Monopoly Control Tools
... CONSPIRACY OF PRACTICE Adam Smith, seen by many as the father of the science of modern economics, observed in his seminal work published in 1776 “An Inquiry into the Nature and Causes of the Wealth of Nations” that: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices” This astute and oft quoted observation recognises the propensity of individuals (and the organisations those individuals control) to participate in restrictive practices, including monopolistic activities, as a means of self betterment. ... This view certainly holds general consensus, with the major economies of the world all possessing codes which attempt to control restrictive business practices, from the pioneering Sherman Act introduced as far back as 1890 in the USA to the plethora of more recent legislation found in all modern economies including the United Kingdom and the European Union. ... The respected academic JA Schumpeter hypothised “perfect competition is not only impossible, but inferior (to monopoly)” In this brief essay, I first set out definitions for the different types of competion and then set out an analysis of the theoretical mechanics for the two extreme systems of perfect competition and monopoly, allowing comparison and identification of causes for concern. By considering the theoretical equilibrium positions of firms in conditions of perfect competition and monopoly, we can identify the impacts of monopolistic behaviour in the general economy. Consideration of the tools available to governments in their efforts to curb monopoly power will be reviewed. United Kingdom anti monopoly policies can then be assessed against this analysis, and finally the influence of EU policies and objectives can be considered. ... The diagram above shows the Competition Types in order of their assumed benefit to Consumer Interests, with the best case being a state of Perfect Competition through to the worst case, in terms of consumer interests, of Monopoly. ... Duopoly o Competition exists between two very large firms Cartel o The market operates as a collective monopoly – firms come together by agreement to act as a monopoly Monopoly o The market is dominated and serviced by one large firm. ... This journey from an environment of Perfect Competition to one of Oligopoly or Monopoly is, however, checked by limiting factors which prevent firms obtaining ever lower Average Total Costs by continual expansion. ... MONOPOLY Where the assumptions of the Perfect Competition Model do not hold true, other types of firm behaviour will manifest. As noted by Adam Smith, the primary condition for monopoly is the mind and imagination of man and his ability to engage in “conspiracy”, but the manifestation of monopolies can nonetheless be considered under the following broad headings: 4. ... Conditions For Monopoly 4. ... Theoretical Model – Asumptions Monopoly has legally been defined in those circumstances where a firm enjoys more than 25% of market share, but for the purposes of constructing a simple model to analyse the behaviour of the monopolistic firm, we can make the following assumptions: Market Share o The monopolistic firm enjoys 100% of market share Products o No close substitutes for the product exist Market Demand o The Market Demand Schedule is “normal” (downward sloping) o The firm faces the entire market demand schedule o Cost of Supply o the marginal cost function of the monopoly is identically equal to the supply curve of the competitive industry Barriers o Effective barriers to entry exist – there are NO new entrants Price o The firm is a price setter 4. ... The monopoly firm, however, is faced with a downward sloping demand curve, allowing the firm to choose its price anywhere on that line. ... We can now consider the profit-maximising position of the monopoly, which is illustrated graphically in the following diagram. ... The diagram clearly illustrates that, given our previous assumptions, market equilibrium under conditions of perfect competition gives higher production (Qpc) than that of the monopolist (Qm) at a lower price – perfect competition producing a price of Ppc which is lower than the price in monopoly conditions of Pm. ... However, as the monopoly faces a downward sloping demand curve, reflecting varying levels of market demand at varying prices, the monopolist will realise that many consumers would have been prepared to pay more for the product than the “equilibrium” market price for the given level of supply. ... Monopoly Power Comparison of the equilibrium position of the monopolist to that of the perfectly competitive as illustrated above shows that monopolies will produce less (bad for the economy), will produce inefficiently at a higher average cost (bad for the economy) and all at a higher price (bad for the consumer). ... We can now consider the tools available to governments wishing to control the negative impacts of monopolistic and anti competitive behaviour. ... REGULATING MONOPOLY The tools available to a government wishing to control monopolistic behaviour fall into two main categories Fiscal and Legal. ... Price Ceilings Price Ceilings are a popular control instrument in the U. ... Their effect is to artificially control the market demand line, and by consequence, the firm’s marginal revenue line. In the above diagram, the monopoly firm’s output without price regulation would be y* at a price p*.