It ORR (office of rail regulator) were set
Posted On May 30, 2019
It also becomes a problem when monopolies make supernormal profits as it leads to a great inequality in income distribution in the society. Besides that, is speculated that due to the lack of competition and achieving supernormal profits, firms are less likely to be innovative. In a study by the National Bureau of Economic Research in 2017, it was found that U.S. businesses have invested less than expected since 2000 partly due to the lack in competition. An example being the cable industry who was a monopoly but because of their lack of innovation, got beaten down by the disruptive technologies like Netflix and DishTV who created a new type of entertainment service which didn’t require cables. Furthermore, a monopoly could also face diseconomies of scale if the firm grows too fast and becomes too big to coordinate properly. This also contributes to the X-inefficiency as there is a lack of management control, causing the productivity of workers to fall.
To correct this market failure, it is a must for the government to interfere. In fact, there are already policies in place to ensure that monopolies in this era do not abuse their power as monopolies. In the UK, based on the Competition Act 1998, the OFT is to investigate any collusive behavior or abuse in market power. In this context, the OFT would investigate when predatory pricing, charging of higher prices by firms, vertical restraints (where firms use market power to pay a lower price to suppliers), or tie-in-sales (where when one product is bought, a second item must be purchased together with it). The Sherman Act 1890 with their Anti-trust laws also prohibited certain outcomes and behaviors of a monopoly, however, on its own initiative. A monopoly that came into power because of its own skill and hard work is considered an innocent monopoly and the Act only punishes those coercive monopolies that intentionally dominated the market through misconduct and ill-intention toward the society.
Governments also regulate monopolies by price capping previously state owned monopolies like gas and water using RPI-X regulators. Regulatory bodies such as OFGEM (for the gas and electricity markets), OFWAT (tap water), ORR (office of rail regulator) were set up. One of their functions were to limit price increases, using the formula RPI-X, where X is the amount they have to cut prices by in real terms. For example, if inflation was 3% and X=1%, firms are allowed to increase their prices by (3%-1%)=2%. If the regulators think the firms can make efficiency savings and are charging consumers at too high a price, they can set a higher value of X to regulate the price increments. E.g. early years of telecom regulation, the level of X was set really high because the efficiency savings enabled big price cuts.
Merger policies also prohibited the mergers of firms that will create a combined more than 25% of the market shares and if believed to be against the public interest. This policy acknowledges the right of the OFT to investigate any mergers that could create a monopoly power and any of the sort will be automatically referred to the competition commission to decide whether to allow or block the merger or allow it under conditions such as divesting some parts of the business to keep the market share low.
During the instances that existing monopolies become too powerful and start turning for the bad, governments can also interfere to break up the monopoly into smaller competing firms though cases like these are really rare. With that, more competition will be created, lower prices set and technological advances can be made. It is with the passing of the Sherman’s Anti-Trust Act 1890 that the government was given the power to shatter big companies into smaller firms when needed to. E.g. regulators in the EU investigated Microsoft in 1998 for potential abuse of market dominance and threatened to break it up into two smaller firms, one for software and another for operating systems.