Monopoly 2

Monopoly 2

1. Regulation

   • The govt may wish to regulate monopolies to protect the interests of consumers.
   • Why?
     • Prevent excess price which would lead to allocative inefficiency and a decline in consumer welfare.
     • Quality of service - if a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service. Regulation can ensure the firm meets minimum service standards.
     • Prevent exploitation of monopsony buying power, e.g. supermarkets using their dominant market position to squeeze profit margins of farmers.
     • Promote competition so there is less need for govt regulation
     • Some industries are natural monopolies so we can't encourage competition and it is essential to regulate the firm to prevent abuse of monopoly power.
     • Prevent anti-competitive practices
       • Raising prices above what they would be in a competitive market by restricting output, restricting choice, raising barriers to entry and applying different trading conditions to equivalent transactions (price discrimination)
         • Predatory Pricing
         • Price discrimination
         • Refusal to supply a competitor/customer
         • Resale Price Maintenance
   • How?
     • Regulation of quality of service
       • e.g. in gas & electricity markets regulators (OFGEM) won't allow a monopoly to cut off gas supplies to elderly people in winter.
     • Merger policy - the CMA will investigate mergers with more than 25% market share and decide whether to allow/block the merger.
     • CMA will investigate the abuse of monopoly power for unfair trading practices such as collusion.
     • Price Capping: regulators are able to limit price increases within an industry with a formula RPI-X ...X is the amount by which they have to cut prices by in real terms.e.g. if the regulator thinks a firm is charging consumers too much, it can set a high level of X.
       • If a firm cuts costs by more than X they can increase their profits. However, it is costly and difficult to decide on the level of X, and there is danger of regulatory capture.
     • Breaking up a monopoly if firm has become too powerful - extreme step and no guarantee the new firms won't collude.

2. Evaluation

   • A monopolistic market can operate efficiently without competition, provided the market is contestable; firms benefit from large-scale production and consumers benefit from fair prices, provided that there is the threat of new entrants into the industry.
   • They can benefit from economies of scale and may be 'natural' monopolies, so it may be argued that it's best for them to remain monopolies to avoid the wasteful duplication of infrastructure if new firms were encouraged to build their own.
   • Domestic monopolies can become dominant in their own territory and then penetrate overseas markets, earning a country valuable export revenues.
   • Some economists argue that monopoly power is required to generate dynamic efficiency, because high profit levels boost investment in R&D, and innovation is more likely with large firms as they can bear the associated risks.