Market Power & Government Intervention (DP IB Economics)

Advantage

Explanation

Higher Profits

• Firms with market power can often set prices above their marginal costs, allowing them to earn abnormal profits
   

• Higher abnormal profits improve the reputation of the company amongst its shareholders and make it easier for the firm to access greater finance

Research, Development & Innovation

• Higher profits provide the means and incentive for firms to invest in research and development, innovation, and expanding their operations
   

• This may result in a better quality product for consumers

Economies of Scale

• Larger firms can take advantage of economies of scale to lower their average costs
   

• With lower costs, firms can leave price levels the same and enjoy higher profits - or firms can lower prices and pass on the cost benefits to their customers

Branding and Reputation

• Market power enables firms to build strong brands and reputations

  • This can create customer loyalty and trust
     

• Established brands often have a competitive advantage, allowing firms to charge premium prices 

Strategic Decision-Making

• Firms with market power have more strategic options in terms of their business decisions
   

• They can pursue long-term goals, undertake mergers and acquisitions, engage in vertical integration, and explore new markets
   

• This strategic freedom can lead to increased market dominance and sustained profitability.

Advantage

Explanation

Reduced Competition

• A firm with significant market power is likely to limit the entry of new competitors or engage in anti-competitive practices that stifle competition
  

• This can lead to higher prices, reduced consumer choice, and decreased efficiency in the market

 Lack of Innovation & Efficiency

• In the absence of competition, firms may have less motivation to improve their products, lower costs, or invest in research and development
  

• This can harm consumer welfare and hinder overall industry progress

Regulatory & Legal Risks

• Firms with significant market power often face increased scrutiny and regulation from anti-monopoly authorities
   

• These firms may be subject to legal actions, fines, or forced divestitures if their market power is deemed anti-competitive

Approach

Explanation

Example

Creating a Competition Regulator

• One way to control monopoly power is to prevent it from forming in the first place
  

• A key function of agencies is to monitor merger activity with the aim of preventing any single firm gaining more than 25% market share
  

  • If there are concerns about the merger then the regulator has the authority to stop it from happening
     

• Competition regulators also intervene by placing maximum prices, especially when monitoring natural monopolies

• The Competition & Markets Authority (CMA) is the UK Government regulator tasked with ensuring that the creation of monopoly power is avoided
   

• There are similar regulators in Europe (European Competition Commission) & in the USA (Antitrust Commission)
  
  

• E.g. in July 2022 the CMA launched an investigation into the merger of two companies which produce foam used in bedding & cleaning products as they believed it would lead to higher prices & less choice

Protecting Suppliers

• Monopsony power is abusive towards suppliers & over time can change the nature of entire industries in an economy
   
  

• Governments can pass anti monopsony laws and issue fines if breaches occur
   

• They can set minimum prices which buyers have to pay suppliers

• Autorité de la concurrence (Competition Authority in France) launched an investigation in 2018 on big retailers for unfair practices in the food sector
  

• They fined several supermarket chains for using abusive commercial practices against their suppliers, such as unilaterally changing contract terms and imposing excessive payment delays
   

• These actions aimed to protect suppliers from unfair treatment and ensure fair competition within the industry.

Protecting Employees

• Wage bills for firms are often one of their highest costs as a proportion of expenditure
   

• With a goal of profit maximisation firms will always seek to reduce their wage expenditure as this will result in higher profit
   

• There is a role for government to protect workers who could be exploited by firms
   

• The government uses the following methods to protect employees

• National minimum wage legislation
   

• Legislation on health & safety, working hours & employment conditions e.g. maternity pay
   

• Permitting trade unions to operate in the economy (some countries limit or ban the existence of unions as they view them as anti-competitive e.g. Singapore)

Explanation

Advantages

Disadvantages

• Nationalisation occurs when the Government takes control and ownership of firms which were in the private sector

• This can generate efficiencies, especially when delivering utilities (gas, water, electricity) to the national population
  
  

• It creates more equity in society as all citizens have the same access to the same resource at the same price e.g. Norway nationalised much of the oil industry when oil was first discovered in 1972. The profits belong to the citizens
  
  

• The business can generate significant revenue for the government

• Government firms can often run very inefficiently
  

• There is an opportunity cost associated with the money required to run it
  

• The Government may lack the expertise to run the business