Circumstances under which monopolies can benefit the consumer

“Competition policies are set against monopolies in general.” Explain why this statement is true. Are there any circumstances under which monopolies can benefit the consumer?

A monopoly is a situation in which a single company owns all or nearly all of the market for a given type of product or service. This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition (for example, vast economies of scale, barriers to entry, or governmental regulation). In such an industry structure, the producer will often produce a volume that is less than the amount which would maximize social welfare.

The EU Competition Commission is in charge of monitoring abuse of market dominance by monopolies, and follows the Treaty establishing the European Community:

Article 82 of the Treaty establishing the European Community is an anti-monopoly instrument. It outlaws ‘any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it… in so far as it may affect the trade between Member States’. Dominant position here means concentration or monopoly power which enables the firm or firms to influence, by independent action as a buyer or a seller, the outcome of the market. However, the article doesn’t define what size of market share constitutes a dominant position, as this can vary from product to product. The emphasis isn’t on the existence of a dominant position but rather on the abuse of power, primarily in trade between member states. Dominant enterprises are stopped from committing price discrimination in their interstate purchases or sales.

Microsoft is often at the forefront of monopoly investigations:

In December 1998, Sun Microsystems, another US company, complained that Microsoft had refused to provide information necessary for Sun to be able to develop products that would be able to interface with Windows PCs, so be able to compete on an equal footing in the market for work group server operating systems.

The Commission’s investigation revealed that Sun was not the only company that had been refused this information, and that these non-disclosures by Microsoft were part of a broader strategy designed to shut competitors out of the market.

In 2000, the Commission also began to investigate the effect of Microsoft’s tying of another product, windows media player, to its operating system.

This left other media player firms unable to compete.

In 2004, after a 5-year-investigation, the European Commission concluded that the Microsoft Corporation broke European Union competition law by abusing its near monopoly in the market for PC operating systems and for media players.

Microsoft had to disclose information to allow other firms to interface with the windows operating system.

They were also fined € 497 million for abusing its market power in the EU.

In February 2008 the EU fined Microsoft a further €899 million for abusing its dominance of the market. *(skim over – don’t say all)*

This diagram shows the effect of a monopoly on an economy; you can see that consumers are left worse off through the loss of consumer surplus.

Policies are set against monopolies in general because of the market failure that Monopolies cause:

Monopolies have large barriers to entry which prevent other firms being able to enter the market; this enables them to abuse their market dominance and set prices higher than the market equilibrium. If the product is price inelastic as there are no alternatives too it (such as the motor industry), then the customer has no choice but to pay the higher prices, thus consumers are worse off.

They are able to charge Predatory prices which is when the firm sets artificially low prices which competitors aren’t able to compete with.

Monopolies have less incentive to create good products because the customers have little or no alternative to that product.

Compared to a normal market structure, a monopoly market skews most of the positive externalities to the producer rather than the consumer.

Certain forms or cooperation agreements between enterprises, which are considered beneficial for the consumers by improving production, distribution or technical progress, are deemed not to restrict competition and therefore they are exempted. Cross-border concentrations of community interest, regardless of whether they are brought about by agreement or by takeovers, are also exempted

There are a number of potential benefits of monopolies:

It’s possible that monopoly firms can be efficient:

An argument popular with economists of the Austrian School of Economics is that firms who gain monopoly power are invariably successful, innovative and efficient. e.g. Google have monopoly power but who can do it any better?

Stimulating Innovation and Investment with Patents:

The most obvious field where monopolies benefit society in a great way is that of patents. Patents give inventors the exclusive rights to market their inventions for twenty years, after which these inventions turn into public property. In other words, patents give these inventors the right to keep a monopoly for twenty years.

Monopolies are so important in this context because if they did not exist, an inventor would probably not receive any financial compensation for his or her work, since the imitators would steal it and flood the market with copied stuff, making the price collapse along with them. As a result, in a world without patents, a lot less people would invest their time, effort and money required to achieve new things.

In order to remedy this situation, the nations all around the world offer inventors monopolies on patents. The result is much quicker innovation; an economic growth much more accelerated and at quicker speeds in the lifestyles. In truth, it is difficult to think about a more beneficial monopoly from the social view of patents.

Monopoly and Economies of Scale

If long-run average total cost (LRATC) declines over an extended range of output, it is argued that it is better to have a few large firms (and in the extreme case, only one firm). This is known as the natural monopoly argument.

Because monopoly producers are often supplying goods and services on a very large scale, they may be better placed to take advantage of economies of scale – leading to a fall in the average total costs of production. These reductions in costs will lead to an increase in monopoly profits but some of the gains in productive efficiency might be passed onto consumers in the form of lower prices. The effect of economies of scale is shown in the diagram.

Examples of Natural Monopolies include public utilities such as water services and electricity. It is very expensive to build transmission networks (water/gas pipelines, electricity and telephone lines), therefore it is unlikely that a potential competitor would be willing to make the capital investment needed to even enter the monopolist’s market.

Conclusion:

Competition policies can be seen as generally set against monopolies, as monopolies can be such obstructions to competition, so the Competition Commission is going to have a lot of focus on managing monopolies; making sure they don’t abuse their position. Though, Monopolies aren’t necessarily all bad as natural monopolies can be the most effective market structure, benefiting both the firm and the consumer. However Competition Policies aren’t only set against monopolies, as they also have a big focus on aspects such as Mergers, takeovers and collusions of firms like cartels.