1. Liberalisation of Markets. Deregulating markets enables new firms to enter and compete with the existing monopoly. For example, this occurred in telecoms, gas and electricity. However, some industries are natural monopolies and therefore  in these industries it is difficult to encourage new firms. To some extent, the UK government overcame this through increasing access to gas and electricity infrastructure.

2. Merger Policy. This prevents an increase in monopoly power when two firms joining together. Can be useful in preventing monopolies but not dealing with existing monopolies.

3. Regulation .e.g. Price capping or windfall taxes. Price capping is used for privatised utilities e.g. CPI – X. However, regulators may be subject to regulatory capture. see: Regulation of privatised industries

4. Break up existing monopolies. A drastic way to increase competition. But, may damage the progress of the firm. Does Microsoft have too much market power?

Not all monopolies are inefficient. Some firms generate monopoly power because they are efficient, dynamic and successful. e.g. Google. Therefore, it is inadvisable to break up these companies.

See: Advantages of Monopolies

Vertical integration occurs when two firms at different stages of production merge.

Example of vertical integration.

Brewery merging with chain of pubs

Software supplier merging with Computer firm

Coffer grower merging with coffee retailer such as Nescafe

Advantages of Mergers

See: Advantages of Mergers 

See: disadvantages of mergers 

Vertical mergers will have less economies of scale because most of the production is at different stages of production. There is still scope for monopoly power. Also a vertical merger can lead to monoposony power. e.g. Nescafe have been accused of paying a low price to farmers.

This question is a rather complicated way of saying:

• Discuss Why Firms wish to merge.
• Using Examples, discuss whether firms have  actually benefited from Mergers

Why Firm wish to Merge

1. Increase Market Share. A merger enables a firm to have more market share and therefore it is in a position to set higher prices and make more profit. Increasing market share may be necessary in a declining market with falling profitability.
2. Economies of scale. A merger can enable greater efficiency because the larger firms can share fixed costs. This argument is important for industries with high fixed costs such as car manufacture. It is less important for industries with low economies of scale e.g. cafes.
3. Profit for Research and development. A merger enables a firm to make more investment. This is important for risky investments in industries such as oil exploration.

See also: Benefits of Mergers

Advantages of Monopolies 

The degree of success enjoyed by firms, requires some research. Bear in mind the benefits of mergers will vary depending on the type of industry. Recent mergers include:

Safeway and Morrisons Supermarket

Mergers in Car Industry

Daimler-Benz took over Chrysler and also control Suzuki and Mitsubishi

The car industry is a good example, because the industry was suffering from over capacity and therefore there were many good reasons for mergers.

The diagram for a monopoly is generally considered to be the same in the short run as well as the long run.

Profit Maximisation occurs where MR=MC. Therefore equilibrium is at at Qm, Pm.

Features of this diagram

• There are barriers to entry in Monopoly. Firms are price makers. The industry demand curve is the same as the firms demand curve.
• Profits are maximised at output where MR=MC. This means they set a price greater than MC which is allocatively inefficient.
• In this diagram the firms makes supernormal profits because AR is greater than AC.

Note: In monopolistic competition the short run equilibrium is different to the long run equilibrium

More on Monopoly

Some of the benefits of monopoly Power.

1. Economies of Scale.

If the firms produces in an industry with very high fixed costs, consumers can benefit from a large firm which can exploit economies of scale. Economies of scale lead to lower average costs and therefore the potential of lower prices. Example:

Would you want several firms providing tap water? Would it make sense to have 2-3 companies laying a network of water pipes and sewage systems across the country? No. It is better to have 1 firm. This is an example of an industry which is a natural monopoly.

Industries like car production and airline production also have significant economies of scale so it makes sense for firms to have some degree of market power.

• However, just because a firm has monopoly power doesn’t mean that the industry necessarily has economies of scale or that lower average costs lead to lower prices.

2. Research and Development

Firms with monopoly profit can use their profit to invest in new products and techonologies that benefit consumers in the long run. e.g. oil companies who find new sources of oil

3. Monopoly Firms are 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?

Does Microsoft have too much Monopoly  Power?

Benefits of Mergers 

It is rather ironic that Google, have filed a complaint on the ground the new firm would have too much market power. It is interesting because it was Microsoft who was once seen as dominating the computer industry. But, it seems increasingly the case that it is Google which is looked upto as the dominating firm in the industry. The reason for the shift is simply that Google are dominating the biggest areas of growth – which is online advertising.

Microsoft has monopoly power in software like Microsoft Word, but, it is expected that people will increasingly choose software that can be downloaded online. Google’s dominance of search engines and online advertising mean that they will be in a position to benefit from this.

With regard to online advertising and search engines, Microsoft  have only a tiny market share (2.9%) (through MSN – despite frequent relaunches). It seems Microsoft have tried to improve their search technology too late and it looks very difficult for them to dislodge Google’s position as the dominant player (62.5%). Therefore, to give themselves a chance Microsoft are seeking to buy Yahoo, who have a reasonably respectable share of the market at about 22%.

The new firm will only have about 20% of the market share. On the one hand you could argue that if Yahoo and Microsoft share resources they will be in a better postion to counter the monopoly power of Google. On the other hand, it could be argued that the merger will lead to a reduction in competition.

However, it could be argued Microsoft may try use its monopoly power in operating systems to try and push its new online search. It is an interesting dilemna

• UK Merger Policy 

In the US, antitrust become important in the late nineteenth century, when American industry and become dominated by a few very powerful firms – in particular Rockefeller and J.P. Morgan trust’s. In 1890, the US anti trust board successfully broke up some of the big Railroad firms, Du Point chemicals and Rockefeller corp. This became known as the Sherman Antitrust act of 1890 and dominated American antitrust policy in the twentieth centuries.

Anti Trust and Monopoly.

Under the Clinton administration, the monopoly power of Microsoft was targetted and the company was recommended to be broken up. However, on appeal Microsoft were able to overturn the judgement. This shows the debate about how aggressive anti trust policy should be. For example, some economists (such as the Austrian school) argue big firms are not necessarily bad but maybe a reflection of a successful company.

Anti Trust and Contestability

Often anti trust policy was based on the market share of the leading firms. E.g. if a firm had more than 25% it was assumed to have market power. However, recently greater importance has been given to contestability. This looks at the the ease of entry and exit into the market. If there is ease of entry then the threat of competition may be sufficient to keep prices competitive, no matter what the market share.

• Does Microsoft have too Much Monopoly Power
  
• Monopoly
• UK Competition Policy

(b)readers Question: A monopolist operates under a production technology which allows the production of any output level at a constant average cost of $5 per unit. This monopolist sells into two distinct markets the demand curves for which are:Q1 = 55 – P1 (for market one) and Q2 = 70 – 2P2 (for market 2).If this monopolist operates so as to maximize total profit then calculate:

(i) Total output;
(ii) The quantity sold in each market;
(iii) The price charged in each market;
(iv) The monopolist’s total profit.

The Demand Curve equals the average revenue curve.
We need to find out the Marginal revenue Curve

The Marginal Revenue curve is twice as steep.

• If Q.D = 55 – P1
  MR = 55 -2P1

The next step is to work out profit maximisation.

Profit Maximisation for a Monopolist

• Profit Maximisation occurs where MR=MC

In this example MC = $5 (a constant average cost means the MC=AC)

Therefore, $5 = 55 – 2P1
2P = 50
Therefore, P=25

To find out the Quantity we put 25 into the equation
Q=55-25
Q=30

To Calculate Profit for A Monopoly

Profit = Total revenue – Total Cost

Total Revenue = 25*30 = 750
Total Cost = 5 * 30 = 150

• Therefore, total profit for this section is = 600 (assuming there is no fixed cost)

Readers Question: describes how markets for electronic goods and software are sometimes dominated by
a single type of product, which incorporates the technology developed and controlled by one of the firms in the market. Do you agree that this reduces competition and is bad for consumers and producers? Justify your answer. (15)  AQA unit 1

A difficult question for AS level

The firm with the patent can charge monopoly prices for using the technology. Therefore, this leads to higher prices for consumers and less competition, because new firms may not be able to afford the rights to use the technology.

However, the fact that many companies are in the market suggests the market is competitive. For example, there are several firms selling computers based on the micro chip.

The common technology may be a small % of total costs. e.g. microchip may only be 5% of the total cost. Therefore, even if one firm has monopoly power in selling micro chips (intel) it doesn’t affect prices and competition too much.

The monopoly power from developing a good technology gives firms the incentive to invest in research and development. Without the profits from monopoly, there would be little incentive for firms to take risks and generate better products. In electronic goods new technology is important for providing better quality goods

if one firms concentrates on producing a certain technology it can benefit from economies of scale. This can lead to lower average costs and lower prices for consumers.

In theory other firms could design their own technology, but, it may be cheaper just to buy it from a a monopoly