A monopoly means that there is a single supplier, however,
‘monopoly power’ can exist in more than one supplier in the shape of a duopoly
or an oligopoly (Economics Online). Monopoly power can lead to market failure
due to a firm’s ability to keep competitors out of the market due to high
barriers to entry, also with the ability to operate without competitive
pressures. A single company does not need a monopoly to exercise monopoly
power; it essentially depends on the market share of the company with regard to
competitors. Furthermore, the smartphone industry is an example of an
oligopolistic market, which as shown in figure 1.1 (Economics Online). According to the ‘IDC Quarterly Mobile Phone
Tracker’, in the first quarter of 2017, the
market 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 to
as an oligopoly as a relatively small number of large firms dominate the market
in terms of market share, these popular multi-national companies exercise
monopoly power.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 1.1 (idc.com,
2017)

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Market failure can result from monopoly power in a market for
a number of reasons. Consumers have less choice when they come to purchasing
products as firms which have high monopoly power essentially block new entrants
and decrease competition due to the lower prices market leaders can set due to
economies 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 they
lost their monopoly at the start of 2006 after a 350-year run due to regulation
organisations intervening. In this case, Royal Mail exploited their monopoly
power and were able to charge high prices, leaving the consumer with no other
alternative but to pay the price set by the market leaders. To increase the
price of products/services, a company with high monopoly power can also
decrease supply or output which they have the power to control. However, this
is rarely the case as a firm normally doesn’t control enough market share due
to regulations that are put in place. Nonetheless, this would lead to a loss of
consumer surplus meaning there is no extra net private benefit for the consumer
as the prices is higher than what they are willing to pay. This can be the case
when a business controls the consumer with monopoly power. Less employment
could also result as, if the firm decreases output, fewer workers will be needed
at the firm. Moreover, this also relates to the allocative inefficiency of
monopolies in terms of setting prices. Other competition is forced to follow
the prices which are essentially set by the industry and market leaders,
whereas monopolist companies can set their own prices, which aren’t necessarily
set equal to the marginal cost of supply. Due to the fact that consumers can’t
compare the prices for the businesses who exercise this monopoly power as there
are no other suppliers in the industry, prices can be set considerably higher
than marginal cost.

 

Welfare loss is defined as a loss socially in the community
in relation to consumer and producer surplus when a market is controlled by a
monopoly rather than a number of firms operating competitively. Total social
welfare is maximised at the allocative efficient point where production
represents consumer preferences, and when price equals marginal cost, as shown
in figure 1.2. Monopolies result in a reduction in social welfare as trades
that were socially desired no longer take place. These trades that no longer
take place can be shown on figure 1.2 (Economics online) which show the
deadweight loss for both the consumer and the producer in the area shaded in
red. This welfare loss will impact families with lower incomes the most. Economists
often monitor monopolies using ‘welfare analysis’.

 

 

 

Figure 1.2- (Economics Online)

 

 

 

The government try to reduce the barriers to entry when a
monopoly is evident in a market due to the welfare problems and negative
impacts on the consumer. This is done in a number of regulatory ways to prevent
market failure.

 

Setting price controls is one of the main ways that the
government control monopolies. The ‘Office of Fair Trading’ was the main
organisation in the UK that regulated monopolies until it closed in 2014 and
its responsibilities were passed to a number of different organisations, for
example, the OFGEM for the gas and electricity industry. Such organisations
limit prices using an RPI-X formula, ‘X’ being ‘the amount they have to cut
prices in real terms’ (Tejvan Pettinger). If the regulatory organisations think
that firms are charging too much to consumers, they can increase ‘X’ which would
limit 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, the
government have the ability to prevent the build-up of monopoly power in a firm
whilst also being able to break up a monopoly into smaller entities. This
course of action is extreme and rare, although Microsoft were investigated in
the 1990’s and early ‘000s in the US but the action of breaking them up into an
operating 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 see
problems in competition, pricing and domination in a market. The ultimate way
in which the state can remove monopolies is to nationalise companies and bring
them under their control or create state-run companies to offer consumers more
options. For example, in 2017, Labour proposed in their manifesto to create a
state energy business to compete against the ‘big six’ in the UK energy industry
which have ‘collectively earned around £1 billion in profits every year since
2013′ (Peter Kennedy, 2017). The government could also buy up to 50% of shares
in 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 as
British Telecom or the Post Office, can decrease the power of the state
monopolies by lowering barriers to entry, allowing new entrants into the market
which can compete against the other firms for market share.

 

 

 

 

In conclusion, monopoly power is a form of market failure
due to the business’ ability to control the consumer, with higher prices and
less choice. Despite the money monopolies inject into the economy, consumer
surplus’ leave the consumer with less purchasing power and at a welfare loss as
desired trading does not take place due to monopoly power which cuts off
cheaper consumer options. Patents have created formidable barriers for new
entrants and the ability for a business with a monopoly in the market to set
prices well above the marginal cost adds to the net welfare loss that is
created. Production inefficiency also contributes to the market failure caused
by a monopoly, as the firms have no incentive to make production more
efficient, environmentally safer or cheaper. It is for this reason why
governmental remedies exist to tackle monopolies and prevent market failure
which is frequently done through price control, nationalisation and merger
prohibition. Through controlling rise in prices, government regulatory bodies
can restrict monopolies allowing other entrants in the market to thrive with
lower barriers to entry. In terms of preventing the abuse of monopoly power in
the future, the government has the final say on the prospect of a merger and
takes into consideration public interest which protects society from the
potential market failure it could cause. Nationalisation and de-regulation are
other methods of decreasing monopoly power in order to stimulate healthier competition
within markets and assist in the growth of new entrants. Although monopoly
power can cause substantial market failure, the governments regulations and
methods in restricting its abuse are effective and thorough.