Special Studies on Global

Cooperation
5. Controls, Regulation and
Deregulation: vs. Laissez-faire

Hideaki Ohta
College of International Relations
 Contents
1. Markets(Free Competition vs. Monopoly
vs. Oligopoly)
2. Privatization and Deregulation
3. Controls and the Effects
4. Financial / Capital Market Liberalization
and Control
1. Markets(Competition vs. Monopoly[]
vs. Oligopoly[])
(1) General
Free competitive markets are limited in certain
sectors of the economy (i.e. local agricultural
products[ fruit and vegetables, etc.] where certain
equilibrium is attained by the supply and demand
in the market
Monopoly is those situation, where only one
producer exists in the market, so that the price in
the market is determined by the producer, and not
influenced by the demand
(1) General (continued)
Oligopoly: a market form in which a market or
industry is dominated by (not monopoly) a small
number of sellers (oligopolists). reduce
competition and lead to higher costs for consumers
The decisions of one firm are influenced by the
decisions of other firms planning by
oligopolists need to take into account the likely
responses of the other market participants.)
For consumers, prices of products may be
higher than that under free competition
Fairly common in several sectors of industry
(2) Perfect Competition
price-taking producer is a producer whose
actions have no effect on the market price of the
good it sells.
price-taking consumer is a consumer whose
actions have no effect on the market price of the
good he or she buys.
perfectly competitive market is a market in
which all market participants are price-takers.
perfectly competitive industry is an industry
in which producers are price-takers.
free entry and exit into and from an industry
(3) The Price-Taking Firms Profit-Maximizing
Quantity of Output
Price, cost of
bushel

MC
$24 Optimal
point

20 E
Market MR = P
price 18
16

12

8
6

0 1 2 3 4 5 6 7
Quantity of
Profit-maximizing tomatoes
quantity (bushels)
 Profit of monopolistic firm
Market Price = $18
Price, cost of
bushel

Minimum
average MC
total cost

E
$18 MR = P
14.40 Profit ATC
14 Z
Break C
even
price

0 1 2 3 4 5 6 7
Quantity of tomatoes (bushels)
 Loss of production
Market Price = $10
Price, cost of
bushel

Minimum MC
average
total cost

ATC
$14.67 Y
14
Break C
even Loss
price 10 MR = P
A

0 1 2 3 4 5 6 7
Quantity of tomatoes (bushels)
Competitive Firms Profitability and Production
Conditions
(4) Monopoly
A monopolist is a firm that is the only producer
of a good that has no close substitutes. An industry
controlled by a monopolist is known as a
monopoly, e.g. De Beers (for distribution channel).
The ability of a monopolist to raise its price
above the competitive level by reducing output is
known as market power.
Profits will not persist in the long run unless
there is a barrier to entry.
(4) Monopoly (continued)
An increase in production by a monopolist has
two opposing effects on revenue:
quantity effect + price effect
a profit-maximizing monopolist chooses the
output level at which marginal cost is equal to
marginal revenuenot to price.
the monopolist produces less and sells its
output at a higher price than a perfectly
competitive industry would.
A Monopolists Demand, Total Revenue,
and Marginal Revenue Curves
(a) Demand and Marginal Revenue
Price, cost, marginal
revenue of demand
$1,000

Quantity effect =
550 A +$500
B
500
Price effect =
-$450
C
50 D
0 9 10 20
200 Marginal revenue = $50
MR
400
Quantity of diamonds
(b) Total Revenue

Total Quantity effect dominates Price effect dominates quantity

Revenue price effect. effect.
$5,000
4,000
3,000
2,000
1,000
TR
0 10 20
Quantity of diamonds
 The Monopolists Profit-Maximizing
Output and Price
Price, cost,
marginal revenue
of demand

$1,000 Monopolists
optimal point

B
P 600
M
Perfectly competitive
Monopoly industrys optimal point
profit

P 200 MC = A TC
C A C
D
0
8 10 16 20
Quantity of diamonds
200 Q Q
M MR C
400
The Monopolists Profit

Price, cost,
marginal
revenue

MC
ATC
B
P
M

Monopoly
profit
A
D
ATC
M C

MR

Q Quantity
M
P = MC competitive firms
profit-maximizing quantity of output
P > MR = MC monopolists
profit-maximizing quantity of output
monopolist does the following:
Produces a smaller quantity: QM < QC
Charges a higher price: PM > PC
Earns a profit
(5) Oligopoly
Oligopolies operate under legal restrictions in the
form of antitrust policyto prevent oligopolistic
industries from becoming monopolies). But many
succeed in achieving tacit collusion, which is
limited by a number of factors, including:
large numbers of firms
complex products and pricing scheme
bargaining power of buyers
conflicts of interest among firms
Market Structure: Competition vs. Oligopoly
vs. Monopoly
Are Products Differentiated?

No Yes

One Monopoly Not applicable

How Many
Producers Oligopoly
Are There? Few

Perfect Monopolistic
Many competition competition
2. Privatization and Deregulation
(1) Definition
Privatization: to transfer ownership of a
corporation or property from government owned
to a private entity (to change the monopolistic
position of public enterprises/ entities)
Deregulation: taking away government
intervention on a particular industry to stem an
increase in competition (to avoid monopoly).
[i.e.] oil prices are regulated (until 1970s)
retail sector business ownership limited to the
national citizens only or control of business
instead of foreign national.
2Objectives of Privatization
Official : to promote competition in the
market and improve the efficiency of the
management
Actual: to gain revenues from the public sales
of the stocks of those public enterprises/ entities;
and to suppress the labour union movement
( i.e. the UK under Ms. Thatcher and Nakasone
in Japan during the 1980s)
[Outcomes]
UK British railways totally failure
Japan: Japan National Railways not very
successful
(3) Experiences of Privatization (Privatisation)
U.K. (under Ms. Thatcher)
Failure : not attained any of the objectives of activation of
competition; decrease in subsidies; improvement in
services
Fragmentation of the British Railways into about 100
companies Railtrack [infrastructure]; maintenance ;
railways [passengers]; lease, etc.
3 Railways; 25 operating companies with no collaboration
/ adjustment Inefficiency
lack of technitians/ technical personnel resulted in
several severe and critical accidents
Railtrack company buncruptcy (2001)
(3) Experiences of Privatization (continued)
Japan (under Mr. Nakasone)
(i) Japan National Railways not very
successful (profitable for those JR companies
with Shinkansen, but not for Three
Islands(now Two Islands: Hokkaido, Shikoku),
which have run without net gains and
profitablity
JR Hokkaido: 24.1 billion (March 2013)
JR Shikoku: subsidized with Management
Stabilization Fund as JR Hokkaido and Kyushu
only 3 JR (Tokai, East, and West) listed in the
stock market (thanks to Shinkansen)
JR(continued)
JNR Settlement Corporation(1987): Total Debt
of 37.1trillion Now: part of Japan Railway
Construction, Transport and Technology
Agency (JRTT) [2003-]
Long-term debt of 23.5trillion][repayment
of 660bn]fiscal budget expenditure
60 years to be required (for completion of
debt repayment!)
(ii) Japan Post
Privatization Japan Post (Public Corp) [2003]
Japan Post Holdings Co.Ltd [2007]
Net Profit (2011/12): 468.9bn
Capital: 3,500 billion yen
Shareholder: Minister of Finance: 100%
[Problems: Privatization of Japan Post]
Loss of source of funds for the Government
Deterioration of services
Decrease in post offices caused fewer regional
offices for finance
merit of small savings for regions
Loss of economies of scale by dividing the
Japan Post (Postal services[Yubin] ; Postal
Savings[Yucho] ; Postal Insurance[Kanpo])
[Truth of Privatization of Japan Post ]
Privatization of Japan Post has been due to the
US pressure!! (under Koizumi)
Privatization and public offering (listing)
US investors target for holding shares
By holding the shares of Japan Post, portfolio
management would increase the share of US bonds
and stocks, and substituting JGB and other Japan
Post shares
Campaign from public to private the USA
still national body, not privatized (Federal Post)
 [ Japan Posts Future Plan (official)

Public Offering and

listing planned?
Japan Post Holding
to be listed and sale
of shares more than
half1/3 govt.
holding
Foreign (the US)
investors would
take over!
USA: not privatized in public utilities
(i) Amtrak = National Railways Public corporation
Protection under the political pressure of the
related members of the parlament
Huge yearly deficitUS$ 1,281million[2003]
+ accumulated debt
Express NY and WashingtonDC): still deficit
USA has kept as public company, since no profit
expected, as indicated by the official report
(ii) Federal Post = National body
 New Zealand
Typical case of failure in privatization of
Post Office
Postal SavingSold to an Australian Bank
inefficient and lower quality in services;
closure of branches
Post Offices decreased in number (1/5);
increase in the postal charges
inconveniences
Banks (Kiwi Banl) reconstructed with
repurchase of the sold banks
Sectors to be privatized and not to be
privatized : sectors for public interest
e.g. Postal service; railways;
telecommunications (fixed)
Criteria: equilibrium price setting may be too
expensive for general public, if private sectors
are allowed to operate
Sectors with public nature may not have
purely profitable, and subsidies are required to
operate.
Important point: whether those sectors and
operations are efficiently managed
(3) Deregulation
Competitive conditions may be more
important than the privatization as it is
some private enterprises are allowed to enter
in the market
competitive environment may be effective to
give the public entities to have some
opportunity to improve
Reality: inequality of household income and
creating the lower income class
[e.g.] The act of dispatching
(deregulated) could result in lower standard of
wages for a long period, increasing the disparity
[Failure of deregulation]
Deregulation with less controls in public utilities
and transportation in the USA resulted in failure
Airlines increase in accidents (safety neglected
under the severe competition)
Electricity increased troubles in ceasing
electricity supply in California, etc.
deregulation (and privatization) policies are based
on neo-liberalism, which is supported by large
enterprises and several conservative parties
3. Regulation/ Controls and the Effects
(1) Justification
Public services cannot be profit-oriented
activities require public support
(public utilities; public transportation, etc.)
Some public services are not to be privatized,
since loss/ deterioration of services quality,
which causes inconvenience among the people
Public services are not suitable for open market
competition
Thus, partial competition may be effective in
some limited area (i.e. support services for the
aged people, like the cases in Sweden)
(2) Regulation/ Controls
Market-based approach is not always
beneficial and efficient in several cases:
Command and control regulatory
instruments may be useful in several occasions,
e.g. environmental pollution (see details lecture
No.6) [emission standards; process/equipment
specifications; limits on input/output/discharges,
Labour Market: mainly for protection of wage
earners right in working conditions, status and
salaries, etc.
4. Financial / Capital Market Liberalization
and Control
(1) Origin of liberalization
the USA experienced current account deficit
and fiscal deficit (Twin Deficit) in the 1980s
credit crunch in the domestic market
(2) History
1970s Mainly Latin American countries had
liberalized capital account mainly in bank loans
(the US banks lending to the subsidiaries),
which facilitated lending to Latin America, and
it resulted in debt crisis in the 1980s
(2) History (continued)
1980s1990s:
Not only major industrial countries (e.g. Japan,
France) but also many emerging economies
(then developing countries) initiated capital
account liberalization
Globalization (international trade and finance)
significantly influenced on the economies both
in developed and developing countries
Capital Account Crisis[completely new
type of crisis] emerged in the 1990s
(3) History (continued)
2000s: Crisis mainly in developing/ emerging
economies until in the former half of 2000s
Extended to industrial/advanced nations
(mainly small countries with completely open
economy)

Argentina (2001/2)
Turkey (2001/2)
Lehman Shock/ Global Financial Crisis(2008)
Euro Crisis (2011)
(4) Importance in Management and Controls
Countries with some capital management and
controls have not experienced severe crisis since
the early 2000s (i.e. Indonesia; Korea;
Argentina)
Countries with open capital account and no
regulation and controls experienced severe crises
(i.e. GIIPS, Iceland, Central/East Europe)
Advanced countries with complete
liberalization (Japan, USA, etc)
has suffered monetary independence, and
facing difficulty in economic policy
(see more details in lecture No. 12, 15)
 Management and controls through some
regulatory measures are essential for stabilizing
the Financial sector / Market, to achieve stable
economic growth and market conditions,
avoiding crises, like the Asian Crisis[1997/8], or
the Global Financial Crisis[2008/9])
Today, one of the most important policy
issues would be management and controls in the
global financial and capital markets, under the
massive capital flows in the global market
[see Stiglitz:Making Globalization Work(2007),
Rodrik:The Globalization Paradox(2011),
Ocampo/ErtenCapital Account Regulations, Foreign
Exchange Pressure and Crisis Resilience(2013), etc.)
Thank you very much!

Any Questions?

hoviolin@fc.ritsumei.ac.jp