The social cost of monopoly power arises because marginal
cost is set equal to marginal revenue, which is less than price and marginal
consumer benefit. The social cost is the cumulative difference between the
value that consumers place on the lost output and its marginal production
cost. The social cost is higher if market power allows firms to have cost
curves that are unnecessarily higher than they might have been.
X-ineffciency arises from the information monopoly
that a monopolist has about its cost possibilities. The easy life may lead
monopolists to make inadequate efforts to reduce costs, adding to the social
cost of monopoly.
Industrial policy seeks to off set production market failures
except those arising from scale economies and imperfect competition; off setting
these is the aim of competition policy.
Intellectual property is conferred through the award of
patents and copyrights, a temporary legal monopoly for successful
knowledge creators. Patents provide an incentive to look for inventions. Otherwise,
inventors, foreseeing that profits on successful inventions will quickly be
competed away by imitators, will devote few resources to invention.
R & D has a beneficial externality: spending by one
firm benefits other firms.
The industrial policies of national governments towards their own 'national
champions'is a commitment that affects the bargaining
power of their firms in the international market.
Sunrise and sunset industries involve other market failures.
This is not a general licence for active industrial policy to manage change.
Governments must identify the market failure and show that intervention is
preferable. Picking winners has not been a success, but decentralized incentives
may be effective if their rationale has been clearly identified.
Economic geography reflects locational externalities
arising in training, transport and knowledge creation. The industrial
base is the existing stock of locational capital.
In the UK, the Office of Fair Trading is responsible for
consumer protection and the efficient operation of markets. It can refer a
market to a detailed investigation by the Competition Commission
to assess whether competition is being substantially reduced by the current
market structure and the conduct of firms within it.
UK firms are subject to EU competition law if their activities extend substantially
beyond UK borders.
Mergers may be horizontal, vertical or
conglomerate. Conglomerate mergers have the smallest scope
for economies of scale. The recent merger boom has largely been in horizontal
mergers to take advantage of larger markets caused by globalization, European
integration and deregulation.
In principle, mergers can be referred to the Competition Commission if
they will create a firm with a 25 per cent market share or if they involve
taking over a firm with an annual turnover of over £70 million. In practice,
few mergers satisfying these criteria are actually referred. In part this
may be justified because the UK competes in large world markets where the
firms will have little monopoly power.
