Monopoly power creates various problems. It is an example of market failure and tends to lead to higher prices, less choice and more inefficiency.
Policies to Overcome Market Failure in Monopolies
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.