Increasing industry concentration a concern

Economists have long understood that competition between firms brings the advantages of lower prices, improved quality and greater consumer choice. This is because firms deliver on these or they will be competed out of the market. 

The Australian Competition and Consumer Commission (ACCC) chairman has warned that market concentration (the percentage of market share held by the biggest firms) has risen to a level where consumers are possibly going to be worse off.

If a firm has monopoly power then they typically charge more and sell less, but earn higher profits. Over the last few decades mergers and takeovers have led to a very high proportion of Australian output being concentrated in the top 100 firms.

This provides a problem for the ACCC who regulate competition. The article below suggests that a change of rules whereby the firms that merge or want to takeover another have to prove the result will not harm competition. At present the ACCC have to prove it would harm competition.

An interesting point made by the ACCC is that if we want the benefits of economies of scale to work through to lower prices then we have to maintain a competitive environment. In other words a merger/takeover may improve productive efficiency but harm allocative efficiency.

The ABC cover the story here

This article deals directly with competition policy in Australia so is directly relevant to VCE economics. This is a part of IB economics also, and the harm that monopolies do to efficiency is often visited on Paper 1 of Higher Level in questions on the theory of the firm.

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.