You are on page 1of 7

Using a suitable diagram, predict what is likely to happen to efficiency hen a competitive industry is monopolised?

The normal answer is likely to arrive at the conclusion that under monopoly the industry will produce a lower output at a higher price as compared to perfect competition. This will result in a loss of technical/productive and allocative efficiency. Good candidates might also comment on the loss of consumer welfare and sovereignty. The candidate who, in addition, comments on the possibility of economies of scale under monopoly would obviously score very highly.

Monopoly • only one seller  the firm is the industry • firm faces the market demand curve and is a price-maker • demand is inelastic because no substitutes are available  firm has significant market power • entry into industry is blocked by barriers economies of scale  natural monopoly patents ownership of key resources legal restriction on entry

EFFECIENCY IS REDUCED WHEN A COMPETITIVE INDUSTRY IS MONOPOLISED

1. Lack of competition The lack of competition may give a monopolist less incentive to invest in new ideas. Even if the monopolist benefits from economies of scale, they have little incentive to control their costs and 'X' inefficiencies will mean that there will be no real cost savings compared to a competitive market. 2. Reduced consumer surplus If the industry is taken over by a monopolist the profit-maximising point (MC=MR) is at price Pmon and output Q2. The monopolist is able to charge a higher price restrict total output and thereby reduce welfare because the rise in price to Pmon reduces consumer surplus. 3. Higher prices A competitive industry will produce in the long run where market demand = market supply. Consider the diagrams below. Equilibrium output and price is at Q1 and Pcomp on the left hand diagram and Pcomp and Q1 on the right hand diagram. At this point, Price = MC and the industry meets the conditions for allocative efficiency.

. Dead weight welfare loss Some of this reduction in welfare is a pure transfer to the producer through higher profits. This is known as the deadweight welfare loss or the social cost of monopoly and is equal to the area ABC. but some of the loss is not reassigned to any other agent.4.

INCREASED EFFICIENCY WHEN THE COMPETITIVE INDUSTRY IS MONOPOLISED At the same time. where we assume that the monopolist is able to drive marginal costs lower in the . This is illustrated in the next diagram. Economies of Scale A monopolist might be better placed to exploit increasing returns to scale leasing to an equilibrium that gives a higher output and a lower price than under competitive conditions. the highly competitive industry take s advantage of the following and increases its efficiency.

in one of China’s more high profile inquiries China Unicom and China Telecom.   Chinese broadband monopolised Antinti-monopoly case held against two of the country’s biggest broadband providers. Monopoly Profits.long run. investment in research and development can be beneficial to society because they expand the technological frontier and open new ways to prosperity. As firms are able to earn abnormal profits in the long run there may be a faster rate of technological development that will reduce costs and produce better quality items for consumers. Many innovations are developed by firms with patents on ‘leading-edge’ technologies. Research and Development and Dynamic Efficiency  Patents provide legal protection of an idea or process. Toyota. the two biggest telecommunications operators in the country. finding an equilibrium output of Q2 and pricing below the competitive price. GlaxoSmithKline and Sony is often criticised. Monopoly power can be good for innovation. Generic patents allow legal copying of a product. Despite the fact that the market leadership of firms like Microsoft. China Telecom and China Unicom. are facing an anti-monopoly investigation by .

the National Development and Reform Commission (NDRC). such is the Chinese government’s current view of monopoly behaviour. for example. The current Anti-Monopoly Law (AML) in China is only three years old and there have not been many groundbreaking cases under the new legislation. apart from interventions in a small number of merger cases. The Municipality of Guangdong. such as Japan. “According to the Anti-Monopoly Law (AML). Indeed.5 gigabytes. itself. to offer lower prices to non-competitors while charging competitors higher rates. which is only about one tenth of competing countries. said in an interview with the government-run China Central Television.” It is believed that price discrimination has been responsible for low quality connection between the networks of the two companies and also low internet speeds. was seen as an attempt by the government to establish more competition in the industry. the UK and the USA. the creation of China Unicom. The case is related to their actions in the broadband market. . Taking into account that both of these companies have a yearly turnover of more than RMB30 billion. This has had a negative impact on China’s broadband speed. In addition to this causing low capacity. quite recently received a hefty fine under AML legislation. it also resulted in inefficient inter-connection. the current investigation into China Telecom and China Unicom is not the first attempt to bring about a more competitive marketplace. As long ago as the 1990s. over recent months the authorities have started to adopt a more hard line approach towards companies that have been found guilty of monopolistic behaviour. The deputy director of the Price Supervision and Antimonopoly Department of the NDRC. both China Unicom and China Telecom could face fines amountingto between one and 10 percent of their annual business turnover. we call such behaviour price discrimination. the packet loss and inter-connect delay are still way above official requirements. However. the prices to access the internet could be lowered by 27 percent to 38 percent in five years. but they have restricted the amount of bandwidth for connections between the two networks to 261.078 gigabytes. It is clear that China fully recognises the disadvantages of having a monopoly in its telecommunications industry. If we can bring about effective competition to the market. they could face a substantial fine that might amount to several billions of RMB. Li Qing. According to Li the two companies collectively own bandwidth of 1. Regulators in China believe the two companies are using their dominant position. According to official statistics for the first nine months of 2011. If they are found guilty. says Li. together they account for more than two thirds of the entire broadband market.

In a statement released on November 9.” EU fines Microsoft again Lack of browser choice gets Microsoft fined in Europe again after 2009 ruling The focus of legal battles over competition in the technology industry has shifted back towards Microsoft yet again after the European Union fined it €561m yesterday. China Unicom denied the allegations.5m. followed by a €899m fine in 2008. Google Chrome. Microsoft have been fined for not sticking to a 2009 ruling that instructed them to offer a choice of web browsers after complaints from rivals that said it had been favouring its Internet Explorer software. but in an update to Windows 7 in early 2011 the choice screen was removed. the company began offering a choice of browsers. In 2004. but the EU competition commissioner Joaquin Almunia was adamant that new fine was needed to deter any companies going back on previous rulings. including Mozilla Firefox. Then in 2006 it was fined an additional €280. The company stated that it had “always provided broadband services strictly in accordance with the relevant laws and regulations. and the Opera browser. we closed our investigation about a suspected abuse of dominant position by Microsoft due to the tying of Internet Explorer to Windows by . Microsoft describe the removal of the screen as a “technical error”. It follows many years of heavy criticism towards Microsoft over the way the company bundles its software with its widely-used Windows operating system. After the ruling in 2009. the largest ever imposed by the EU at the time. Microsoft were fined €497m. He said: “In 2009.

Slovakia. EVALUATION . but reliance on gas supplies from Russia for the majority of their heating fuel leaves countries including Bulgaria.” In response to the fine. higher demand for the gas in their domestic market means that less is available for export than usual. for about two weeks. said on Friday it was supplying as much gas as it could spare. Gazprom. Serbia and Bosnia vulnerable to disruption in that supply. Austria. However.theneweconomy. This gives a clear example of some of the wide-ranging negative externalities which can come from monopoly power over such a vital resource. with a consequent reduction in supply to other countries. they are used to far colder winters than us. Hungary. Greece and Italy. http://www.accepting commitments offered by the company. with Apple. which pass through Ukraine. and we have taken steps to strengthen our software development and other processes to help avoid this mistake – or anything similar – in the future. We provided the Commission with a complete and candid assessment of the situation. An EU spokeswoman has confirmed that there has been a decrease in gas deliveries in various member states . Bulgaria. and notably in 2009 when political tension between Russia and Ukraine led to a cut in supplies to parts of Europe. and have different ways of dealing with the weather. Microsoft admitted their mistake in a statement: “We take full responsibility for the technical error that caused this problem and have apologized for it. Of course. it is a notable change. the Russian gas export monopoly. and although this is not yet a crisis. but nothing compared to the temperatures as low as -35 which have hit parts of central and eastern Europe. A failure to comply is a very serious infringement that must be sanctioned accordingly.Poland.com/business/eu-fines-microsoft-again Russia ‘s monopoly over gas supplies It has been a bit chilly in the UK for the last few days. Google and Samsung fighting over patent infringements and competition. Romania. There have been similar disruptions to supply in the past during particularly cold spells.” Recent years have seen a series of courtroom disputes between tech giants.