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Competition law
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  • European Community
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  • Competition Act 1998 (U. Competition law history refers to attempts by governments to regulate Competitive markets for goods and services leading up to the modern competition or Antitrust The term "monopolization" refers to an offense under Section 2 of the American Sherman Antitrust Act, passed in 1890 In Economics and Business ethics, a coercive monopoly is a business concern that prohibits competitors from entering the field with the natural result being that In Economics and especially in the theory of Competition, barriers to entry are obstacles in the path of a firm which wants to enter a given Market In Economics, market power is the ability of a firm to alter the Market price of a good or service In Competition law, before deciding whether companies have significant Market power which would justify government intervention the test of Small but Significant and Non-transitory In Competition law the Relevant market defines the market in which one or more goods compete Merger control refers to the procedure of reviewing Mergers and acquisitions under Antitrust / competition law Anti-competitive practices are Business or Government practices that prevent and/or reduce Competition in a Market (see Restraint of trade Collusion is an agreement usually secretive which occurs between two or more persons to deceive mislead or defraud others of their legal rights or to obtain an objective forbidden A cartel is a formal (explicit agreement among firms Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve Price fixing is an agreement between business competitors to sell the same product or service at the same price Product bundling is a Marketing strategy that involves offering several products for sale as one combined product Tying is the practice of making the sale of one good (the tying good to the De facto or De jure customer conditional on the purchase of a second distinctive Refusal to deal is one of several Anti-competitive practices forbidden in countries which have Free market economies In Competition law, a group boycott is a type of Secondary boycott in which two or more competitors in a Relevant market refuse to conduct business Exclusive dealing refers to when a retailer or wholesaler is ‘tied’ to purchase from a supplier on the understanding that no other distributor will be appointed or receive supplies Bid rigging is an illegal agreement between two or more competitors Dividing territories (also Market division) is an agreement by two companies to stay out of each other's way and reduce competition in the agreed-upon territories Conscious parallelism is a term used in Competition law to describe Price-fixing between competitors in an Oligopoly that occurs without an actual spoken Predatory pricing (also known as destroyer pricing) is the practice of a firm selling a product at very low price with the intent of driving competitors out of the Market In United States patent law, patent misuse is an Affirmative defense used in patent litigation when a Defendant has been accused to have Copyright misuse is an equitable defense against Copyright infringement in the United States based on the unreasonable conduct of United States antitrust law is the body of Laws that prohibits anti-competitive behavior (monopoly and Unfair business practices. The Sherman Antitrust Act ( Sherman Act, July 2, 1890, ch 647,) was the first United States Federal statute to limit Cartels and The Clayton Antitrust Act of 1914 ( October 15[[ 914]] ch 323, codified at,) was enacted in the United States to add further substance to the U The Robinson-Patman Act of 1936 (or Anti-Justice League Discrimination Act,) is a United States federal law that prohibits what were considered at the time of passage The Federal Trade Commission Act of 1914 (15 USC §§ 41-58 as amended) established the Federal Trade Commission (FTC a Bipartisan body of five members The Merger guidelines are a set of internal rules promulgated by the Antitrust Division of the United States Department of Justice (USDOJ in conjunction with the The essential facilities doctrine (sometimes also referred to as the essential facility doctrine) is a Legal doctrine which describes a particular type of claim of The Noerr-Pennington doctrine is a doctrine of United States Antitrust law set forth by the United States Supreme Court in a pair of cases which The rule of reason is a doctrine developed by the United States Supreme Court in its interpretation of the Sherman Antitrust Act. European Community competition law is one of the areas of authority of the European Union. Irish Competition Law is the Irish body of legal rules designed to ensure fairness and freedom in the Marketplace. The Competition Act 1998 is the current major source of competition policy in the UK along with Enterprise Act 2002. K. )

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In economics, the term natural monopoly is used to refer to two different things. The Trade Practices Act 1974 is an act of the Parliament of Australia. The International Competition Network is an informal virtual network that seeks to facilitate cooperation between Competition law authorities globally A competition regulator is a Government agency, typically a statutory authority, sometimes called an economic regulator, which regulates and enforces Economics is the social science that studies the production distribution, and consumption of goods and services. This has been a source of some ambiguity in discussions of "natural monopoly". [1] The two definitions follow:

Contents

Overview

The original concept of natural monopoly is often attributed to John Stuart Mill, who argued that it was wasteful to have multiple providers of utility services, although he did not refer to the situation as a "natural monopoly. John Stuart Mill (20 May 1806 &ndash 8 May 1873 British Philosopher, political economist, civil servant and Member of Parliament, was an influential "

One example of a claimed natural monopoly would be the subway industry. It is said that there would be greater social costs to have two competing subway systems running in parallel, given the costs of digging pathways that go to the same place. The average cost per trip would be less if there is only one subway system. [5] So, a legal prohibition against competition is often advocated and rates are not left to the market but are regulated by the government.

Though a claim that an industry is a natural monopoly does not mean that there is only one provider, it is often argued that in a natural monopoly industry only a single firm will be able to survive.

Explanation

All industries have costs associated with entering them. Often, a large portion of these costs is required for investment. Investment or investing is a term with several closely-related meanings in Business management, Finance and Economics, related to saving Larger industries, like utilities, require enormous initial investment. This barrier to entry reduces the number of possible entrants into the industry regardless of the earning of the corporations within. In Economics and especially in the theory of Competition, barriers to entry are obstacles in the path of a firm which wants to enter a given Market Natural monopolies arise where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors; this tends to be the case in industries where fixed costs predominate, creating economies of scale which are large in relation to the size of the market - examples include water services and electricity. Fixed costs are business Expenses that are not dependent on the level of production or sales It is very expensive to build transmission networks (water/gas pipelines, electricity and telephone lines), therefore it is unlikely that a potential competitor would be willing to make the capital investment needed to even enter the monopolists market.

Companies that grow to take advantage of economies of scale often run into problems of bureaucracy; these factors interact to produce an "ideal" size for a company, at which the company's average cost of production is minimized. If that ideal size is large enough to supply the whole market, then that market is a natural monopoly.

A further discussion and understanding requires more microeconomics:

Two different types of cost are important in microeconomics: marginal cost, and fixed cost. Microeconomics is a branch of Economics that studies how individuals households and firms and some states make decisions to allocate limited resources typically in markets The marginal cost is the cost to the company of serving one more customer. In an industry where a natural monopoly does not exist, the vast majority of industries, the marginal cost decreases with economies of scale, then increases as the company has growing pains (overworking its employees, bureaucracy, inefficiencies, etc. ) Along with this, the average cost of its products will decrease and then increase again. A natural monopoly has a very different cost structure. A natural monopoly has a high fixed cost for a product that does not depend on output, but its marginal cost of producing one more good is roughly constant, and small.

A firm with high fixed costs will require a large number of customers in order to retrieve a meaningful return on their initial investment. This is where economies of scale become important. Since each firm has large initial costs, as the firm gains market share and increases its output the fixed cost (what they initially invested) is divided among a larger number of customers. Fixed costs are business Expenses that are not dependent on the level of production or sales Therefore, in industries with large initial investment requirements, average total cost declines as output increases over a much larger range of output levels. In Economics, average cost is equal to total cost divided by the number of goods produced (the output quantity Q

Once a natural monopoly has been established because of the large initial cost and that, according to the rule of economies of scale, the larger corporation (to a point) has lower average cost and therefore a huge advantage. With this knowledge, no firms attempt to enter the industry and an oligopoly or monopoly develops.

A natural monopoly and a monopoly are not the same concept. A natural monopoly describes a firm's cost structure (high fixed cost, extremely low constant marginal cost). A monopoly describes market share and market power; the two are not synonymous. In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient

Industry with a Natural Monopoly

Utilities are often natural monopolies. In industries with a standardized product and economies of scale, a natural monopoly will often arise. In the case of electricity, all companies provide the same product, the infrastructure required is immense, and the cost of adding one more customer is negligible (up to a point. ) Adding one more customer may increase the company's revenue and lowers the average cost of providing for the company's customer base. So long as the average cost of serving customers is decreasing, the larger firm will more efficiently serve the entire customer base. Of course, this might be circumvented by differentiating the product, making it no longer a pure commodity. For example, firms may gain customers who will pay more by selling "green" power, or non-polluting power, or locally-produced power.

Historical example

Such a process happened in the water industry in nineteenth century Britain. The water industry provides Drinking water and Wastewater services (including Sewage treatment) to households and industry Up until the mid-nineteenth century, Parliament discouraged municipal involvement in water supply; in 1851, private companies had 60% of the market. Competition amongst the companies in larger industrial towns lowered profit margins, as companies were less able to charge a sufficient price for installation of networks in new areas. In areas with direct competition (with two sets of mains), usually at the edge of companies' territories, profit margins were lowest of all. Such situations resulted in higher costs and lower efficiency, as two networks, neither used to capacity, were used. With a limited number of households that could afford their services, expansion of networks slowed, and many companies were barely profitable. With a lack of water and sanitation claiming thousands of lives in periodic epidemics, municipalisation proceeded rapidly after 1860, and it was municipalities which were able to raise the finance for investment which private companies in many cases could not. Municipalization is the transfer of Corporations or other Assets to Municipal ownership A few well-run private companies which worked together with their local towns and cities (gaining legal monopolies and thereby the financial security to invest as required) did survive, providing around 20% of the population with water even today. The rest of the water industry in England and Wales was reprivatised in the form of 10 regional monopolies in 1989. England is a Country which is part of the United Kingdom. Its inhabitants account for more than 83% of the total UK population whilst its mainland

Regulation

As with all monopolies, a monopolist who has gained his position through natural monopoly effects may engage in behavior that abuses his market position. This tends to lead to calls from consumers for government regulation, while at the same time opening up opportunities for competitors to offer better service. This article is for the legal term For regulation of genes see Regulation of gene expression. Government regulation may also come about at the request of a business hoping to set up a monopoly position for itself (e. g. electricity supply in a city). Having a monopoly greatly reduces risk and makes it easier to obtain the finance needed for investment. Risk is a Concept that denotes the precise probability of specific eventualities

As a quid pro quo for accepting government oversight, private suppliers may be permitted some monopolistic returns, through stable prices or guaranteed through limited rates of return, and a reduced risk of long-term competition. Quid pro quo ( Latin for "something for something") indicates a more-or-less equal exchange or substitution of goods or services In Finance, rate of return ( ROR) also known as return on investment ( ROI) rate of profit or sometimes just return, is (See also rate of return pricing). Target rate of return pricing is a Pricing method used almost exclusively by market leaders or monopolists. For example, an electric utility may be allowed to sell electricity at price that will give it a 12% return on its capital investment. If not constrained by the public utility commission, the company would likely charge a far higher price and earn an abnormal profit on its capital. A public utility (usually just utility) is an organization that maintains the Infrastructure for a public service (often also providing a service using In Economics supernormal profit, also called Economic rent, abnormal profit or pure profit or excess profits, is a

Regulatory responses:

Since the 1980s there is a global trend towards utility deregulation, in which systems of competition are intended to replace regulation by specifying or limiting firms' behaviour; the telecommunications industry is a leading example globally. A common carrier is a business that transports people goods or services and offers its services to the general public under license or authority provided by a regulatory body Benchmarking is the process of comparing the cost time or quality of what one organization does against what another organization does A stock market, or (equity market is a private or public market for the trading of company Stock and derivatives of company Deregulation, a term which gained widespread currency in the period 1970-2000 can be seen as a process by which governments remove reduce or simplify Restrictions on Business

Doing nothing

Because the existence of a natural monopoly depends on an industry's cost structure, which can change dramatically through new technology (both physical and organizational/institutional), the nature or even existence of natural monopoly may change over time. A classic example is the undermining of the natural monopoly of the canals in eighteenth century Britain by the emergence in the nineteenth century of the new technology of railways. Canals are artificial channels for water There are two types of canals water conveyance canals which are used for the conveyance and delivery of water and Waterways "Railroad" and "Railway" both redirect here For other uses see Railroad (disambiguation.

Arguments from public choice suggest that regulatory capture is likely in the case of a regulated private monopoly. Public choice in economic theory is the use of modern Economic tools to study problems that are traditionally in the province of Political science. Regulatory capture is a term used to refer to situations in which a Government regulatory agency created to act in the public interest instead acts in favor of the commercial Moreover, in some cases the costs to society of overzealous regulation may be higher than the costs of permitting an unregulated private monopoly. (Although the monopolist charges monopoly prices, much of the price increase is a transfer rather than a loss to society. )

More fundamentally, the theory of contestable markets developed by Baumol and others argues that monopolists (including natural monopolists) may be forced over time by the mere possibility of competition at some point in the future to limit their monopolistic behaviour, in order to deter entry. In Economics, a contestable market is a Market served by only one firm but with mandated "competitive" pricing so as to escond the Monopoly In the limit, a monopolist is forced to make the same production decisions as a competitive market would produce. A common example is that of airline flight schedules, where a particular airline may have a monopoly between destinations A and B, but the relative ease with which in many cases competitors could also serve that route limits its monopolistic behaviour. The argument even applies somewhat to government-granted monopolies, as although they are protected from competitors entering the industry, in a democracy excessively monopolistic behaviour may lead to the monopoly being revoked, or given to another party. In Economics, a government-granted monopoly (also called a "de jure monopoly" is a form of Coercive monopoly by which a government grants exclusive privilege

Nobel economist Milton Friedman, said that in the case of natural monopoly that "there is only a choice among three evils: private unregulated monopoly, private monopoly regulated by the state, and government operation. Milton Friedman (July 31 1912 November 16 2006 was an American Nobel Laureate Economist and Public intellectual. " He said "the least of these evils is private unregulated monopoly where this is tolerable. " He reasons that the other alternatives are "exceedingly difficult to reverse," and that the dynamics of the market should be allowed the opportunity to have an effect and are likely to do so (Capitalism and Freedom). In a Wincott Lecture, he said that if the commodity in question is "essential" (for example: water or electricity) and the "monopoly power is sizeable," then "either public regulation or ownership may be a lesser evil. " However, he goes on to say that such action by government should not consist of forbidding competition by law. Friedman has taken a stronger laissez-faire stance since, saying that "over time I have gradually come to the conclusion that antitrust laws do far more harm than good and that we would be better off if we didn’t have them at all, if we could get rid of them" (The Business Community's Suicidal Impulse).

Advocates of laissez-faire capitalism, such as libertarians, typically say that permanent natural monopolies are merely theoretical. Laissez-faire ( pronunciation: French,; English,) is a French phrase literally meaning Let do (“allow to do” Libertarianism is a term used by a broad spectrum of political philosophies which prioritize individual Liberty and seek to minimize or even abolish the Economists from the Austrian school claim that governments take ownership of the means of production in certain industries and ban competition under the false pretense that they are natural monopolies. The Austrian School, also known as the “ Vienna School ” or the “ Psychological School ” is a heterodox school of economics that advocates [3]

Franchising and outsourcing

Although competition within a natural monopoly market is costly, it is possible to set up competition for the market. This has been, for example, the dominant organizational method for water services in France, although in this case the resulting degree of competition is limited by contracts often being set for long periods (30 years), and there only being three major competitors in the market. This article is about the country For a topic outline on this subject see List of basic France topics.

Equally, competition may be used for part of the market (eg IT services), through outsourcing contracts; some water companies outsource a considerable proportion of their operations. Information technology ( IT) as defined by the Information Technology Association of America (ITAA is "the study design development implementation support Outsourcing is Subcontracting a process such as product design or Manufacturing, to a Third-party company The extreme case is Welsh Water, which outsources virtually its entire business operations, running just a skeleton staff to manage these contracts. Dŵr Cymru / Welsh Water (DCWW is a company which supplies drinking water and Wastewater services to most of Wales and parts of western England Franchising different parts of the business on a regional basis (eg parts of a city) can bring in some features of "yardstick" competition (see below), as the performance of different contractors can be compared. See also water privatization. Water privatization is a short-hand for private sector participation in the provision of water services and Sanitation, although more rarely it refers to privatization

Common carriage competition

This involves different firms competing to distribute goods and services via the same infrastructure - for example different electricity companies competing to provide services to customers over the same electricity network. For this to work requires government intervention to break up vertically integrated monopolies, so that for instance in electricity, generation is separated from distribution and possibly from other parts of the industry such as sales. In Microeconomics and Management, the term vertical integration describes a style of Management control. The key element is that access to the network is available to any firm that needs it to supply its service, with the price the infrastructure owner is permitted to charge being regulated. (There are several competing models of network access pricing. ) In the British model of electricity liberalization, there is a market for generation capacity, where electricity can be bought on a minute-to-minute basis or through longer-term contracts, by companies with insufficient generation capacity (or sometimes no capacity at all). Electricity liberalization refers to the Liberalization of Electricity markets As electricity supply is a Natural monopoly, this entails complex and costly

Such a system may be considered a form of deregulation, but in fact it requires active government creation of a new system of competition rather than simply the removal of existing legal restrictions. Deregulation, a term which gained widespread currency in the period 1970-2000 can be seen as a process by which governments remove reduce or simplify Restrictions on Business The system may also need continuing government finetuning, for example to prevent the development of long-term contracts from reducing the liquidity of the generation market too much, or to ensure the correct incentives for long-term security of supply are present. Market liquidity is a Business, Economics or Investment term that refers to an Asset 's ability to be easily converted through an act of buying See also California electricity crisis. The California electricity crisis (also known as the Western U Whether such a system is more efficient than possible alternatives is unclear; the cost of the market mechanisms themselves are substantial, and the vertical de-integration required introduces additional risks. This raises the cost of finance - which for a capital intensive industry (as natural monopolies are) is a key issue. Moreover, such competition also raises equity and efficiency issues, as large industrial consumers tend to benefit much more than domestic consumers. Equity is the concept or idea of fairness in Economics, particularly as to Taxation or welfare economics Economic efficiency is used to refer to a number of related concepts

Stock market

One regulatory response is to require that private companies running natural monopolies be quoted on the stock market. This ensures they are subject to certain financial transparency requirements, and maintains the possibility of a takeover if the company is mismanaged. In business a takeover is the purchase of one company (the target) by another (the acquirer, or bidder) The latter in theory should help ensure that company is efficiently run.

In practice, the notorious short-termism of the stock market may be antithetical to appropriate spending on maintenance and investment in industries with long time horizons, where the failure to do so may only have effects a decade or more hence (which is typically long after current chief executives have left the company). By way of example, the UK's water economic regulator, Ofwat, sees the stock market as an important regulatory instrument for ensuring efficient management of the water companies. The Water Services Regulation Authority (Ofwat is the body responsible for economic regulation of the privatised Water and sewerage industry in England and Wales

Public ownership

A traditional solution to the regulation problem, especially in Europe, is public ownership. Public ownership (also called government ownership, state ownership or state property) refers to Government Ownership of any This 'cuts out the middle man': instead of government regulating a firm's behaviour, it simply takes it over (usually by buy-out), and sets itself limits within which to act.

Network effects

Network effects are considered separately from natural monopoly status. In Economics and Business, a network effect (also called network externality) is the effect that one user of a good or service has Natural monopoly effects are a property of the producer's cost curves, whilst network effects arise from the benefit to the consumers of a good from standardization of the good. Many goods have both properties, like operating system software and telephone networks.

Notes and References

  1. ^ a b c Baumol, William, J. . Microtheory: Applications and Origins. Cambridge, MA, USA: MIT Press, 27.  
  2. ^ Mueller, Milton L. (1998). Competition, Interconnection, and Monopoly in the Making of the American Telephone System, American Enterprise Institute. AEI Press, 14.  
  3. ^ a b DiLorenzo, Thomas J. (1996). "The Myth of Natural Monopoly". The Review of Austrian Economics 9 (2): 43-58. ISSN 0889-3047. An International Standard Serial Number ( ISSN) is a unique eight-digit number used to identify a print or electronic Periodical publication.  
  4. ^ Demetz, Harold (April 1968). "Why Regulate Utilities?". Journal of Law and Economics 11 (1): 55-65.  
  5. ^ McEachern, Willam A. (2005). Economics: A Contemporary Introduction. Thomson South-Western, 319.  

See also

References

External links

Dictionary

natural monopoly

-noun

  1. Control over the market for a product which occurs when a firm gains large benefit from economies of scale, or from a superior business model or product, and is thus able to produce a very large percentage of the total market demand for a given product and unintentionally exclude meaningful competition via price structures.
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