Approaches to Controlling Monopolies - Essay Example

Approaches to Controlling Monopolies Outline and discuss TWO the following approaches to controllingthe monopoly problem: (A) public ownership, (B) regulation, and (C) franchising. Introduction In the simplest economic terms, a monopoly is defined as the situation where there is only one seller or provider for a certain good or service. The central property of a monopoly situation is that there is no competition for the seller and there is no substitute for that particular product or service (Lypczynski & Wilson, 2005). Monopolies are often typed due to situations under which they are created and the two major types are those which are created with the blessing of the government and those which come about due to public enterprise. Government mandated monopolies are often created due to the efficiency associated with having a monopoly in a certain field while market monopolies may be created by outperforming other competitors, having total access to a limited resource or by utilizing the economies of scale (Lypczynski & Wilson, 2005). While monopolies are often naturally required in certain situation and can also be beneficial for an economy, there are also cases where they have to be avoided or controlled by using certain methods like the public ownership and regulation which are discussed below. Public Ownership Public ownership is also known as government or state control which signifies that the control of that particular asset or industry is controlled by the authorities who cover other business of the state. Public ownership may also be created if a private enterprise is brought under the control of the government. This is considered one of the most effective means of controlling monopoly powers since the government operated company may not be required to either show a profit or to operate as a traditional corporation. Therefore a privately owned firm may be transferred to the public domain because the ideal publicly owned company can sell the monopoly controlled product at cost and be more beneficial for the people (Moschandreas, 2000). Additionally, since it would have a monopoly, it would not have to allocate any resources in fending off the competition and that will help in improving its products and services. In the situation that they manage to earn a profit, these profits can be used to support the country in development costs. While a private monopoly is only accountable to its owners, a government monopoly would mean that the operation of the company is accountable to the people (Wikipedia.org, 2006). However, it is difficult to define the interest of the people and efficiency when it comes to politicians defining these terms. While the idea behind nationalising certain industries is a noble one, the people as well as those in the government could lose out significantly if these monopolies are not as ‘efficient’ as they should be. In fact, the situation in the UK got the point that monopoly mismanagement caused nationalised industries to go into losses and had to be bailed out with government subsidies. After years of sufferning their inefficiency and waste, it was decided that they had to be broken up. However, the process of privitisation does have its detractors since British Telecom was not broken up. The electric power supplier was split which caused problems in the nuclear energy sector. . British Rail represents the worse case since it was broken into many parts without placing much thought into the process and those have not been completely resolved even till now. A minor advantage of using publicly owned setups to control monopolies is that while a monopoly can fail due to financial reasons, a government owned company has very little chance of financial failure (Wikipedia.org, 2006). Even the best managed companies have gone bankrupt in the past but it is extremely unlikely that an entire government structure can run out of money. Therefore it is easier for the publicly owned company to secure credit. Despite these advantages, the government owned company may have certain drawbacks like creating a wasteful environment. The workers may have a lack of incentive to work due to higher job security and lower salaries. The most well known example of that is the mismanagement of the Railways which caused the transfer of ownership from government hands to private parties during the 1980s. Additionally, innovations in any monopolised field may be reduced since there would be no person willing to compete with the monopoly and the monopoly itself might be disinclined to offer new services or products (Wikipedia.org, 2006). In these cases, government regulation can perhaps be better than government ownership and control. Regulation Regulation is the process by which certain rules and laws are created to govern monopolies or monopoly like setups which are in the private domain. To counter the negative effects of these large corporations the government uses legislation and other legal controls called regulations (Conigliaro, et. al., 1996). There are several well known situations where governments intervened to prevent monopolistic control, the famous cases of the early railroads, IBM, AT&T and Microsoft are all examples of government regulation to prevent and control large monopolies. Microsoft has been embroiled in a famous case with the European Union over unfair monopoly practices for its operating system and regulation techniques have been used to curtail their practices. In the UK, monopolies or monopoly like businesses are controlled by the Competition Commission which guides and oversees their operations and uses laws to keep them mostly benign. The central purpose of regulation is to ensure that competition remains active in the market and there is little chance of collusion between companies. In the past the Competition Commission was known as the Monopolies and Mergers Commission but with a new initiative the name was changed to reflect the actual purpose of the commission i.e. to protect competition from being eliminated (Competition Commission, 2006). Using regulatory controls to protect the competition is a relatively new phenomenon since earlier economists focused on protecting the consumer rather than the competition. In the past, regulation focused on creating various controls on price or production to maintain a certain level of output. However, it was found that this method of control was not as effective as ensuring the survival of the competition since that was considered to be better in economic terms leading to improvements in both the product and the quality (Conigliaro, et. al., 1996). The regulatory laws in the UK for different industries have created many layers of controls for the governance of monopolies. Utility company, telecommunications giants, water suppliers and to some extent, even newspaper publishers have regulatory laws which they have to follow (Competition Commission, 2006). The Office of Communications is one such body which provides extensive regulations for keeping the competition alive and protecting the consumers from monopolies in the telecommunications industry. This is done by controlling prices on the upside to ensure a fair deal for the consumers and controlling prices on the downward side to prevent bleeding by the competition (OFComm, 2006). Regulation and regulatory controls are often criticized for being too weak in controlling monopolies or having any substantial support for a competitive market especially in the media sector (Adam Smith Institute, 2006). While regulatory bodies can create laws or rules for monopoly like companies, the rules which are created to control monopolies can always be challenged in court, repealed or avoided if the owners of the company manage to wiggle through them. The regulation process comes across as a battle between opposing lawyers where one party wants to assume control of the market and the other devises ways to prevent that from happening (Conigliaro, et. al., 1996). Conclusion Without doubt, free trade and liberal enterprise is essential for the survival and growth for any economy yet at the same time, the protection of the public interest and the prevention of consumer exploitation are also important. Privately owned monopolies come across as being good only for the people who own them and appear to offer no significant benefits to the consumers. It is clear to see that they must be owned by the government or controlled and governed by laws which regulate their operation. However, between the two I believe that regulation is the better option since government control can lead to inefficiencies and waste which can adversely affect the quality of products and services. Regulation has the benefit of allowing the competition to survive alongside the larger companies. This creates room for innovation and differentiation between the choices available to the customers. Additionally, regulation comes across as being much more flexible since the laws made by the regulators can be changed to increase or decrease the strength of the monopoly. Regulations can be flexible to tolerate a monopoly or they can be harsh enough to break the monopoly completely to prevent harm while still allowing the services or products to reach the individual customer. Works Cited Lypczynski, J. & Wilson, J. (2005). Industrial Organisation. Prentice Hall. Moschandreas, M. (2000) Business economics. Thompson. Conigliaro, A. et. al. (1996). The Danger of Corporate Monopolies. Retrieved April 12, 2006 from Stanford University Website: http://cse.stanford.edu/class/cs201/Projects/corporate-monopolies/index.html Wikipedia. (2006). Natural Monopoly. Retrieved April 10, 2006 from Wikipedia.org website: http://en.wikipedia.org/wiki/Natural_monopoly Competition Commission. (2006). What is the Competition Commission? Retrieved April 17, 2006 from CompetitionCommission.org.uk website: http://www.competition-commission.org.uk/ Adam Smith Institute. (2006). Managing the media. Retrieved April 17, 2006 from Adam Smith Institute Website: http://www.adamsmith.org/cissues/media-culture-sport/home.htm OFComm. (2006). Duties and Regulatory Principles. Retrieved April 17, 2006 from Office of Communications website: http://www.ofcom.org.uk/about/sdrp/ Read More