Economics Help

Abuse of Monopoly Power

Chapter 2 of the competition Act states it is illegal for a dominant firm to abuse its monopoly power.

Firstly the OFT must investigate whether firms have a dominant position they will look at:

National or regional market share. Usually a firm would have to have at least 40% of the market to be considered to be a dominant firm.
The Contestability of the market. If barriers to entry are low then the incumbent firm is unlikely to be dominant even with a high market share because new firms can enter if profits are high.

If the firm is considered to be dominant then the OFT will look at abuses of Monopoly power these include:

Charging excessively high prices, this might be difficult to judge but if they are making high profits then this is an indication
Predatory Pricing. This involves cutting prices and selling below average cost to force rivals out of business.
Vertical restraints. This involves the monopoly firm imposing prices or restrictions on its suppliers or retailers. For example this could involve

Selective distribution e.g. Levis’ doesn’t want to supply Tesco supermarkets. Also this is a significant problem in the UK car industry with car firms entering into selective and exclusive distribution networks to keep prices high. The competition commission report of 2000 found UK cars were at least 10% higher than European cars
Exclusive distribution. Some retailers will only buy from some particular manufacturers
Tie in sales. E.g. if you buy a printer the company will try and make you buy their own brand ink

In 2003 OFT stated toy manufacturers were guilty of fixing prices and were fined a significant amount.

Make recommendations such as:
no brewery should be allowed to have more than 2000 public houses
In 1995 It investigated Sega and Nintendo and stated that they should reduce its licensing charges on firms supplying software