Nowadays, assimilated to the supply in the market,

            Nowadays, our capitalist society
bran been enlarged ghave us to a market society, the basis of our economy.
Unwillingly, this economic structure presents a certain number of failures. The
Monopoly Power is one of them and depicts the degree of price setting power,
held by a supplier on the basis of its market share (BusinessDictionary) which  can result several economic welfare losses
that we can assimilate as the economic wellbeing of an individual, group or
economy (InvestorWords). It is thus a very negative microeconomic phenomenon.
This paper will explain to what extent Monopoly Power is a form of market failure,
the welfare losses that it causes, and provide a concrete example of Monopoly
Power as an illustration in our economy and finally argue on how government can
intervene to fight it with its different available tools.

 

            To
define Monopoly Power as a market failure, we are allowed to use the Marshall’s
definition of Perfect Competition. A monopoly breaks the
conditions of many undifferentiated sellers and of free entry and exit of a
market. In a market of perfectly competitive, prices are determined by the
supply and the demand. Furthermore, the marginal cost of production is
assimilated to the supply in the market, ceteris paribus. Whereas in a monopoly
situation, the seller is not constrained by any competitor to sell at the
market price, so we say that they switch from price-taker to price-setter. This
would consequently prevent this market to be Pareto efficient ; price-taking
being one of the characteristics of Pareto efficiency that is defined as an
economic state of the market where resources are allocated in the most
efficient manner so none of the parties can provide more without affecting
their peers.

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A natural monopoly can be studied in certain
markets because of the economies of scale thus for some economists like William
Baumol, this form of monopoly is more efficient and preferable as a perfectly
competitive market in the domains of gas, water or electricity for example : “an
industry in which multiform production is more costly than production by a
monopoly” (1997).

As a result of this situation, in function of
their interests, they would be able to increase the prices and/or reduce the
quantities sold. It is at this moment that, as long as the firm is selling
products for more than marginal cost of production, there will be customers who
value it more than what it costs to the producer, what we can measure with the Willingness To Pay, but are not getting
it. Due to this failure, a Deadweigth
Loss occurs for the producer as well as for the customers because we can
see graphically that it is the difference between the willingness to pay of the
customers and the supply, framed by the price in use and the equilibrium price.
This deadweight loss would be nonexistent and there would be allocative efficiency
if the equilibrium price was in use.

This control available over the market when the
Monopoly Power is high extends to way more. In fact, artificial monopolies can
be reached by an already-settled monopolist by cutting the prices enduringly
under the average costs of production of its firm and of the little competitors
who will have to follow to prevent loosing customers. There is way more chance
to the latter to go bankrupt partly because of the economies of scale and the
technology that can be provided to an already bigger than everyone firm in a
certain market. After this, the monopolist will be able to settle a monopoly
price, way higher than before the drop and hence will benefit from a monopoly
rent, this malpractice is called predatory pricing.

One of the most publicized form of Monopoly
Power abuse could be the cartels.
These associations of legally independent firms with the purpose of exercising a
certain kind of monopolistic influence on the production or sale of a good or
service are illegal. Nevertheless, when an oligopoly occurs, the main firms of
this market can conclude an agreement with, most of the time, the aim of increasing
prices and profit above the competitive equilibrium price. What breaks the law
of Marshall’s perfect competition that says that sellers must act
independently. Consumers can’t even have a word about this because “thanks” to
their agreement, the importance of those firms in this market and all the
benefits unlocked for them. They act as one firm and it can be on distribution,
production strategies, thus having a real monopoly pressure ability on the
customers. Customers are consequently the victims of it because some have then
less purchasing power and are “poorly organized and ignorant of the public
decisions” (Tirole, 2017). This can easily lead to a consequent decrease of the
consumer welfare which is, with the consumer demand and thus ability to find substitute
the thesis of Prof. Lynne Kiesling from Northwestern University. It is also possible
to use cartels to divide a market or to practice some predatory pricing.

 

            Now
that we confirmed that Monopoly Power is a market failure, let us briefly
explain why government needs to seek perfect competition. As we saw, Monopoly
Power leads to market power which relates to “a firm’s ability to set its
prices sustainably above its costs or to offer poor-quality services without
loosing many customers.” (Tirole, 2017).

We are looking for competition because, in Jean
Tirole’s opinion, it “serves society” within three main channels :
affordability (it helps to keep the prices low), the incentives for innovation
and producing more efficiently and integrity what prevents better to influence
or to corrupt in the interests of the supplier. It is why Tirole thinks the
government has to play an important regulatory function in the markets. Indeed,
it prevents incentives to innovate, which is the basis of economic growth

To face this problem, states appeal to
Industrial Economics by “creating models that extract the essential elements
from each situation” (Tirole, 2017), what results in several norms, ways of
regulating , prohibiting and other tools to try to reach perfect competition in
markets.

In the UK, both consumer protection and competition
law enforcement are handled by the Competition and Markets Authority. The non-ministerial
department describes its mission as promoting “competition for the benefit of
consumers” and to “make markets work well for consumers, businesses and the
economy.”.

We talked about natural monopolies and even if
the majority agrees on the fact that they are beneficial, government has to
regulate them. The first way is by capping prices and, depending on the sector,
it is in function of what amount is invested and how affordable should be the
merchandise sold with taking into account the inflation so the companies don’t
overuse their power to increase prices. Another way to control natural monopolies
is by forcing companies to hire a regulator to check on the quality of the
services and the security of the infrastructures. An other kind of price
capping is when the authority have a look at the firm over its capital base to
evaluate what should be a reasonable level of profit. It is called the “Rate of
return” regulation or Yardstick. However, it is tough to evaluate precisely the
firm ; if the evaluation is too high, firms can abuse of their market power. In
addition, the latter can adopt strategies aimed to bypass the regulation and
finally make high profit by letting the production costs rise, so the profit
level is not too high. The point which is very negative is that it creates too
little incentives to produce efficiently.

But, out of natural monopolies or cartels,
firms are able to increase their market share. They can try to circumvent the
law by merging. The authority investigates about mergers and if one creates a
firm which owns more than 25% of the market, it gets automatically notified and
after the study of the case, it can be allowed or blocked. The decision of
preventing a merger already occurred the third of July 2001 against General
Electrics and Honeywell when the US government allowed it. The European
commission judged it as “incompatible with the common market” (European
Commission’s decision, 2001), it would have lead to a consequent reduction in
competition for the aerospace industry and would have “resulted ultimately in
higher prices for customers (Mario Monti, 2001). Antitrust regulation can also
be achieved by an ownership of the government , what is more reliable. This
subject is in the middle of actual debates in the UK because, if elected, Jeremy
Corbin have the intention to renationalize natural monopolies : “Rail, water,
energy, Royal Mail: we’re taking them back.” (John McDonnel, 2017) but the
economist journalist Martin Wolf argues that it would be a big step back
because with private owners, managing and service are way more efficient.

Finally, the basis of this kind of regulation
is the investigation of monopoly power’s abuses such as predatory pricing,
cartels, vertical restraint which depicts when the producer controls the price
used by retailer. Tie-in-Sale, where other producers encounter barriers to
enter the market of a by-product, vertical integration and all other forms of
illegal collusion are concerned by the antitrust legislations. Those actions
can lead to fines and, in some cases, to be judged as a criminal offence.

 

            Monopoly
Power is a market failure, one of the woes of our contemporary society.
Industrial economics and governmental entities are aimed to regulate markets
and avoid oligopolies or monopolies with different types of policies enforcing
the law and punishing the offenders. Still, it doesn’t seem like we have a
solution to every situation and monopolies continue appearing such as naturally
or artificially because of producer’s drive.

 

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