Download SpotNomics

NOVEMBER 2013
MONTHLY NEWSLETTER
Department of Economics
Content Editor: Dr. E. Azzopardi
This Issue
Great Economic Thinkers
Monopolies
Examination Success
Monopolies—Q & A
Great
Economic
Thinkers
SpotNomics
What is meant by a monopoly
In economic theory a monopoly is defined as the sole supplier of a good, who is
able to prevent the entry of competitors, and for whose product there is no very
close substitute. In fact, the word ‘monopoly’ comes from the Greek words ‘monos
polein’ which mean ‘alone to sell’. The essence of a monopoly is that there is a
single supplier. As an example, we can cite OPEC (Organisation of Petroleum Exporting Countries) that consists of a number of producers that collectively set the
price of oil.
Measures of Monopoly Power in Practice
The most obvious measure of monopoly power is looking at the percentage of the
market which any one firm accounts for. As far as the Competition Act in Malta,
1994, is concerned, a firm is said to be in a dominant position when it is able to act
independently of its competitors, customers or suppliers to the detriment of effective competition. A firm with a market share reaching 40% will always be deemed
to have this ability to act independently on the market share and so to be in a dominant position. One case where a firm is certainly in a dominant position is when it
has a 100% market share. In Malta, as in other countries, one finds a number of
public utilities (e.g. WSC and EneMalta) enjoying a natural monopoly.
Joseph Schumpeter
Schumpeter was probably the
first scholar to develop theories
in entrepreneurship. He argued
that the innovation and technological change of a nation come
from the entrepreneurs, or wild
spirits. He asserted that the
agents that drive innovation and
the economy are large companies
which have the resources and
capital to invest in research and
development. He argued that
economic change revolves Source: Nipping Monopoly Activities in the Bud, ChinaDaily.com.cn, April 26, 2013.
around innovation, entrepreneurial activities, and market power.
Examination Success
He sought to prove that innovaHints regarding time management
tion-originated market power
The MATSEC Advanced Level of Economics consistis of two papers. Paper I requires candidates to answer four essays in a three-hour essay paper, allowing about
could provide better results than
forty minutes for each question. It is vital to arrange your time so as to answer all
the invisible hand and price comfour questions (two from each section, A and B) since all carry equal marks. Paper
petition. He argued that technoII requires students to answer 1 data question from both section and the other from
logical innovation often creates
either one allowing approximately one hour for each data.
temporary monopolies, allowing
Choosing your question in your exam
Spend at least a couple of minutes at the beginning of the examination in carefully
abnormal profits that would soon
reading the paper, paying close attention to the wording of each question. Only
be competed away by rivals and
attempt questions where you can answer each part. It is important to divide your
imitators. He said that these temtime according to allotted marks. Many candidates like to gain confidence by tackporary monopolies were essenling their best question first. It is absolutely essential that you complete the retial to provide the incentive necquired number of questions. Once you have finished writing, do not think the
question is ready. Check that you have included everything you intended to. It is
essary for firms to develop new
amazing how easy it is to overlook something when you are busy writing.
products and processes.
Monopolies—Q & A
What is the role of the Malta Competition and Consumer Affairs Authority (MCCAA) regarding monopolies?
The Malta Competition and Consumer Affairs Authority (MCCAA) was established on 23 May 2011 with the coming into
force of Chapter 510. The law provides for the establishment of an Authority to promote, maintain and encourage competition,
to safeguard the interests of consumers and enhance their welfare, to promote sound business practices, to adopt and co-ordinate
standards in relation to products or services, to regulate such activities and to provide for such matters ancillary or incidental
thereto or connected therewith, to provide for the establishment, jurisdiction and procedure of an appeals tribunal, and to make
amendments to other laws.
The Authority’s mission is to make markets work well for consumers. Markets work well when businesses are in open, fair and
vigorous competition with each other for the consumer's custom. Its job is to make sure that consumers have as much choice as
possible across all the different sectors of the marketplace. When consumers have choice they have genuine and enduring
power. It pursues its goal by:
• encouraging businesses to comply with competition and consumer law and to improve their trading practices through selfregulation
• acting decisively to stop hardcore or flagrant offenders
• studying markets and recommending action where required
• empowering consumers with the knowledge and skills to make informed choices and get the best value from markets.
As an independent professional authority, the MCCAA plays a leading role in promoting and protecting consumer interests
while ensuring that businesses are fair and competitive.
What consumer and competition legislation is utilized by the Authority to carry out its work?
The Authority has many different powers that enable it to carry out its aim of making markets work better for consumers which
are closely based on the corresponding prohibitions under Article 101 and 102 of the Treaty of the Functioning of European
Union.
anti-competitive behaviour is prohibited in two main ways:
Anti-competitive agreements - Article 5 which prohibits (i) agreements between undertakings, (ii) decisions by associations of
undertakings, or (iii) conceted practices which have the object or effect of preventing, restricting or distorting competitions
within Malta or any part of Malta
Abuse of a dominant position - Article 9 which prohibits any abuse by one or more undertakings of a dominant position within
Malta or any part of it.
Article 9 does not define abuse, but sets out a non-exhaustive list of specific conduct that may constitute abuse such as pricing
abuses including excessive pricing; predatory pricing; discriminatory pricing; fidelity (or loyalty) pricing or discounting
schemes.
Are monopolies necessarily harmful?
In reality, even those who take extreme positions in this debate acknowledge there is no “right answer.” To suggest that all monopolies are bad is wrong; to suggest that monopolies should run unchecked is equally wrong. The question is: How can we
derive the benefits of monopolies and at the same time minimize its undesirable consequences.
Possible disadvantages of monopoly power:
Abnormal profit means less incentive to be efficient and develop new products;
Monopoly power means higher prices and lower output for domestic consumers than under perfect competition, assuming that
costs are common in both situations;
Monopolists may waste resources by undertaking cross-subsidisation, using profits from one sector to finance losses in another
sector;
Monopolists may undertake price discrimination to raise producer surplus and reduce consumer surplus;
Monopolists do not necessarily produce at the most efficient point of output;
Monopolists may lead to a misallocation of resources by setting price above marginal costs, so that prices are above the opportunity cost of providing the good.
Possible advantages of monopoly power:
Abnormal profit means: finance for investment to maintain competitive edge; reserves to overcome short term difficulties, giving stability to employment; funds for research and development;
Monopoly power means countervailing power to match overseas large organizations;
Cross-subsidization may lead to an increased range of goods or services available to the consumer;
Price discrimination may raise total revenue to a point which allows survival of a product or service;
Monopolists may be able to take advantage of economies of scale which means that unit costs may still be lower than the most
efficient unit cost position of a competitive firm;
There are reservations about advocating marginal cost pricing especially where externalities are involved.