Monopoly Suppliers of Milk and Electricity

IS THE PUBLIC INTEREST BETTER SERVED BY A MONOPOLY OR BY SIGNIFICANT COMPETITION BETWEEN SUPPLIERS?

1. If a supplier has monopoly power then it will be able to charge higher prices to the seller (retailer). For example, in the case of electricity, the supply is dominated by the firm who run the national grid. Therefore, they are able to set higher prices to the retailers of electricity.

2. However, the supply of electricity is a natural monopoly. This means the most efficient number of firms is one due to very high economies of scale. Therefore, it is not possible to have competition in this particular industry.

Also the Government can regulate the monopoly supplier; in electricity markets it will be done by OFGEM. Therefore, in theory the regulator can prevent high prices. However, there have been concerns over recent price rises suggesting that OFGEM is not doing a good job (possibility of regulatory capture)

3. In other industries, it is important to have competition between suppliers; for example clothing or music. This is not just important for lower prices, it is also important for creating more choice and variety for consumers.

Milk Marketing Board.

In agriculture it may be appropriate to have one organisation control the supply of a product. e.g. farmers sell their milk to the milk marketing board, they then sell it to supermarkets. The argument is that the Milk marketing board can get better prices for farmers, it could also operate a scheme to control supply of milk and prevent prices collapsing.

However, it is in practise it is difficult for these organisations to control price. Farmers have been complaining about falling prices and having to destroy output.