David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 8 Perfect competition and pure monopoly
The social cost of
monopoly is the failure to
maximize social surplus.
ls the social cost of monopoly power large? Economists who believe in market
forces tend to think it is small. Professor George Stigler, a Nobel Prize winner, once
quipped, 'Economists might serve a more useful purpose if they fought fires
or termites instead of monopoly: Other economists believe the social cost of
monopoly is much larger.
Why such a disagreement? First, the area of the deadweight loss triangle in Figure 8.13 depends on the
elasticity of the demand curve. In calculating the size of deadweight loss triangles under monopoly,
different economists use different estimates of the demand elasticity.
Second, the welfare cost of monopoly is not just the deadweight loss. Since monopoly may yield high
profits to the firm, firms spend a lot trying to acquire and secure monopoly positions. Firms may devote
large quantities of resources trying to influence the government in ways that enhance or preserve their
monopoly power. They may also deliberately maintain extra production capacity to create a credible threat
to flood the market if an entrant comes in. Socially, resources devoted to lobbying the government or
maintaining overcapacity are largely wasted. This kind of behaviour by firms to acquire and protect
monopoly profits is called rent-seeking behaviour and it may be socially wasteful.
Monopoly power and competition policy
We have seen that a monopoly creates a social loss compared to a perfectly competitive market.
If it is possible to increase the level of competition in a monopolized market, then society is
better off since social surplus increases. Competition policy (also known as antitrust policy) deals with
markets where competition can arise; however, given the behaviour of some firms in those markets,
competition is restricted. There are markets in which increasing the level of competition is not feasible, so
competition policy does not apply. This is the case of a natural monopoly, which will be discussed at the end
of this chapter.
Broadly speaking, competition policy can be divided into policies to deal with monopoly power that already
exists, and policies to deal with mergers that may increase monopoly power. While mergers will be discussed
in the next chapter, here we discuss policies to address existing monopoly power. Since the UK belongs to the
European Union, EU competition law takes precedence where it is relevant, essentially in the case of larger
businesses with significant European or global activities.
The original Common Market was created by the 1956 Treaty of Rome. The modern and enlarged EU is
largely underpinned by the 1999 Treaty of Amsterdam.
Article 81 of this treaty prohibits anti-competitive agreements that have an appreciable effect on trade between
EU member states and which prevent or distort competition within the EU. Article 82 prohibits the abuse of
any existing dominant position.
Responsibility for enforcement of these articles lies with the European Commission.
Although global businesses are increasingly subject to transnational competition law, many businesses still
operate primarily within one country; national decisions are then appropriate. Within the UK, these are
governed by the Competition Act 1998 and the Enterprise Act 2002. The latter made it a criminal offence,
punishable by a jail sentence, to engage in a dishonest cartel.
Two key institutions of UK competition policy are the Office of Fair Trading (OFT) and the Competition
Commission. In particular, the OFT has the power to refer cases in which existing monopoly power
may be leading to a 'substantial lessening of competition' to the Competition Commission for detailed
investigation.
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