Question

In passing judgement on whether monopoly power has a pernicious impact on the
economy, what set of factors would you consider? If two reasonably large firms wish
to vertically integrate, should policymakers always err on the side of caution? Discuss
and explain what set of factors they should consider. 2 pages double spaced.

Answer 1

Answer

Monopolies can be criticised because of their potential negative effects on the consumer, including:

1. Restricting output onto the market.
2. Charging a higher price than in a more competitive market.
3. Reducing consumer surplus and economic welfare.
4. Restricting choice for consumers.
5. Reducing consumer sovereignty.

Monopolies can also lead to:

1. A less competitive economy in the global market-place.
2. A less efficient economy.
3. Less productively efficient
4. Less allocatively efficient
5. The economy is also likely to suffer from ‘X’ inefficiency, which is the loss of management efficiency associated with markets where competition is limited or absent.
6. Less employment in the economy, as higher prices lead to lower output and less need to employ labour.

If two reasonably large firms wish to vertically integrate, policymakers should not always err on the side of caution. However, Policy makers must take into consideration a few factors to decide whether a vertical integration is pro-competitive or anti-competitive. Factors considered are the likelihood of changes in the patterns of industry behavior caused by the vertical integration. Some examples of these changes are if a supplier is likely to lose a market for its goods, if retail outlets are refused certain supplies or if competitors find their avenues to supplies or resources blocked. Vertical integrations may also be considered uncompetitive if they grant one company such entrenched market power that it discourages new competitors from entering that particular marketplace.

An example to prove the harmful effects of such an integration could be:

In Ford Motor Co. v. United States, Ford Motors wished to acquire a company called Autolite. This business manufactured spark plugs. The action was condemned on the basis that the vertical integration would entrench too much market power in the company and thus discourage other competitors from entering the marketplace. Ford Motors attempted to argue that the acquisition would make Autolite a more effective company but this was dismissed by the Supreme Court, which saw the potentially anti-competitive effects of the vertical integration as a more important concern.