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Monopolies in the UK

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Economics

Monopolies are either natural or formed through acquisitions and mergers. However, though firms stand to make a lot of profit, it is possible they become too powerful and harmful to social welfare. Can you name monopoly examples in the UK market?

A monopoly is a market situation where one company has a dominant position in an industry or sector. This enables it to exclude all other viable competitors.

A pure monopoly occurs when a firm is the single seller of a good or service in an industry, which means that it has 100% of the market share. It is also relevant to note that in the UK, a firm with over 25% of the market share is defined as a firm with monopoly power.

The UK may not have an ‘anti-monopoly policy’ like the US, Germany, and the European Economic Community, but it does have a legal framework that establishes which behaviours are acceptable. The UK also has a mechanism that investigates and provides ad hoc remedies to certain failures of the market mechanism.

Real-life examples of monopoly markets in the UK

Most of the recognisable monopolies in the UK are connected to the technology industry and have been termed as the ‘big tech’ monopolies.

Monopoly example 1: Microsoft

Microsoft is a computer and software manufacturing company. It holds a market share of more than 75% and is the market leader and virtual monopolist in the tech space.

Monopoly example 2: Google

Google is the biggest web search engine, and with its algorithm, it controls more than 70% of the market share. The company has grown vastly over the years and provides web services that are interlinked with each other such as Google Maps, Gmail, Google Drive, etc. The Google company has left its competitors, Yahoo and Microsoft, behind in terms of innovation and technological advancement.

Monopoly example 3: Facebook

Facebook is one of the oldest social media platforms and it has a huge chunk of the market share. It is almost a complete monopoly. The Facebook company is ahead of all its competitors like Google+, Twitter, etc., and has experienced growth both in the number of users and advertisers and through the acquisition of other companies like WhatsApp and Instagram.

Monopoly example 4: Apple

Apple is a well-known tech company known for the production of iPhones, MacBooks, and application software. The company holds a dominant position in the distribution of apps in the UK. However, the company has recently been in trouble for engaging in unfair and anti-competitive behaviour, as it forces app developers to use its own payment system which is more expensive compared to its competitors.

Monopoly Example 5: Amazon

Amazon isn’t only an online retailer. It also occupies the markets of cloud service providers, broadcasting, entertainment, and home security. It is also recognised as the largest internet company in the world, with a market share of over 30% in the UK’s e-commerce market.

Monopolies’ legislation in the UK

The two main legislations that deal with monopolies and monopoly behaviours in the UK are the Competition Act of 1998 and the Enterprise Act of 2002. Anti-competitive behaviour is prohibited under Chapters I and II of the Competition Act of 1998. These laws prohibit anti-competitive agreements between businesses and abusing their dominant position in the market.

The UK acts to ensure that monopolies don’t act in a manner that is detrimental to market efficiency. The government achieves this by prohibiting agreements and practices that restrict free trading and competition between businesses, banning abusive and anti-competitive behaviour by firms that dominate the market, and supervising the mergers and acquisitions of large corporations.

Anti-monopoly interventions in the UK

Let’s explore some actions that the UK government can take to control and regulate monopolies.

Breaking up monopolies

In certain instances, the government may decide that a monopoly needs to be broken up due to the firm being too powerful. This would require the firm to sell off parts of the business to create competing firms, which leads to lower prices and profits.

This approach to breaking down monopoly power is suitable for multi-plant monopolies where the minimum efficient scale (MES) is small. However, it is inappropriate if the MES is very high, especially if it is a natural monopoly as breaking up the firm would result in higher average costs as economies of scale are lost.

The minimum efficient scale (MES) is the lowest point on a firm’s cost curve. The firm produces its output at this cost and offers it at a very competitive price on the market.

Regulation of mergers

This strategy prevents firms from growing to the stage where they can become monopolies. In the UK the government can refer a proposed merger or takeover to the Competition and Market Authority (CMA). If the CMA disproves, then the merger or takeover can be stopped or it might be allowed under certain restrictions.

Lowering entry barriers

The government may lower the financial and non-financial requirements for entering the market to help small businesses enter it. This can take the form of guaranteed bank loans. The government may take measures against firms that engage in anti-competitive behaviour such as predatory pricing, which tends to deter new entries into the industry.

Price controls

This is one of the main ways the government can intervene in privatised monopolies such as gas, electricity, and telecommunications. The government can prevent monopolies from charging consumers excessive price, by instilling price ceilings, which requires the price to be equal to the firms marginal cost (MC=MR). However, the main problem with price control (price regulation) is that it might result in a loss of allocative efficiency.

Performance and quality control

Monopoly firms might decide to cut costs in order to maximise profits by reducing the quality of the goods and services. In order to address this, the government may set quality standards and performance targets that require monopolies’ goods and services to meet minimum standards and targets.

The government may introduce quality standards for the gas and electricity markets to prevent people from being treated unfairly. Performance targets may also be set for organisations such as schools, to ensure they meet a minimum target. This maximises quality as far as possible.

Profit control

The government may decide to regulate monopolies by limiting the amount of profit they can earn. The government can set the maximum profit rate at the same level as what it would expect a firm to make in a competitive market. This may be determined by looking at the rate of return on capital in other industries with a competitive market.

The UK government reduced the rate of corporate tax from 21% to 20% back in 2015.

However, a number of issues may arise from this:

1. Ingenuine increase in investment (over investment).

2. Little incentive to try to reduce costs and become more efficient.

3. Regulatory capture occurs when the regulators have interests in the industries they regulate. The regulator then acts in their own self-interest rather than the public interest.

Intervention to promote competition

These are some ways in which the government intervenes to promote competition.

Help small businesses

Small and Medium-Sized Enterprises (SMEs) are important for creating a competitive market. They engage in activities that larger firms may not be greatly engaged in, such as innovation and investment, which promotes competitiveness in the market. This is why they’re so important.

Therefore, the government helps them through VAT exemptions, lower corporate tax rates, grants for training or investment, and bank loans.

In the UK, the government established the 'Red Tape Challenge' which aims to simplify regulation, particularly for small businesses, making it cheaper and easier to meet environmental targets and create jobs.

Deregulation and privatisation

By deregulating or privatising the public sector, firms can compete in a competitive market, which would improve economic efficiency.

In the 1980s, the UK government privatised a number of state-owned monopolies including the water supply industry, British Gas, and electricity generation and distribution with the aim of encouraging greater efficiency and to enhance competition.

British Airways, for instance, was privatised and now operates in the competitive market. Its assets were transferred from the public to the private sector, removing control from the government to the free market and to private individuals.

Punishing anti-competitive practices

This includes practices such as the operation of cartels, predatory pricing, bid-rigging, and bundling of products. The Competition and Markets Authority (CMA) in the UK, which regulates market behaviour, has the power to punish companies that do such things by issuing fines of up to 10% of their annual revenue. Aside from this, the CMA also has the authority to prosecute company directors and send them to prison for perpetrating such practices.

Competitive tendering

Public Goods and Merit Goods are usually provided by the government. However, the government may decide to contract out the provision of merit goods such as roads, hospitals, rubbish collection, or running prisons. Firms are invited to raise bids for the right to provide these services, and the one that offers the best combination of price and quality wins the government contract.

However, this strategy is sometimes criticised as ineffective as there is evidence that it isn’t a good use of taxpayers’ money. There is the possibility that a private sector firm will try to cut costs by lowering wages, and it will be less likely to have social welfare as a priority.

Contracting out is a process that is part of privatisation. It has taken place since the 1980s to create a competitive market rather than a public sector monopoly.

Intervention to protect suppliers and employees

These are some ways in which the government intervenes to protect the suppliers and employees.

Nationalisation

This occurs when private sector firms and assets are sold to the government or the public sector. This creates natural monopolies where it is inefficient to have multiple providers. An example is water wipes. Here, the priority is social welfare, which includes the protection of the interests of everyone in the economy.

Employment legislation

Governments put in place laws to protect the rights of workers in economies with monopolies. Some of these include minimum wage laws, obligation on firms to provide pension, minimum redundancy payments, rights to join a trade union, and legally binding employment contracts.

Legal codes and laws for suppliers

A government might also pass legislation to make it illegal for buyers to impose unfair contracts on suppliers. Suppliers may also be given the right to charge an interests rate on firms that delay payment.

Monopolies in the UK - Key takeaways

  • A monopoly is a market structure where one company has a dominant position in an industry or sector, which enables them to exclude all other viable competitors.

  • Five real-life examples of monopolies in the UK are Google, Apple, Facebook, Microsoft, and Amazon.

  • The Competition Act of 1998 and the Enterprise Act of 2002 are the two main legislations that regulate monopoly behaviour in the UK.

  • Anti-monopoly interventions include the breaking up of monopolies, regulation of mergers, lowering entry barriers, price controls, performance and quality controls, and profit controls.

  • The interventions to promote competition in the market are rendering help to small businesses, privatisation, deregulation, punishing anti-competitive practices, and competitive tendering.
  • The government protects employees and suppliers from abuse of monopoly powers by nationalisation, employment legislation, and legal codes and practices for suppliers.

Monopolies in the UK

A monopoly is a market structure where one company has a dominant position in an industry or sector, which enables them to exclude all other viable competitors. 

Monopolies are not illegal in the UK. However, it is illegal to engage in prohibited acts and abuse of monopoly power. 

Examples of monopoly markets in the UK include Microsoft, Google, Facebook, Apple, and Amazon. 

Final Monopolies in the UK Quiz

Question

What is a monopoly?

Show answer

Answer

A monopoly is a market situation where one company has a dominant position in an industry or sector, which enables them to exclude all other viable competitors. 

Show question

Question

List three real-life examples of monopolies in the UK.

Show answer

Answer

Any three from:

Microsoft

Google

Facebook

Apple 

Amazon

Show question

Question

In the UK a firm needs a minimum of 75% of the market share to be a monopoly. 

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Answer

True

Show question

Question

Monopolies are illegal in the UK.

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Answer

True

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Question

List some of the anti-monopoly policies in the UK.

Show answer

Answer

Breaking up of monopolies. 

Regulation of mergers. 

Lowering entry barriers. 

Price controls. 

Performance and quality controls. 

Profit controls. 

Show question

Question

In what ways does the UK government promote competition?

Show answer

Answer

Rendering help to small businesses.

Through privatisations and deregulation. 

Punishing anti-competitive practices. 

Competitive tendering. 

Show question

Question

What UK government body is in charge of regulating monopolies? 

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Answer

Competition and Market Authority (CMA)

Show question

Question

What UK legislations regulate monopolies and monopoly power?

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Answer

The Competition Act of 1998 and the Enterprise Act of 2002.

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Question

How does the UK government protect employees and suppliers?

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Answer

Through nationalisation, employment legislation, and legal codes and practices for suppliers. 

Show question

Question

Why does government intervene in monopoly markets? Give three reasons.

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Answer

To prevent the abuse of monopoly powers.

To protect employees and suppliers. 

To ensure that monopolies produce good quality products.

Show question

Question

What is a pure monopoly?

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Answer

A pure monopoly is an enterprise that is the single seller of a good or service in an industry, which means that they have 100% of the market share.

Show question

Question

How does the government helping small businesses promote competition?

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Answer

The government helping small businesses enables them to engage in activities such as investment and innovation, which they can use to satisfy more specific needs of consumers, therefore giving them a competitive edge.

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