A monopoly means that there is a single supplier, however,’monopoly power’ can exist in more than one supplier in the shape of a duopolyor an oligopoly (Economics Online). Monopoly power can lead to market failuredue to a firm’s ability to keep competitors out of the market due to highbarriers to entry, also with the ability to operate without competitivepressures. A single company does not need a monopoly to exercise monopolypower; it essentially depends on the market share of the company with regard tocompetitors. Furthermore, the smartphone industry is an example of anoligopolistic market, which as shown in figure 1.
1 (Economics Online). According to the ‘IDC Quarterly Mobile PhoneTracker’, in the first quarter of 2017, themarket share for Samsung was 23.3%, Apple’s was at 14.7% and Huawei shared 10%of the market (idc.
com). Therefore, although this market would be referred toas an oligopoly as a relatively small number of large firms dominate the marketin terms of market share, these popular multi-national companies exercisemonopoly power. Figure 1.
1 (idc.com,2017) Market failure can result from monopoly power in a market fora number of reasons. Consumers have less choice when they come to purchasingproducts as firms which have high monopoly power essentially block new entrantsand decrease competition due to the lower prices market leaders can set due toeconomies of scale.
An example of this is when the ‘Royal Mail controlled 99%of the postal market’ (BBC News, 2005) which was worth £4.5 billion when theylost their monopoly at the start of 2006 after a 350-year run due to regulationorganisations intervening. In this case, Royal Mail exploited their monopolypower and were able to charge high prices, leaving the consumer with no otheralternative but to pay the price set by the market leaders. To increase theprice of products/services, a company with high monopoly power can alsodecrease supply or output which they have the power to control. However, thisis rarely the case as a firm normally doesn’t control enough market share dueto regulations that are put in place. Nonetheless, this would lead to a loss ofconsumer surplus meaning there is no extra net private benefit for the consumeras the prices is higher than what they are willing to pay. This can be the casewhen a business controls the consumer with monopoly power. Less employmentcould also result as, if the firm decreases output, fewer workers will be neededat the firm.
Moreover, this also relates to the allocative inefficiency ofmonopolies in terms of setting prices. Other competition is forced to followthe prices which are essentially set by the industry and market leaders,whereas monopolist companies can set their own prices, which aren’t necessarilyset equal to the marginal cost of supply. Due to the fact that consumers can’tcompare the prices for the businesses who exercise this monopoly power as thereare no other suppliers in the industry, prices can be set considerably higherthan marginal cost. Welfare loss is defined as a loss socially in the communityin relation to consumer and producer surplus when a market is controlled by amonopoly rather than a number of firms operating competitively. Total socialwelfare is maximised at the allocative efficient point where productionrepresents consumer preferences, and when price equals marginal cost, as shownin figure 1.2. Monopolies result in a reduction in social welfare as tradesthat were socially desired no longer take place. These trades that no longertake place can be shown on figure 1.
2 (Economics online) which show thedeadweight loss for both the consumer and the producer in the area shaded inred. This welfare loss will impact families with lower incomes the most. Economistsoften monitor monopolies using ‘welfare analysis’. Figure 1.2- (Economics Online) The government try to reduce the barriers to entry when amonopoly is evident in a market due to the welfare problems and negativeimpacts on the consumer.
This is done in a number of regulatory ways to preventmarket failure. Setting price controls is one of the main ways that thegovernment control monopolies. The ‘Office of Fair Trading’ was the mainorganisation in the UK that regulated monopolies until it closed in 2014 andits responsibilities were passed to a number of different organisations, forexample, the OFGEM for the gas and electricity industry. Such organisationslimit prices using an RPI-X formula, ‘X’ being ‘the amount they have to cutprices in real terms’ (Tejvan Pettinger). If the regulatory organisations thinkthat firms are charging too much to consumers, they can increase ‘X’ which wouldlimit the percentage increase the firm can increase the prices by. Before a merger between two companies takes place in the UK,the ‘Competition Commission’ calculate whether the two firms add up to having 25%market share in an industry, before assessing whether the merger is within’public interest’ in relation to jobs, prices and competition.
Therefore, thegovernment have the ability to prevent the build-up of monopoly power in a firmwhilst also being able to break up a monopoly into smaller entities. Thiscourse of action is extreme and rare, although Microsoft were investigated inthe 1990’s and early ‘000s in the US but the action of breaking them up into anoperating body and a software body was dropped (Alex Fitzpatrick, 2014).Microsoft were also targeted in a Chinese anti-monopoly investigation in 2014.An investigation into the abuse of a monopoly is possible if the government seeproblems in competition, pricing and domination in a market.
The ultimate wayin which the state can remove monopolies is to nationalise companies and bringthem under their control or create state-run companies to offer consumers moreoptions. For example, in 2017, Labour proposed in their manifesto to create astate energy business to compete against the ‘big six’ in the UK energy industrywhich have ‘collectively earned around £1 billion in profits every year since2013′ (Peter Kennedy, 2017). The government could also buy up to 50% of sharesin a company to have partial control and prevent abuse of its monopoly.De-regulation in the cases in which the monopolies are state-owned such asBritish Telecom or the Post Office, can decrease the power of the statemonopolies by lowering barriers to entry, allowing new entrants into the marketwhich can compete against the other firms for market share. In conclusion, monopoly power is a form of market failuredue to the business’ ability to control the consumer, with higher prices andless choice. Despite the money monopolies inject into the economy, consumersurplus’ leave the consumer with less purchasing power and at a welfare loss asdesired trading does not take place due to monopoly power which cuts offcheaper consumer options. Patents have created formidable barriers for newentrants and the ability for a business with a monopoly in the market to setprices well above the marginal cost adds to the net welfare loss that iscreated.
Production inefficiency also contributes to the market failure causedby a monopoly, as the firms have no incentive to make production moreefficient, environmentally safer or cheaper. It is for this reason whygovernmental remedies exist to tackle monopolies and prevent market failurewhich is frequently done through price control, nationalisation and mergerprohibition. Through controlling rise in prices, government regulatory bodiescan restrict monopolies allowing other entrants in the market to thrive withlower barriers to entry.
In terms of preventing the abuse of monopoly power inthe future, the government has the final say on the prospect of a merger andtakes into consideration public interest which protects society from thepotential market failure it could cause. Nationalisation and de-regulation areother methods of decreasing monopoly power in order to stimulate healthier competitionwithin markets and assist in the growth of new entrants. Although monopolypower can cause substantial market failure, the governments regulations andmethods in restricting its abuse are effective and thorough.