60.1K

Verified Solution

Link Copied!

Case Monopoly power and competition policy We have seen that amonopoly creates a social loss compared to a perfectly competitivemarket. If it is possible to increase the level of competition in amonopolized market, then society is better off since social surplusincreases. Competition policy (also known as antitrust policy)deals with markets where competition can arise; however, given thebehaviour of some firms in those markets, competition isrestricted. There are markets in which increasing the level ofcompetition is not feasible, so competition policy does not apply.This is the case of a natural monopoly, which will be discussed atthe end of this chapter. Broadly speaking, competition policy canbe divided into policies to deal with monopoly power that alreadyexists, and policies to deal with mergers that may increasemonopoly power. While mergers will be discussed in the nextchapter, here we discuss policies to address existing monopolypower. Since the UK belongs to the European Union, EU competitionlaw takes precedence where it is relevant, essentially in the caseof larger businesses with significant European or globalactivities. The original Common Market was created by the 1956Treaty of Rome. The modern and enlarged EU is largely underpinnedby the 1999 Treaty of Amsterdam. Article 81 of this treatyprohibits anti-competitive agreements (called cartels) that have anappreciable effect on trade between EU member states and whichprevent or distort competition within the EU. Article 82 prohibitsthe abuse of any existing dominant position. A firm has a dominantposition in a given market if it has a large market share in thatmarket. For example, Microsoft has a dominant position in themarket for operating systems (OS) for PCs, with a market share ofaround 90 per cent. Article 82 prohibits the abuse of a dominantposition not the dominant position itself. A firm can become adominant firm simply because it is more productive than the othersand this is fine for competition policy. What is not fi ne is afirm that uses its dominant position to restrict competition in themarket. Responsibility for enforcement of these articles lies withthe European Commission. Although global businesses areincreasingly subject to transnational competition law, manybusinesses still operate primarily within one country; nationaldecisions are then appropriate. Within the UK, these are governedby the Competition Act 1998 and the Enterprise Act 2002. The lattermade it a criminal offence, punishable by a jail sentence, toengage in a dishonest cartel. Two key institutions addressing UKcompetition policy are the Office of Fair Trading (OFT) and theCompetition Commission. In particular, the OFT has the power torefer cases in which existing monopoly power may be leading to a‘substantial lessening of competition’ to the CompetitionCommission for detailed investigation. Prior to the Enterprise Act2002, the Competition Commission was asked instead to evaluatewhether or not a monopoly was acting ‘in the public interest’,without any presumption that monopoly was bad, and many previousjudgements of the Commission concluded that companies were actingin the public interest, for example because they had an excellentrecord of innovation, despite having a monopoly position.

Questions on case study:

1. Explain the ways in which a monopolist can abuse its powerwhen compared to a perfect competitor.

2. In light of your answer to question 1, explain why it isimportant for monopolists to be regulated to protect the interestsof consumers, as done by the OFT and the CompetitionCommission.

3. Discuss how monopolists can be beneficial to the economy andconsumers.