The market power vs deadweight loss (DWL). A market monopoly occurs when one firm becomes the only manufacturer or producer of a certain product or service. If the firm happens to be supplying the product or service to a vast population, then chances are that the firm may fail to fully satisfy the needs and demands of the users. The company will therefore opt to hike the prices in order to reduce consumer surplus, an act that will result in a gap loss for the consumer and an increased profit margin for the firm. Therefore, the government through its relevant agencies should restrict and control a monopoly since it will always result in consumer exploitation (Kung & Zhong, 2017). The government can introduce new strategies such as price capping, nationalization and regulation of mergers in order to effectively regulate monopolies. In the long-run, monopolies should be framed to benefit customers and also to promote fair market competition. This write-up explores different economic theories and ways in which the government can regulate market power.
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I strongly support government regulations of market power and restrictions on monopoly. This is because a monopoly market results in inferior products inhibit inflation, price discrimination, and increased prices. Besides, in a monopoly market power, the entry of new firms is highly restricted and this limits fair market competition. The market power vs deadweight loss (DWL)
Before government regulations are implemented, there are several theories that are considered, these include private interest theories and public interest theories. Public interest theories in this case seeks the benefit and protection of the public or consumers at large. Meaning, when the market power intensifies, the deadweight loss imposes a burden on the public, while the suppliers are left counting profits. The supplier will continue accumulating profits by raising the prices of the commodities, despite the reduced quantity and quality. The consumers in this case are going to be affected since they rely on one supplier in the market and are therefore forced to purchase the product or service at a higher price. The public interest theory according to Christensen (2011), assumes that regulations are formulated to mitigate different market problems and also to improve the social welfare of the society. The theory does not only address consumers in the market but also suppliers in the market. The theory takes two distinct forms, both of which relate to regulators in the market. The first form involves a scenario where market regulators are aware of the different forces that drive the market and try to restrict fair competition. The second form involves a scenario where regulators have no or little knowledge of demand, cost and quality. The public interest theory, therefore, considers various market aspects such as market instabilities, imperfect competition, undesirable results and missing markets. The market power vs deadweight loss (DWL)
Private interest theory, on the other hand, claims that groups are established to safeguard different economic interests. Such groups will influence the government to implement policies that economically benefit them. Outcome regulations in a private interest theory benefit individual groups such as firms, trade unions, consumer groups, legislators, regulators and many others. In actuality, private interest theories prevail in practice when compared to public theories (Gilmore, Branston & Sweanor, 2010). On the assumption that many interest groups will contest for economic interests of the consumers, these fights may only involve the public but in the long run, may end up benefiting certain individuals and groups. The market power vs deadweight loss (DWL)
I strongly support government regulation on market power and restrictions on monopolies because these policies are aimed at improving the social welfare of the consumers and other small enterprises in the market. The government may also regulate the market for its own interests such as taxation and to reduce inflation. Since the government has the authority and power to regulate the market, it does so with several considerations in place so that it does not interfere with the end goal in the market, which is for consumers to acquire essential products and services and for the supplier to be contended with the prices (Mutiarin et al., 2019). Some of the reasons why a government may impose restrictions in the market include, to prevent excess pricing, preventing consumer exploitation, to prevent the growth of monopoly effect, to allow fair competition and also to allow free entry of firms in the market. When a government decides to regulate the market prices, then the social welfare of the public is considered and this favours the interests of the majority. Additionally, regulations also ensure that organizations meet the minimum standard requirements for operation. The market power vs deadweight loss (DWL)
When a single firm dominates a market, then chances are that it will exploit the consumers through pricing. For instance, a regional company such as J.B Dukes may use its market position to raise tobacco prices but at the same time suppress farmers by buying their raw products at a lower price. If a single company dominates the market, then chances are that few or no company will be able to enter the market freely (Kanazawa, 2013). This is because of the restrictions put in place, such a market may also require high capital to enter and run the business. This is the reason why governments need to be on their toes so as to prevent monopolies since in the long-run have a negative impact on the consumers. The government in this case can allow free entry of small and large companies that meet the minimum standards of operation in the industry. This way, prices will be regulated and fair market competition will also be promoted. According to O’Toole (2017), government interventions are necessary in an economy in order to correct market failures. If a producer’s surplus and consumer surplus are astray, then the only entity that can remedy the market failure is the government. For instance, after the exit of the United Kingdom from the European Union, most businesses in the UK faced a reduction in competitive prices from different European firms, this resulted in inflation in prices. The UK government intervened and necessitated several remedies to the market failure that had sent the country into huge inflation. Some of the interventions by the UK government included the provision of essential service and the implementation of both monetary and fiscal policies.
In order to create a fair competitive market, a government can regulate market power through;
- Price capping
Price capping is a regulation set to cap the prices of different utility providers. A price cap is set based on several economic factors such as expected efficiency savings, price cap index and inflation. The government in this case may impose new regulatory bodies and policies that control activities relating to pricing, packaging and quality of the product. some of the government regulators that the government may impose include OFGEM to guarantee price optimization. In addition, the quantity and quality of products should match the prices of the products and services within the equilibrium loop.
- Regulation of mergers
Mergers play a significant role in an economy, especially to the parent companies, however, some alliances may create a market power or a monopoly. Mergers according to Gaughan (2010), are companies or firms that undergo some mutual agreements to join forces to increase their market share and at the same time maximize their profits. If a merger comprehensively contributes 45% of the market share, then the merger may be considered as a source of market force. Such a merger may have a huge influence on the prices, quantity and quality of products. Such a scenario may trigger government interventions since the merger creates a huge monopoly.
- Breaking existing monopolies
Over the past, different government have tried to break monopolies in different industries, however, the process always results in chaos and sometimes in lawsuits. Despite the hardships, a government must proceed to break a monopoly for the good of the public. A good example is when the U.S government tried to block Microsoft company because of its domination in the market, the government lost the case and Microsoft remains the global manufacturer of Windows operating system. The process however may involve certain protocols and rules, especially if it involves a single company that solely supplies certain products and services.
From the above discussion, it is evident that a government has an obligatory authority to regulate market power and to restrict monopoly power. Such a regulation favours not only the interests of the government but also the interests of the consumers, private firms, the public and other entities. The government can regulate monopolies through price capping, market mergers, and breaking existing mergers. Despite the obligatory authority given to governments by distinct constitutions, regulating and imposing policies can be challenging at times. This is evident in the case of Microsoft when the US government tried to block the company from solely manufacturing the Windows operating system. A government may implement market power regulations to prevent overpricing of products and services, to guarantee quality products and to promote fair competition. When these factors are comprehensively considered, the probability of a deadweight loss will be reduced, even when there is a slight increase in prices.
Christensen, J. G. (2011). Competing theories of regulatory governance: reconsidering public interest theory of regulation. Handbook on the politics of regulation, 96-110.
Gaughan, P. A. (2010). Mergers, acquisitions, and corporate restructurings. John Wiley & Sons.
Gilmore, A. B., Branston, J. R., & Sweanor, D. (2010). The case for OFSMOKE: how tobacco price regulation is needed to promote the health of markets, government revenue and the public. Tobacco Control, 19(5), 423-430.
Kanazawa, Y. (2013). The Regulation of Corporate Enterprise: The Law of Unfair Competition and the Control of Monopoly Power. In Law in Japan (pp. 480-506). Harvard University Press.
Kung, L. C., & Zhong, G. Y. (2017). The optimal pricing strategy for two-sided platform delivery in the sharing economy. Transportation Research Part E: Logistics and Transportation Review, 101, 1-12.
Mutiarin, D., Nurmandi, A., Jovita, H., Fajar, M., & Lien, Y. N. (2019). How do government regulations and policies respond to the growing online-enabled transportation service (OETS) in Indonesia, the Philippines, and Taiwan?. Digital Policy, Regulation and Governance.
O’Toole, N. E. (2017). Consumers in Shock: How Federal Government Overregulation Led Mylan to Acquire a Monopoly over Epinephrine Autoinjectors. DePaul Bus. & Comm. LJ, 16, 26.