- Created by: Aimen Kamran
- Created on: 29-05-13 16:06
Element of competition policy with the longest history, dating back to the introduction of the Monopolies Commission in 1948. The role of the Competition Commission (CC) is not restricted solely to the investigation of pure monopoly. It also includes mergers that may lead to potential monopolies in addition to established monopolies. More generally, it investigates monopoly power in oligopolistic industries that are dominated by a few large firms.
The govt. identifies two types of monopoly: scale and complex. Together these form statutory monopoly, taken to mean 'monopoly as defined in the law'. A statutory monopoly exists if:
- One firm has at least 25% of the market for the supply or acquisition of a particular good or service (scale).
- A number of firms together have at least 25% share and conduct their affairs so as to restrict competition (complex).
Theoretical background to monopoly policy
Note that in the absence of economies of scale (EoS) perfect competition is more productively and allocatively efficient, also X-efficient. In perfect competition the consumer is 'king' and there is consumer sovereignty. Monopoly leads to the exploitation of producer sovereignty and manipulation of ocnsumers. By restricting output and raising price, monopoly results in a net welfare loss as well as a transference of producer surplus to consumer surplus.
Therefore the justification for monopoly policy comes from the model of perfect competition. However, there are two circumstances under which monopoly may be preferable to small firms producing in a competitive market.
Firstly, when the size of the market is limited but economies of scale are possible, monopolies can produce at a lower average cost per unit (ACPU) than smaller, competitive firms.
Second, under certain circumsances, firms with monopoly power may be more innovative than firms unprotected by entry barriers. When this is the case, a monopoly may be more dynamically efficient than a firm in a more competitive market.
Cartels vs fully integrated monopolies
The efficiency or lack thereof of a monopoly depends generally upon what type of monopoly it is and the circumstances under which it was created.
Cartels are usually regarded as the worst form of monopoly power from the public interest point of view. They are likely to exhibit monopoly disadvantanges with few benefits. A cartel is a price ring formed of independent firms who make a collective trading agreement to restrict output or charge the same price. This acts as a monopoly in the marketing of goods but the benefits of EoS likely do not occur because there isn't physical or technological integration of the members of the cartel. Consumer choice is restricted and cartels tend to keep inefficient firms in business while the more efficient members make monopoly profits. Thus it is possible that they lack the incentive to innovate in products and processes of production. They are likely to be dynamically efficient and are thus generally illegal (exception: OPEC).
A fully integrated monopoly may result from accident rather than design. Happens when a dynamic firm grows…