Why is short-run AS curve upward sloping?

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1 For Students Taking HKDSE Examinations from 2016 onwards Supplementary Notes The supplementary notes are prepared in accordance with the fine-tuning and updating of the Economics curriculum and assessment announced by the Education Bureau in May Vision Publishing Co. Ltd 2013 P.76 Why is short-run AS curve upward sloping? part is replaced by the following: Why is short-run AS curve upward sloping? Imperfect adjustment of input & output prices Price level unexpectedly Imperfect adjustment of input & output prices More profitable production Qs Price level unexpectedly Imperfect adjustment of input & output prices Less profitable production Qs Upward sloping short-run AS curve 1

2 2 Vision Publishing Co. Ltd 2013 P.122 How do tariff and quota affect a small open economy? part is replaced by the following: How do tariff & quota affect a small open economy? Small open economy After tariff World price from Pw to Pwt Quantity demanded from Qd 1 to Qd 2 Quantity supplied by domestic producers from Qs 1 to Qs 2 Quantity imported from Qd 1 Qs 1 to Qd 2 Qs 2 Tariff revenue by area G After quota World price from Pw to Pwt Quantity demanded from Qd 1 to Qd 2 Quantity supplied by domestic producers from Qs 1 to Qs 2 Quantity imported from Qd 1 Qs 1 to Qd 2 Qs 2 Holders of quota make a profit equal to area (GH) P.126, 127, 128 and 129 are to be deleted.

3 P.140 and 141 are to be deleted. Additional study notes: How may anti-competitive business practices harm consumers? Price of goods & services Output Harm to consumers Choices to consumers Vision Publishing Co. Ltd 2013 What are the objectives of the Competition Ordinance? Consumer surplus Market competition To prohibit conduct that prevents, restricts or distorts competition in Hong Kong The objectives of the Competition Ordinance To prohibit mergers that substantially lessen competition in Hong Kong To establish a Competition Commission and a Competition Tribunal 3 What is the difference between competition rule and conduct rule? First conduct rule Conduct rule Competition rule Second conduct rule Merger rule

4 4 Vision Publishing Co. Ltd 2013 What is the First Conduct Rule? The First Conduct Rule = It prohibits undertakings From engaging in agreements, concerted practices or decisions with the object or effect of preventing, restricting or distorting competition in Hong Kong Serious Anti-Competitive Conduct No need to issue warning notices to the infringing parties before instigating any legal proceedings Not Serious Anti-Competitive Conduct Need to issue warning notices to the infringing parties before instigating any legal proceedings 1. Directly or Indirectly Fixing Prices 2. Agreements to Share Markets 3. Output control or restriction 4. Bid rigging 1. Fixing trading conditions 2. Joint purchasing or selling 3. Sharing information 4. Exchanging price information 5. Exchanging non-price information Agreement to fix price, its changes and its components to restrict competition and earn higher profits Agreement to divide up the market to be sheltered from competition Production or sales quota to control current output Agreement to coordinate future investment plans to control future output Agreement on who wins the bid Agreement to use common terms and conditions of sale or purchase Small competitors group together to buy or coordinate pricing policies to sell Several undertakings exchange confidential information frequently and deny others access A price announcement is made in advance to competitors The information exchanged is current or recent, or concerns future plans 6. Restricting advertising It does not aim at curbing misleading advertising. 7. Setting technical or design standards 8. Terms of membership and certification Agreement to prevent others from developing alternative standards or products Rules of admitting and expelling members, and certification by association are not based on reasonable and objective standards

5 What is the Second Conduct Rule? The Second Conduct Rule Predatory behaviour toward competitors To sell products below cost Drive out competitors Raise prices above competitive levels later Vision Publishing Co. Ltd 2013 = It prohibits undertakings with substantial market power From abusing that power by engaging in conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong Limiting production, markets, or technical development to the prejudice of consumers Tying and Bundling Margin Squeeze Refusals to Supply and Essential Facilities To sell the tying product only if the buyer also purchases the tied product Reduce the number of potential buyers of tied products available for its competitors Extend market power in the tying product to the tied product The dominant and vertically integrated supplier sells the essential upstream input to its downstream competitors only at a very high price Eliminate their profit Drive them out Refusal to supply not justified by the buyer s poor creditworthiness or capacity constraints Refusal to allow a rival to use an essential facility not justified by capacity constraints, substantial increase in cost, or the rival s incapability to use the facility 5

6 6 Vision Publishing Co. Ltd 2013 What are the exclusions and exemptions from the first conduct rule and the second conduct rule? Exclusions and exemptions any undertaking at issue is outside Hong Kong the agreement, concerted practice, decision or conduct is engaged in outside Hong Kong Merger arising from agreement, concerted practice, decision or conduct By improving production or distribution or promoting technical or economic progress Economic efficiency Consumers have a fair share of resulting benefit Restrictions imposed are necessary to Economic efficiency No Substantial elimination of competition Complying with legal requirements Serving general economic interest The First Conduct Rule: No Exclusion or Exemption The Second Conduct Rule: No Exclusion or Exemption The Second Conduct Rule: Exclusion The Second Conduct Rule: No Exclusion or Exemption The Second Conduct Rule: Exclusion The Second Conduct Rule: Exclusion Agreements/Conduct of lesser significance Exemption by the Chief Executive on exceptional and compelling public policy grounds or to avoid a conflict with an international obligation All but six of the 581 statutory bodies if the combined annual turnover of the undertakings at issue < HK$200 million and Serious Anti-Competitive Conduct is not involved The Second Conduct Rule: Exclusion if annual turnover of the undertakings at issue < HK$40 million The First Conduct Rule: Exemption The Second Conduct Rule: Exemption The Second Conduct Rule: Exclusion

7 What is the Merger Rule? Vision Publishing Co. Ltd 2013 The Merger Rule = It prohibits undertakings from carrying out a merger that has the effect of substantially lessening competition in Hong Kong Mergers involving carrier licenses in the telecommunications sector Mergers not involving carrier licenses in the telecommunications sector First Conduct Rule does not apply Second Conduct Rule does not apply Merger Rule applies If economic efficiencies > adverse effects of lessening of competition in Hong Kong Exclusion For all but six of the 581 statutory bodies Exclusion Exceptional and compelling reasons of public policy for doing so Exemption by The Chief Executive in Council First Conduct Rule does not apply Second Conduct Rule does not apply Merger Rule does not apply 7

8 8 Vision Publishing Co. Ltd 2013 What are the differences between the Competition Commission and the Competition Tribunal? The Competition Commission VS The Competition Tribunal The Competition Commission The Competition Tribunal Investigate competition-related complaints Bring proceedings before the Tribunal Issue an infringement notice to the undertaking, offering not to bring proceedings before the Tribunal, in return for a commitment to comply Hear and adjudicate on proceedings and applications for the review Impose pecuniary penalty Impose orders requiring an undertaking to modify or terminate the agreement, to pay damages to an injured party, not to engage in any conduct that violates the Competition Rules