The social cost of monopoly power arises because marginal cost is set equal to marginal revenue, which is less than price and marginal consumer benefit. The social cost is the cumulative difference between the value that consumers place on the lost output and its marginal production cost. The social cost is higher if market power allows firms to have
costs curves that are unnecessarily higher than they might have been.
X-inefficiency arises from the information monopoly that a monopolist has about its cost possibilities. The easy life may lead monopolists to make inadequate efforts to reduce costs, adding to the social cost of monopoly.
Industrial policy seeks to offset production market failures except those arising from scale economies and imperfect competition: offsetting these is the aim of competition policy.
Intellectual property is conferred through the award of patents and copyrights, a temporary
legal monopoly for successful knowledge creators. Patents provide an incentive to look for
inventions. Otherwise inventors, foreseeing that profits on successful inventions will quickly
be competed away by imitators, will devote few resources to invention.
R&D has a beneficial externality: spending by one firm benefits other firms.
The industrial policies of national governments towards their own ‘national champions’ is a
commitment that affects the bargaining power of their firms in the international market.
Sunrise and sunset industries involve other market failures. This is not a general licence for
active industrial policy to manage change. Governments must identify the market failure and
show that intervention is preferable. Picking winners has not been a success, but
decentralized incentives may be effective if their rationale has been clearly identified.
Economic geography reflects locational externalities arising in training, transport and
knowledge creation. The industrial base is the existing stock of locational capital.
In the UK, the Office of Fair Trading is responsible for consumer protection and the efficient
operation of markets. It can refer a market to a detailed investigation by the Competition
Commission to assess whether competition is being substantially reduced by the current
market structure and the conduct of firms within it.
UK firms are subject to EU Competition Law if their activities extend substantially beyond
UK borders.
Mergers may be horizontal, vertical or conglomerate. Conglomerate mergers have the
smallest scope for economies of scale. The recent merger boom has largely been in
horizontal mergers to take advantage of larger markets caused by globalization, European
integration and deregulation.
In principle, mergers can be referred to the Competition Commission if they will create a firm
with a 25 per cent market share or if they involve taking over a firm with an annual turnover
of over £70 million. In practice, few mergers satisfying these criteria are actually referred. In
part this may be justified because the UK competes in large world markets where the firms
will have little monopoly power.
