<2.11.6 MONOPOLY ABUSE>

• MONOPOLY ABUSE occurs when a company (Usually the most dominant in the market) USES ANTI-COMPETITIVE BEHAVIOUR in order to RESTRICT OR ELIMINATE COMPETITION.

• CHARGING EXCESSIVELY HIGH PRICES. This might be difficult to judge, but if they are making high profits then this is an indication that prices are higher than in a competitive situation EXAMPLE

• PREDATORY PRICING. This involves cutting prices and selling below-average cost to force rivals out of business. EXAMPLE

• LIMITING PRODUCTION AND ACCESS TO TECHNICAL DEVELOPMENTS. Artificial barriers to fair access.

• UNFAIR TREATMENT OF COMPETITORS – e.g. giving preferential treatment to certain parties, placing others at a disadvantage.

• VERTICAL RESTRAINTS. This involves the monopoly firm imposing prices or restrictions on its suppliers or retailers. For example, this could involve 'Selective distribution' e.g. Levis’ doesn’t want to supply Tesco supermarkets.

• EXCLUSIVE DISTRIBUTION. Some retailers will only buy from some particular  manufacturers

• TIE IN SALES. E.g. if you buy a printer the company will try and make you buy their own brand ink.

Most countries have laws that try to promote competition by preventing collusion between oligopolistic firms (agreements to collaborate, often to fix prices) for the purpose of restricting competition between them, as well as preventing anti-competitive behaviour by a single firm that dominates a market. The objective is to try to prevent monopolistic behaviour by one or a group of firms, and therefore achieve a greater degree of allocative efficiency. 

• Most countries have laws that try to promote competition by preventing collusion between oligopolistic firms (agreements to collaborate, often to fix prices) for the purpose of restricting competition between them, as well as PREVENTING ANTI-COMPETITIVE BEHAVIOUR by a single firm that dominates a market. 

• The objective is to try to prevent monopolistic behaviour by one or a group of firms, and therefore ACHIEVE A GREATER DEGREE OF ALLOCATIVE EFFICIENCY. 

• PREVENT EXCESSIVE PRICES: Without government regulation, monopolies could put prices above the competitive equilibrium. This would lead to allocative inefficiency and a decline in consumer welfare.

• ENSURE QUALITY OF SERVICE: If a firm has a monopoly over the provision of a particular service, it may have LITTE INCENTIVE TO OFFER A GOOD QUALITY SERVICE. Government regulation can ensure the firm meets minimum standards of service.

• CONTROL MONOPSONY POWER: A firm with monopoly selling power may also be in a position to exploit monopsony buying power. For example, supermarkets may use their dominant market position to squeeze the profit margins of farmers.

• PROMOTE COMPETITION: In some industries, it is possible to encourage competition, and therefore there will be less need for government regulation once competitors are established.

• CONTROL NATURAL MONOPOLIES: As mentioned before some industries are natural monopolies and provide essential goods and services such as water and electricity supplies – due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition, and it is essential to regulate the firm to prevent the abuse of monopoly power and ensure as much consumption as possible.

• The government can regulate monopolies through....

  • • • • PRICE CAPPING

        • REGULATING MERGERS

        • BREAKING UP MONOPOLIES

        • INVESTIGATE POTENTIAL COLLUSION

        • NATIONALISE.

• PRICE-CAPPING: For many newly privatised industries, such as water, electricity and gas, the government created regulatory bodies such as:

  • OFGEM – gas and electricity markets

  • OFWAT – tap water.

  • ORR – Office of rail regulator.

• REGULATION OF QUALITY: Regulators can examine the quality of the service provided by the monopoly. For example, the rail regulator examines the safety record of rail firms to ensure that they don’t cut corners. In gas and electricity markets, regulators will make sure that old people are treated with concern, e.g. not allow a monopoly to cut off gas supplies in winter.

• BREAKING-UP MONOPOLIES: In certain cases, the government may decide a monopoly needs to be broken up because the firm has become too powerful. This rarely occurs. For example, the US looked into breaking up Microsoft, but in the end, the action was dropped. This tends to be seen as an extreme step, and there is no guarantee the new firms won’t collude.

• YARDSTICK or ‘RATE OF RETURN’ REGULATION: This is a different way of regulating monopolies to the price capping. Rate of return regulation looks at the size of the firm and evaluates what would make a reasonable level of profit from the capital base. If the firm is making too much profit compared to its relative size, the regulator may enforce price cuts.

• INVESTIGATION OF MONOPOLY ABUSE: In the UK, the office of fair trading can investigate the abuse of monopoly power. This may include unfair trading practices such as:

  • Collusion (firms agree to set higher prices)

  • Predatory pricing (setting low prices to try and force rival firms out of business)

  • Vertical restraints – prevent retailers stock rival products

  • Selective distribution For example, in the UK car industry firms entered into selective and exclusive distribution networks to keep prices high. The competition commission report of 2000 found UK cars were at least 10% higher than European cars

• A MERGER is an AGREEMENT BETWEEN TWO FIRMS TO JOIN TOGETHER AND BECOME A SINGLE FIRM. Mergers may occur for a number of reasons, such as an interest in capturing economies of scale (a single larger firm may be able to produce at lower average costs), or an interest in firm growth (the firms would like to become larger), or interest in acquiring monopoly power, which is made possible by the larger size of the new, larger firm. 

• Mergers are an issue in competition policy because of the possibility that the single firm created from the merging of smaller firms may be very large and have too much monopoly power. 

• Legislation usually involves LIMITS ON THE SIZE OF THE COMBINED FIRMS.

• E.G In the UK If a new merger creates a firm with more than 25% of market share, it is automatically referred to the Competition and Markets Authority (CMA). The CMA can decide to allow or block the merger depending on whether it believes it is in the public interest.

• For example, CMA blocked the merger between Sainsbury’s and Asda

• As we learned these industries don't naturally face any competitive pressures, and can act like all monopolies, and produce the quantity at which their profits are maximised (Where MC=MR), and where abnormal profits can be earned (AR>AC) which is always below the allocative efficient level (AR=MC). However, the fact that these industries are usually related to the provision of necessities, such as WATER AND POWER SUPPLIES, compels governments to intervene and prevent them from abusing their monopoly power by forcing them to either produce where P=AR=AC ('AVERAGE COST PRICING') or where P=AR=MC ('MARGINAL COST PRICING')

As we just started talking about natural monopolies and monopoly abuse, 

PRODUCE AN INFOGRAPHIC USING CANVA detailing a well-known case of monopoly abuse or a failed mergers. Include logos and data.

Detail the accusation, and resolution e.g. fines, nationalisation etc

THE BEST WORK WILL BE DISPLAYED.

PAPER 1 10-MARKERS

• Explain two possible government responses to the abuse of monopoly power. 

• Explain why monopoly power may be considered a type of market failure

• Explain how welfare loss might result from monopoly power.

PAPER 1 15-MARKERS

• Evaluate the view that monopoly is undesirable as it fails to achieve productive and allocative efficiency

• Evaluate the view that monopolies, despite their inefficiencies, may often be considered desirable. 

• Discuss the effectiveness of government policies (legislation and regulation) to reduce monopoly power.

• Discuss the view that governments should always try to prevent a monopoly from occurring in a market.

• Discuss the view that legislation is the best way of dealing with the problem of monopoly power.