Economics 9708/43 — May/June 2023

Competition, monopoly and the market

Firms are sometimes thought of as machines: inputs go in, products come out. However, it matters how powerful these firms are allowed to become.

Competition law – the law that governs how firms compete in the market, how they may exert their power and how and when they may join forces – has not prevented high concentration ratios in many industries.

Global monopolies have been created in the name of ‘free market’ capitalism. Mergers have been approved and monopolies tolerated under the assumption that they are efficient. Their ability to enable innovation is relied upon to justify these monopolised industries.

Competition law is being used to protect a narrow set of public interests based on the idea of ‘consumer welfare’. The test applied by the law is whether any change will result in lower prices for consumers and thus is beneficial. This is regardless of how monopolised the resulting market structure becomes.

The logic that focuses on consumer prices is flawed. This can be seen in the impacts of firms on the environment. Prices do not capture the negative externalities of production, for which neither the producer nor the consumer pays.

Low consumer prices are not an adequate indicator for consumer welfare. The low price/low wage spiral keeps pushing for cheaper goods and services to increase the profitability of the firm. The result is that workers are paid less. Low prices cause unequal bargaining positions between powerful employers and workers, and between powerful buyers and small independent suppliers.

Regulation has a role to play in protecting consumers from the worst abuses of market power by firms. There needs, however, to be new competition law that promotes the free market rather than the desires of the monopoly firms. It needs to consider the balance of power between the public sector and private enterprise.

Source: RSA Journal. Issue 3, 2020 p 32.