Growth of Monopolies

Question: Is the growth of Monopoly Power always a bad thing?

In recent years, many industries have seen a growth in monopoly power and market concentration. For example, in the supermarket industry, Tesco’s market share has grown; I believe they now have over 30% of market share. The Merger of Morrison’s and Safeway has also decreased the number of competitors in the market.

The banking sector has seen a significant growth in monopoly power, due to the recent mergers. The merger of Lloyds TSB and HBOS has created a firm with over 30% of the retail banking market. It is a significant reduction in competition, and has created a banking sector with strong monopoly power.

Generally, growth in monopoly power is seen as harmful thing, especially for the consumer. Monopoly power enables firms to:

  • Charge higher prices because of the lower levels of competition
  • Offers less choice of service and products to consumers.
  • Make High profits at the expense of the consumer.
  • more disadvantages of monopoly

A growth in Monopoly Power can be beneficial if:

Economies of scale. A larger firm may be able to benefit from lower average costs. Hence consumers may benefit from lower prices

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Diagram showing lower average costs.

Higher profits can be used for Research and Development. e.g. drug companies may need high profit to invest in risky research techniques.

Dynamic Monopoly. If the growth in monopoly power occurs due to the success, efficiency and dynamism of the firm this can benefit consumers. For example, Google gained monopoly power through arguably developing the best search engine. Google is not generally considered to be a lethargic, inefficient monopoly like say an old nationalised monopoly like British Rail.

Monopoly Power In Banking.

If we take the banking industry, the problem is that these advantages seem rather feeble. Certainly there are economies of scale in offering a national banking network. But, I would imagine Lloyds TSB have already exploited most of the economies of scale. A further merger does little to benefit from further economies. If it was a merger of two steel firms, which has much higher fixed costs, the economies of scale may be greater. But, I really can’t see consumers getting lower bank charges because of economies of scale.

If two pharmaceutical firms or airplane manufacturers merged, there could be a good case to say they would use their combined profit for reasearch and development. But, it is hard to justify this for the Banking sector. Profit isn’t needed to invest in new products, it will generally go to the shareholders.

So in the case of banking it seems the growth in monopoly power has many of the disadvantages without any of the advantages. In fact, the only real reason it was allowed to go ahead was the fact, it was seen as a less bad alternative to nationalisation at the time.

So although, it was a convenient solution at the time, the effect of more monopoly power will be felt for many years to come.

The important thing to be aware of is that the benefits of greater monopoly power really depends on the industry in question. We have to look at each merger and firm separately.

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