Exploitation of deregulation by entrenched enterprises

In the period during which competition develops to generate self-correcting market forces, incumbent firms may take advantage of economic deregulation to engage in restrictive business practices previously prevented by government intervention in order to block entry of competing enterprises into the market. Not only may this happen in sectors where incumbent firms already have a market-dominating position, but there may be expansion by such firms into other newly deregulated industries. The problem is not merely a transitional one. For once firms have been allowed to entrench their positions through anti-competitive conduct or structures, it may be difficult to take corrective action without damaging the economy and business confidence in the process.

In several eastern European countries, the effect of liberalization in the 1990s has been a speedy and sharp reduction in output from large public enterprises, without a corresponding increase in supply responses by other producers, accompanied by high inflation. There has been monopolistic behaviour by such enterprises anticipating future price controls. Liberalization failed to result immediately in a price system that correctly reflected cost and/or demand conditions, making it increasingly apparent that in such economies, it is difficult to contain inflation without restructuring, de-monopolizing and privatizing industries or firms.