Compare and contrast the various methods of dealing with the problem of monopoly.

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Compare and contrast the various methods of dealing with the problem of monopoly.”

Legally, a working Monopoly is defined as a firm which controls 25% of their market. This immediately raises problems, within the measurement of market share, and the definition of their market. Microsoft is a considerably well known monopoly (as a whole), but is this the case for all areas of business? This would be the initial problem: determining their market.  Microsoft spans a vast spectrum of business, however, virtually breaking into distinct main markets – Desktop and Server. It is clear that Microsoft dominate the Desktop market, far outselling any near threats, but is this the case for the server market? I have broken down the server market into two main areas – the Operating System itself, and the web based server.

According to the definition, Microsoft is not
technically a monopoly in both ‘markets’. However, as Microsoft can be accepted to live within a single market (computing), they would have a clear monopoly.  Consequentially, problems of dominance begin to occur. It has been discovered that they have been abusing their market power by forcing small firms into signing contracts that require them to purchase their software, should they be using their hardware.

There are numerous ways to reduce or reclaim the power of monopolies, some controversial, and some are economic theory, therefore unrealistic. I will be discussing these within my essay.

Monopolies tend to play as the dominant firm within their market, and as a result, tend to me price makers rather than takers. However, they can only control the price, or output, but not both. Generally, monopolies can be bad for the market mechanism as they are neither productively nor allocatively efficient. Like most firms, they would choose to profit maximise (at the point MC=MR). As you can see from the diagram on the left, if they choose to output the profit maximising level Q1, they will receive the price displayed by the demand curve – P1.

Fortunately, there are several remedies for monopoly. The first that I am going to discuss is: regulation. An excellent remedy for pure monopolies (where a single firm dominates 100% of a market) is regulation. Regulation involves the government appointing an independent body to monitor the activities of the firms.

Ofcom (merged, previously Oftel) are a working example of this. They are the regulating body for the communications industry, covering telecommunications. Previously, before deregulation occurred, there were two main dominant firms: Telewest/NTL (Now Virgin Media), and British Telecommunications. If there was no regulatory body in place, it would have been too easy for this duopoly (where two main firms dominate the market) to price fix (tactically – through the use of informal signals to indicate their future and current pricing structures) and therefore take advantage of the consumers, at they would have little choice other than to remove their fixed line telephones completely.

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One of the methods that can be used is RPI-X (RPI minus ‘X) regulation. The value of X is defined by the regulatory body, and limits the pricing that firms may change based on the RPI (retail price index) less the value of ‘X’. As a result, if RPI-X<0 then the firms will be forced to reduce their prices by the resultant value. The kind of price barrier will motivate firms to lower costs (as they cannot increase their prices) in order to generate greater profit for themselves. This kind of regulation has been using against British Gas, which expired on the 31st March 2000. ...

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