. Their primary objective should be to protect or enhance
the competitive process in markets where it is only partially operating.

a. Competitive conduct rules codify acceptable behavior in an economy. Typically, such

rules prohibit arrangements that can be construed as anti-competitive, in that them
either:

b. Increase the power of firms within market to the extent that this inhibits competitive
conduct; or

c. Prohibit existing competitors or potential market entrants form effectively competing.

Competitive Process - competitive conduct that reduces costs and prices, which is
driven by impersonal and diffuse market forces and the threat of entry of additional
suppliers. It results in efficient resource allocation and pricing, which can be attained in
open, dynamic markets resembling perfect competition.

What are Anti-competitive Agreements?

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Anti-Competitive Outcomes or Agreements - the Hilmer Report (Hilmer 1993)

identifies several market outcomes or agreements which can be viewed as anti-
competitive. These are:

1. Horizontal Agreements - exist between firms (suppliers or consumers) at the

same level of production chain. This is often referred to as collusion. Collusion usually
takes the form of an agreement on price, such as combination of firms provides them
with a degree of pricing power, or in other words, the ability to at least influence the
price of a good.

2. Vertical Agreements - may vary where firms at different stages of the production
chain collude. In most cases, vertical collusion occurs between suppliers and users of a
business inputs. This may relate to price or other matters (i.e. quotas, exclusive,
dealing, etc.).

3. Mergers and Acquisition - can constitute inappropriate market behavior where

they lead market outcomes of the type described above. It is unlikely that a move
towards increasing market concentration will normally be viewed as favorable affecting
competition.

Potential solution to different types of anti-competitive conduct.

These include:

1. Per se Prohibition - the most direct form of anti-competitive measure that an

authority can undertake. It refers to those activities which are ambiguously detrimental
to regular competitive behavior in a market. (e.g., price fixing)

2. Rule of Reason (Competition Test) - a wide variety of business practices that

while inhibiting competition, may not require total prohibition. The most widely used
determinant in such a case is whether or not such activity reduces competition in the
market.

3. Authorization - a mechanism through which the public benefit from ostensibly

anti-competitive conduct can be assessed as a counter balancing consideration. The
process involved here is a direct intervention or inquiry by a governing commission.
Authorization implies that the commission can "authorize" certain conduct where there
is a perceived net benefit to the community form the anti-competitive conduct.

4. Notification - involves the approval of certain types of anti-competitive conduct

upon the offender being granted immunity, conditional on the consent of the market
regulator. This type of arrangement relies on absolute openness and transparency.

Examples of Anti-competitive Conduct:

1. Price-fixing agreement - competitors agree to fix prices at a particular level, use of

less obvious devices such as "recommended prices", in reality, fix prices by
agreement.

2. Market Sharing Agreement - agreement among competitors to share a market.

3. Exclusionary Provision - agreement between competitors to limit dealings with a

particular supplier or customer or a particular class of customer.
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Primary boycotts or exclusionary provisions occur when a group of people or

firms agree not to deal with a particular supplier or customer. This is subject to per se
prohibition.

Secondary boycotts occur when a group of people who may not otherwise deal
with the target organization persuade another uninvolved (supplier) not to deal with the
target organization.

Tie-in arrangements and third line producing - when the supply of goods or
services to a person is made provisional upon them, also purchasing additional goods
or services, either from the same supplier (tie in arrangement) or form another specified
supplier (third line forcing).

Retail price maintenance - refers to action by suppliers, manufacturers or

wholesalers specifying a minimum price below which goods and services may not be
resold or advertised for resale.

Bid-rigging - includes cover building to assist an undertaking in winning the

tender. An essential feature of the tender system is that tenderers prepare and submit
bids independently.

Limiting or controlling production or investment - involves agreements which

limit output or control production, by fixing production levels or setting quotas, or
agreements which deal with structural overcapacity or coordinate future investment
plans.

Abuse of dominant position - occurs where the dominant enterprise, either

individually or together with other undertakings, exploits its dominant position in the
relevant market or exclude competitors and harms the competition process. It is prudent
to consider the actual or potential impact of the conduct on competition, instead of
treating certain conducts by dominant enterprises as automatically abusive.

What are Regulatory Restrictions?

Regulatory restrictions are government's own restrictions on competitive

conduct, either through legislated regulation or direct ownership.

These restrictions can be detract from overall competitiveness in the economy, in

much the same way as market failure, in the sense that they detract from the regular
workings of the market.

Regulatory restrictions may entrench a smaller number of players in a less competitive

environment. Consequences of these are higher prices, poorer quality goods and a
group of firms that have a diminished response to their market.

Existing Regulatory Restriction in the Philippines?

1. Regulatory barriers to market entry, including licensing and franchising agreements;

2. Government monopolies, including monopolies on public utilities such as electricity
generation and supply, telephone services and the shipping industry.
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Forms of Regulations that Impact on Competition

There are two (2) forms of regulations on competition directly:

Barriers to entry are burdens or limitations forcing any firm not presently
operating in a market they are derive from:

a. Economies of scale due to market share achieved by the incumbents;

b. Capital requirements (including investment in brand development through advertising
and the like);
c. Cost savings accruing to existing firms from their experience and familiarity with the
particular industry; d. Monopoly access to key infrastructure; and
e. Monopoly of key industry knowledge.

1. Regulations that restrict competitive behavior:

a. Price control; and

b. Advertising restrictions

2. Impact of Regulation
a. Higher prices;
b. Lower quality goods; and
c. Less consumer choice as a result of reduced competition
In the case of monopolies, they can prevent any competition in the market.

What is Essential Facility?

Within the framework of competition policy, an essential facility is a major

infrastructure which exhibits two characteristics:

1. The facility is essential to the effective operation of an economic organization; and

2. The facility exhibits natural monopoly characteristics.

What is Natural Monopoly?

Distinguishing feature: one facility can supply the entire market demand more clearly
than two or more smaller facilities.

Typically, natural monopolies have the following features:

1. Large development and start-up costs

2. Economies of scale: as the organization increases its outputs, the average cost per
unit output declines.

Natural monopoly is an outcome of the size of the market and the type of
technology available to meet its demand. It is not a market structure, it is a cost
minimizing method of production. There are two major implications:

1. An industry may consists of more than one firm even though the existing
technology would suggest that monopoly is kore economically efficient.
2. The existence of natural monopoly conditions in an industry may vary as demand
varies and as the prevailing technology changes.
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What are the main areas/concerns which competition policy/law should address?

Competition law and policies are meant ti address concerns that include:

a.Preventing enterprises from entering into agreements which do not have any
beneficial features and which will restrict competition, either among themselves or
between them and third parties;
b.Controlling attempts by monopolists or dominant firms from abusing their market
position and preventing new firms from entering the market;
c. Ensuring that workable competition is maintained in oligopolistic industries; and
d.Monitoring mergers between independent enterprises, where the effect of the merger
may result in market concentration and reduction in competition.

Major Philippine Competition Laws

There are more or less 30 plus competition/antitrust related laws of the Philippines.

The following are some of the examples of such laws:

1. 1987 Constitution - Prohibits monopolization and combination in restraint of

trade (on a rule of reason basis), but has no impossible sanctions for violation.
2. Revised Penal Code of the Philippines (Article 186) - Describes
monopolization and combinations in restraint of trade as acts of punishable and
describes penalties, including imprisonment and fines between P200, 000.00 and P600,
000.00. It is similar in nature to Sect. 2 of the US Sherman Act.
3. Republic Act 3247 - This is known as the Act of Prohibit Monopolies and
Combinations in Restraint of Trade and provide for treble damages for civil liabilities
arising from anti-competitive behavior.
4. Republic Act 165 and 166 - These are the Patent Law and Trademark Law
respectively and describe the appropriate civil actions which can be resorted to and
penalties imposable for breaches. 5. Presidential Decree 49 - This is the Copyright
Law and penalizes copyright infringement.
6. Republic Act 386 - This is the Civil Code of the Philippines and stipulates the
collection of damages arising from unfair competition.
7. Republic Act 7581 - The Price Act which protects consumers by stipulating price
manipulation (hoarding, profiteering and cartels) as illegal for certain commodities in
cases of emergency.
8. Republic Act 73944 - The Consumer Act of the Philippines imposes penalties for
behavior such as deceptive, unfair and unconscionable sales practice in both goods
and credit transactions.
9. Philippine Corporation Code - Provides for rules and proceedings for approving
mergers, consolidations and combinations for the Securities and Exchange
Commission.
10. Executive Order No. 45, series of 2011 - Designating the Department of Justice
as the Competition Authority.