Regulating monopoly power - a good idea?

The European Commission has jut rules that there cannot be a merger of two of the four mobile phone network operators in the UK. They have done this because they say the reduction in competition this would involve could harm the interests of consumers.

There was a proposed takeover by the '3' network of the O2 network. The cost of the deal at nearly 13 billion Euros was enough to attract the attention of the EU Competition Commissioner.

The merger was banned because the EU feared that the result of having just three providers in the market would confer too much monopoly power on the remaining firms. They argue that prices would rise and the service quality fall as a result.

The reason that a high concentration ratio can be bad for consumers is the loss of efficiency that can result:

Productive efficiency falls because there is less competition and no need to keep costs low. There is also less incentive to invest in the service to improve because the chances of loosing market share is minimal.

Allocative efficiency is reduced as there is less need to provide consumers with an innovative new service and high quality as the alternative services are diminished.

Dynamic efficiency is reduced because there is less need to invest. An important point here is that the three remaining firms are more likely to act in their mutual interest and not compete strongly. It is not collusion, that is illegal, but a 'Nash equilibrium' becomes more likely. Each firm realising that strong competition is effectively cut throat they act in a way that maximizes mutual profit.

This is an excellent example of competition policy in action. Some will argue that banning the merger it is a bad move in the long-run as mobile networks need to become international, not national. That's a trade-off of long-run efficiency gains for short-run losses the EU is unwilling to make.

The BBC covers the story here

The detail of this story is of most interest to IB students studying market structures and government intervention. However VCE students should see parallels to the operation of the ACCC and the costs of monopoly power.