Monopolistic Business and Competition
Monopoly is a term used to describe a businesses market share. The most common use is in describing a business that has a 100% market share, such as British Gas, in the gas market, before privatisation allowed other companies to compete with them. This is commonly called a Pure Monopoly; the other type is a Legal Monopoly. This is a firm with a market share equal to or greater than 25%. This means that there can be up to four Legal Monopolies in one market, but only one Pure Monopoly can exist in any market.
There are two other main types of competition. An Oligopoly is where a few firms dominate a market and with the definition of the Legal Monopoly; logic would suggest five or more firms. Here firms tend to compete on non-price factors (maybe even forming a cartel) as it is in all the Oligopoly’s best interests to avoid “price wars” causing profits to plummet. Perfect competition is used to describe a market that is easy to enter and deals in a good that doesn’t really change from firm to firm, such as groceries.
There are a large number of firms involved in the market and they are said to be price takers as the price of goods is dependent on what other firms are charging and what the consumer will pay. Monopolistic businesses can come under a lot of criticism because of their ability to control prices. For example, if they are the only suppliers of a product they will be able to control the price i. e. they are price makers, not price takers.
This is because consumers have no alternative to purchase even if they think that they are paying too much, so why demand may fall slightly as a monopolistic business raises prices, it would fall much faster for a company operating in a very competitive market. For example, British Airways and other big Air travel firms have had to rethink pricing after Easy Jet started to introduce their significantly cheaper flights. Other criticisms may be that they have the power to erect barriers to entry into their market.
This is against the spirit of Enterprise and can even contradict the policies of the nations Government, for example Tony Blair’s “Enterprise culture”. There may also be worries over the quality of the product supplied, or, since there is no competitor the business doesn’t have to provide the best service possible. This was one of the reasons the railways were privatised in the hope that, amongst other things, delays would be reduced, as companies had to be competitive.
So, if a monopolistic business has so much control and power in the market they operate in, why should they worry about competition? The most obvious reason is that a business operates in an ever-changing world, and hence must keep changing to remain on top. This is why strong brand names, such as Coca-Cola must keep coming up with new advertising slogans and packaging to stay ahead of firms like Pepsi and Virgin who themselves are trying to sell their products to Coca-Cola’s customers.
Hence, branding is used to encourage brand loyalty in the hope that this will stop your customers filtering away to competitors. We live in a world a wash with Loyalty Cards, Customer Appreciation Days, Club Cards, Tiger Points, Air Miles… etc… all awarding customers for staying loyal to one brand and encouraging repeat purchasing. This is all done in the belief that it is harder to attract a new customer than to keep an existing one coming back.
For a monopolistic firm this is very relevant as it would suggest that once a firm has lost a customer, it will be hard to “replace” his custom, and hence it is important to keep your customers happy just in case someone else does ever come along. This idea that a business has to constantly change to remain successful is especially relevant with new technologies, most notably the Internet and e-commerce. Companies such as Amazon and CD-Now have became big names in their industries because they adopted up-and-coming technologies quickly and hence had the medium mastered before others entered.
They then almost control Internet shopping and work together so that Amazon’s customers who want to buy CD’s can buy them through their site, but through CD-Now’s distribution channels and visa-versa. This happens for other consumer goods so that a small number of suppliers together control many industries in a sort of internet cartel hybrid. This means that any new business will find it very hard to get a share of the Internet shopping market in these markets because it will take a long time to gain the benefits of their competitors who invested early.
Hence, a monopoly mustn’t resist change, as if it is adopted they can benefit hugely, and if they don’t someone else may “pull the carpet from under their feet” and walk away as the new monopolistic company in that industry. Other examples of the growth of new technologies changing traditional markets are telephone/on-line banking and pay-per-view television broadcasts. It has already been mentioned that a monopolistic firm can control prices and they can use this to stay competitive. For obvious reasons, monopolies will hugely benefit from economies of scale.
Converse to this, any competitors should lack the size to have the same benefits and put the monopolistic firm into a position where they can put other firms out of business by dropping their prices so low that the other companies can’t stay profitable at that price. This is how the People newspaper went out of business, they couldn’t drop prices as low as the Sun and Mirror who had conspired to remove the People and divide their customers among each other. This may also help monopolistic firms to differentiate their products.
These aren’t necessarily two things you would connect, but a monopoly will be able to provide a product with improved features and extras at the same prices as their competitors as they benefit from economies of scale. Hence they use all these extras and options to attract customers who are benefiting in two ways: firstly they are getting more choice as a larger firm can stock a larger number of variants of one product, and secondly they get more for less as the firm can source products at a cheaper price.
Further to this, they can typically offer improved after sales service because large call centres and repair depots are practical as well as affordable. All this can be highlighted in promotional activities to differentiate product A form Product B and hence keep the monopoly in a strong position with a huge market share. However, theoretically they lack the ability to cater for a specialised market, unlike a small, one-man window-fitting firm. Here the one-man operation can be more flexible and supply work that is specific to just one customer.
It is then important that the larger firm can supply a product range wide enough to cater for most of the market and not let the many small competitors topple the giant. Price controlling is one aspect of the monopolistic firm that has come under legal investigation. The obvious reason is that it isn’t fair to the consumer if they are forced to pay inflated prices for a product that is produced by a company that holds a large market share. They are then able to put up barriers to other firms entering the market to stop competitors from entering the market.
British Gas has already been mentioned and would prove a good example here. For people living in gas-heated homes, gas is obviously an essential purchase (unless expensive conversions are made so they can use e. g. oil). If there is only one company to buy from and you have to buy the item, them the price, service offered or product quality doesn’t really matter as you have to buy it anyway. Latter, when competitors were allowed enter the market things could change and people could choose the product that was best for them.
It is obvious that the latter situation is better for the consumer and hence the Government wants to encourage this type of market. This is why the Monopolies and Mergers Commission can recommend that a certain merger is blocked or a monopoly broken up in the interest of the public. It is not that being a monopoly is illegal, but they have a unique power in their industry and can abuse their position. Hence the Commission has the power to decide whether a business is abusing its power of market share and make relevant recommendations to the Secretary of State for Trade and Industry.
He can than act on the recommendations or ignore them completely. For example, electronics manufactures had to stop issuing retailers with “Recommended Retail Prices” and let the different high street stores compete in a “Price War” to attract customers, who benefited from lower prices. There is also the current investigations into the car dealership system and prices in the U. K. compared with those on the continent which is resulting in new regulations for the industry in the hope that car prices will fall in line with the rest of Europe.
Therefore, while a monopoly benefits from is market share and size, if they begin to throw their weight around in the wrong way, there will always be someone bigger to make sure that the consumer gets the best deal – in theory anyhow. It is then clear to see that even a company who can be defined as a monopoly, in either interpretation, must be competitive to keep their large market share. For a start, the business world isn’t stagnant and new technologies and ideas will be adopted by competitors, so change is necessary to remain competitive.
Also, a monopoly has an individual advantage in that they will be benefiting from economies of scale to a greater extent than their competitors. They can provide a better service/product at the same price as their competition and further their market share. This may also be important if they are only operating in a small market, as it should encourage growth. A monopoly can also dictate many things within a market, even the companies that operate in it.
But, they need to be careful that they aren’t exploiting their power as other parties can then intervene and disband the monopoly in the interest of the industry and the consumer. As you can then see, there are significant threats to a monopoly that means they can’t sit back and let the money flow in. If this temptation wins over a business it won’t be long before they are members of an oligopoly, or they are the new David trying to compete with the Goliath benefiting from their previous advantages.