Does it work in a free market

When should the state intervene in the “free game of the market”?

When should the state intervene in a market? From an economic point of view, it is important to assess whether there is competition in the markets under consideration or not. Because markets have advantageous properties when there is competition: the providers are disciplined in their behavior by the competition. Consumers can therefore enjoy lower prices. The quality is adapted to your needs. And the overall welfare is as high as possible because the resources in markets are used as beneficial as possible.

However, this fundamentally positive view of the effects of competition does not mean that, from an economic point of view, state intervention in markets is never necessary. From the cases in which state intervention may be necessary, two should be singled out:

Example 1: There is no functioning competition

Competition does not work because individual providers are able to generate profits that are not based on excellence in competition. Such a situation is a consequence of market power. If suppliers have market power, the price usually rises - quality, overall welfare and efficiency decrease. In this case, the state must intervene to either protect the functionality of competition or to prevent companies from exercising their market power. This is the field of competition policy. Prominent current examples are proceedings against Facebook and Amazon or the examination of the merger between E.on and innogy. The challenge for competition policy is to recognize when such a market power problem arises. This is often not so easy because the competition authorities do not have the information they need at their fingertips.

Example 2: There is effective competition, but the result is not socially desirable

But there are also cases in which competition works - but this leads to socially undesirable consequences. The state can also intervene in such cases. This belongs e.g. B. on the field of labor market and social policy as well as regulatory policy. For example, competition requires all actors to face the competition. This in turn offers the opportunity to fail in the competition - even if you “make an effort” to the greatest extent possible. This indispensable characteristic of competition leads to the question of social security, e.g. B. in bankruptcies. The challenge, however, is to estimate when social security will undermine competition in such a way that it can no longer fulfill its central functions. An example of this are cases such as the bankruptcies of Thomas Cook or Schlecker, in which a decision has to be made as to whether companies and their employees are to be absorbed by government measures. However, if companies can expect to be caught in the event of failure, that reduces the drive to compete. One cannot speak of a single valid technical view of how much social protection undermines the functional characteristics of the market economy. But one can identify the areas of tension that arise through such interventions.

Teaching implementation: content challenges

Responsible judgment on the question of when the principle of competition requires state intervention requires a broad technical basis. This foundation is listed in the curricula for business education and for various joint subjects with business-related components in the federal states at various points: be it in the analysis of price formation in markets and the discussion of the need for state intervention in monopolies, oligopolies and cartels Assessment of consumer policy interventions, or when assessing the impact of other government interventions on markets.

The topics of competition policy and regulatory policy outlined above entail various specific content requirements for teaching:

In order to be able to understand the challenges of competition policy, the model framework of price formation in competition has to be examined in more depth and 'untied': Which goods or services all belong to 'the market' that is being considered? Which companies are therefore in competition with one another? Is it possible for new providers to enter this market? When is there functional competition? If one deals with price formation in markets in class, these questions are assumed to have been answered (“The supply curve on the market for eggs…”, “They are in competition with one another…”). However, the instruments of competition policy are necessary in order to find these answers in the first place. It becomes clear that reality is usually more complex than the model captures. However, it can also become clear that the simplification of reality required in the model helps to plausibly explain a surprising number of real cases - e.g. For example, the competitive pricing model assumes that there are a large number of small providers. This is often not the case in real markets. However, competition policy analysis instruments show that competition can function even when there are few providers in a market. The competitive pricing model can therefore also describe cases with fewer providers. Dealing with questions of competition policy can thus help to understand the pricing model in greater depth.

In order to be able to understand the regulatory challenges mentioned, the effects of a (non) intervention must be understood from the point of view of various actors. It must be reflected that state intervention should be rule-based, and the possible areas of tension, such as B. between the principle of competition on the one hand and social security on the other hand, must be identified and weighed up within their framework. This multi-perspective judgment competence can in turn serve as a basis for dealing with a wide range of regulatory issues.

Teaching implementation: methodological challenges

In all of the cases mentioned, it is advisable to deal with current political cases and decisions. However, when dealing with case studies, it must always be borne in mind that within the framework of the teaching, concrete contexts must also be abstracted in order to reflect the general questions that are expressed in the cases under consideration. Research in various subject didactics shows that pupils are often influenced in their judgment by the chosen example without reflecting on it sufficiently and without this being appropriate from a technical point of view. This context sensitivity in the judgment should also be reflected in the classroom: What distinguishes different cases of abuse of market power and what do they have in common (e.g. Facebook (2019) vs. Microsoft (2004) vs. Amazon (2019))? What distinguishes different cases of company rescues and what do they have in common (e.g. Thomas Cook (2019) vs. Air Berlin (2017) vs. Schlecker (2012))? If the influence of the context on the judgment is not reflected in the lesson, it is to be feared that a technically well-founded view will not be achieved. This has to be considered in the methodical implementation. The material of the month “Should the state protect against competitive losers?” Shows what a teaching implementation can look like, taking into account context sensitivity.

about the author

Franziska Birke is a professor for business education. She is responsible for training business teachers (B.Ed. and M.Ed.) at the Freiburg University of Education. Her research interests include: how regulatory judgment can be promoted.