MONOPOLY AND PUBLIC POLICY

The bases of the policy

There appears to be a generally held opinion that monopoly is against the public interest. The case against monopoly is based mainly on the assumptions we have already outlined, namely, higher prices, abnormal profits (i.e. a redistribution of income from consumers to produc­ers), price discrimination, and the lack of competition which leads to inefficiency and a slower rate of technical progress.

For centuries the common law in Britain has held that 'agreements in restraint of trade' are against the public inter­est, but the courts have tended to interpret this law very leniently. Legislation specifically designed to deal with monopoly and monopolistic practices was not introduced in the UK until 1948. In spite of a generally unfavourable pub­lic opinion, the legislation has not made monopolies illegal (as was the case in the USA). It has been recognised that there might be circumstances where monopoly organisation could be justified. For example, monopoly in the home mar­ket might be necessary in order to obtain important economies of scale which, in turn, would lead to lower-priced exports. Firms which operate agreements to restrict competition between themselves might, as a consequence, collaborate in cost-reducing research and development. An

agreement to restrict competition might be necessary in order to ensure a domestic source of supply. For example, an efficient plant designed to produce some synthetic fibre might have to be very large and require an enormous outlay on capital equipment. A firm may hesitate to embark on such an investment unless it can be guaranteed the whole of the home market. If a competitor were allowed to operate in the market, it would probably mean two large plants each work­ing well below capacity with much higher costs per unit, lower profitability, and reduced prospects in export markets. It is possibilities such as these which have persuaded legislators in the UK to establish machinery for the exami­nation of monopoly situations and to decide each case on its merits. Nevertheless there is a presumption that monopoly is against the public interest.

The public interest

The great problem with this approach to monopoly is that it requires some indicators of what is meant by "the public interest'. The people who have to administer the pol­icy have to come to some decision on whether the trading practices they find in the business world are operating in the public interest or against it. Unfortunately the legislation has not given any very clear guide lines. The 1948 Act laid down that in judging whether a monopoly was operating contrary to the public interest the investigators should con­sider all matters which appear in the particular circum­stances relevant and among other things the need to achieve the production, treatment and distribution by the most effi­cient and economical means of goods of such types and in such quantities as will best meet the requirements of home and overseas markets.

The 'other things' to be taken into account included, the organisation of industry and trade in such a way that their efficiency is progressively increased and new enterprise

encouraged; the fullest use and best distribution of men, materials, and industrial capacity in the UK; the develop­ment of technical improvements, and the expansion of existing markets and the opening up of new markets.

These guide lines have been described by one former member of the Monopolies Commission as a string of plati­tudes, much too wide and general to be of any great assistance to those who had to reach some conclusion on a particular case. One problem of course is that some of these objectives might, in particular circumstances, be incompatible.

For example, a measure which leads to greater efficien­cy may lead to greatly increased local unemployment. It is interesting to note that the 1948 Act did not specifically mention 'competition' among the public interest criteria. The 1973 Act provides more guidance in the form of a new definition of the public interest. This include such phrases as 'the desirability of maintaining and promoting effective competition', the need for 'promoting through competition the reduction of costs and the development of new tech­niques and new products, and... facilitating the entry of new competitors into existing markets'. The emphasis is now much more on competition as a means of stimulating effi­ciency, but the 1973 Act clearly lays down that 'all matters which appear relevant' must be considered, and it makes particular mention of the need to maintain a balanced dis­tribution of industry and employment in the UK. The aim of promoting competition, therefore, will not be the over­riding consideration. An increase in monopoly power (e.g. by merger) which, it is believed, would improve employ­ment prospects in, say, a development area would most probably be judged to be in the public interest.

Identifying monopoly

If the authorities are going to control monopoly, they have to define it in such a way that a monopoly situation can

be clearly identified. The most widely used indicator of monopoly power is that of the market share. In the 1948 Act monopoly was defined as a situation in which at least one third of the supply of a commodity is accounted for by one firm or group of firms under unified control. The 1973 leg­islation has reduced the market share which is considered to be prima facie evidence of monopoly to one quarter.

The market share test is probably the most workable measurement for administrative purposes since it is fairly easily measured. It does not follow that, in itself, it is a good guide to monopoly power. A firm with one quarter of the total market may have great market power (where the rest of the market is shared by numerous small firms), or it may face very keen competition (where the rest of the market is supplied by four or five firms of almost equal size).

Another test of monopoly power is the level of profits. It is usually assumed that the existence of profit levels substan­tially above those being eared in similar industries (or in industry generally) is evidence of the exercise of monopoly power. But, again, this is not conclusive evidence. Such profits may be due to greater efficiency as compared with competitors, and the Monopolies Commission has shown that the existence of monopoly power may reveal itself in low profits due to the inefficiency of companies sheltered from competition.

Monopoly might also be identified by the nature and extent of the barriers to entry. The existence of such barriers would certainly be a factor in deciding whether monopoly conditions existed, but it might be very difficult to measure their effectiveness.

The machinery of control

The legal control of monopoly has been substantially extended and modified since the first legislation in 1948. The laws relating to monopoly have three major targets.

1. Monopolies. In law a monopoly exists when (a) one
firm has at least 25 per cent of the market for the supply of a
particular good or service (i.e. a scale monopoly), or (b)
when a number of firms, which together have a 25 per cent
market share, conduct their business so as to restrict com­
petition (i.e. a complex monopoly).

2. Restrictive trade practices. These are agreements
between independent firms in respect of price or other con­
ditions of supply which are designed to restrict competition
between the parties to the agreements.

3. Mergers. These may be horizontal, vertical, or con­
glomerate.

The investigation and control of monopolies and monopolistic practices is carried out by three important institutions, The Office of the Director-General of Fair Trading, The Monopolies and Mergers Commission, and the Restrictive Practices Court.

1. The Director-General of Fair Trading (DGFT)

This very important office was created by the Fair Trading Act of 1973. The Director-General is obliged to maintain a continuous survey of and collect information on all types of trading practices in relation to the supply of goods and services. He is, in fact, a kind of official watch­dog in the market place. The Office of Fair Trading operates in three main areas.

i Competition policy: monopolies, restrictive trade practices, mergers.

ii Consumer credit.

iii Consumer affairs.

2. The Monopolies and Mergers Commission (MMC)
This organisation formerly known as the Monopolies

Commission was established by the 1948 Monopolies and Restrictive Practices Act. The functions of the M MC are to investigate monopolies and proposed mergers referred to them and to report on whether they consider the existing sit-

uation or the proposed changes to be in the public interest. They also make recommendations to the government on any actions they think are necessary to protect the public interest. The MMC consists of a full-time chairman, two part-time deputies and twenty-two other part-time commis­sioners drawn from such fields as administration, industry, commerce, trade unions and the academic world. There is also a professional full-time staff. The MMC does not have the power to initiate investigations; it can only take action when a case is referred to it by the DGFT or by the Secretary of State for Trade. It has no powers to enforce its recom­mendations; whether any action is taken on the findings of the MMC rests upon a decision by the Secretary of State.

The number of investigations is limited by the resources of the MMC. Its maximum capacity is about 15 investiga­tions of monopolies and mergers at any one time. In prac­tice the MMC is able, on average, to produce about 6 monopoly reports and 6 merger reports each year.

The duties of the MMC are to conduct enquiries into:

(a) monopolies in the supply of goods and services;

(b) merger proposals;

(c) local (or geographical) monopolies;

(d) the general effects of specific monopolistic practices
(e.g. price discrimination);

(e) the efficiency, costs, and quality of services provided
by public enterprises;

(f) anti-competitive practices pursued by any individual firm whether or not it is a monopoly.

Monopolies

As mentioned earlier the MMC can only carry out an investigation where a company has a 25 per cent market share or where two or more companies together having a 25 per cent market share are acting together so as to restrict competition. The DGFT has the duty to keep the UK mar-

ket under continuous review and to ascertain the existence of monopoly situations. He decides the priority for refer­ences to the MMC. The Commission looks into the supply of particular goods and services and not into the activities of large companies as such. This means that a large multi-product firm may be the subject of more than one MMC investigation.

The way in which the MMC works has been criticised for being a much too lengthy process; there is an average interval of about two years between the initial reference and the publication of the MMC's report. The reports have been wide ranging and have provided detailed authoritative accounts of the structure and performance of the firms investigated. They have greatly extended pub­lic knowledge of the way in which the business world con­ducts its affairs.

There has also been criticism because some of the reports and recommendations of the MMC have not been followed by strong legal action by the government. The Secretary of State for Trade has the power to make orders giving legal effect to any recommendations of the MMC, but this power has rarely been used. Even so the reports of MMC have led to substantial changes in business practices. Adverse comments have usually led to voluntary agreements by the firms concerned (in negotiations with the Secretary of State) to modify or abandon the offending practice. The fear of investigation and unwelcome publicity may also have had some beneficial effects on business behaviour.

Over the years the MMC have made a variety of recom­mendations for the control or modification of firms' poli­cies. These have included proposals for price reductions; government supervision of prices, costs and profits; the low­ering of tariffs on competing imports; substantial reductions in advertising and other selling costs, and the prohibition of any further take-overs of competitors.

Mergers

A proposed merger may be referred to the MMC for investigation where it would involve the transfer of gross assets of at least f30 million or where the merger would lead to a monopoly situation (i.e. the control of at least 25 per cent of the market). The Director-General of Fair Trading has the responsibility of keeping himself informed of ail merger situations qualifying for possible reference to the MMC. He carries out preliminary investigations and then advises the Secretary of State on whether the proposed merger should be referred to the MMC; only the Secretary of State can refer a proposed merger to the MMC. In fact only a small percentage of mergers have been referred to the MMC and of these about 60 per cent were either found to be against the public interest or were abandoned. The restrain­ing effects of merger control are certainly greater than the official statistics indicate because many merger proposals are dropped after informal consultations with the DGFT.

Decisions on merger references are taken on a case by case basis. In deciding whether a proposed merger is likely to operate against the public interest the MMC wili take into account such matters as:

(a) the extent to which competition is likely to be
reduced;

(b) the possible gains in efficiency from rationalisation,
economies of scale and better management;

(c) the likely effects on employment;

(d) the possibilities of increased competitiveness in
overseas markets;

(e) whether the merger is likely to stimulate innovation
and technical progress;

(f) the possible effects on the regional distribution of industry;

(g) the effects on consumers and suppliers: for example a merger might create a large preponderant buyer which

would be in a very strong bargaining position if its suppliers were numerous and small.

Until quite recently the official policy on mergers was based on the view that mergers are generally not against the public interest. Current attitudes appear to be more critical and the tendency is for more proposed mergers to be sent to the MMC for their consideration. This change of attitude is largely due to the fact that several recent studies of the effects of mergers have shown that a high proportion (at least 50 per cent) of them have proved unprofitable or much less successful than had been anticipated. One explanation for this may be the fact that the planned gains from mergers often depend upon substantial reorganisation of production facilities which may include the closure of some plants with inevitable redundancies. Such changes are likely to meet with strong resistance especially from organised labour and hence may take a long time to carry out. There is also con­cern that many mergers appear to have been motivated by a desire to increase market power (by reducing competition) rather than by a desire to increase efficiency.

Consumer protection

Although the legal control of monopolies and restrictive practices now has a fairly long history, the idea that govern­ment should provide organisations for a general oversight of consumers' interests is relatively new. The Fair Trading Act of 1973 made the Director-General of Fair Trading respon­sible for safeguarding the interest of consumers. He propos­es new laws to end unfair trading practices, encourages trade associations to produce codes of practice for member firms to follow when dealing with consumers, and deals with manufacturers and traders who persistently indulge in unfair practice. In this matter he is assisted by a Consumer Protection Advisory Committee (CPAC) whose functions are to investigate undesirable trading practices referred to it

by the DGFT and to consider his proposals for dealing with the practices. The types of unfair practice with which the CPAC is concerned are those which:

(a) mislead consumers about the nature, quality, or
quantity of goods involved in a transaction;

(b) mislead consumers about their rights and obliga­
tions;

(c) subject consumers to undue pressures to buy;

(d) cause the terms or conditions of sale to be so adverse
as to be inequitable.

If the CPAC is satisfied that the practice adversely affects consumers and agrees with the DGFT's proposals, the Secretary of State can make an order banning the practice.

The work of the CPAC and the Director-General has resulted in many codes of practice being adopted by various trade associations (e.g. the servicing of electrical appliances, mail order trading, laundry and dry cleaning services, pack­age holidays and footwear retailing). The Office of Fair Trading has also investigated many other practices (e.g. advertising, door-to-door selling and one-day sales) and has obliged many individual companies to give undertakings to modify their business practices.

The DGFT also has important responsibilities as a result of the consumer Credit Act of 1974. Under this Act all businesses involved in the granting of credit or the hiring of goods (including hire purchase) to individuals, sole traders or partnerships require a licence from the DGFT. An important aim of the legislation is that the consumer should be given sufficient information about the credit being offered and its true cost. A court may be asked to reopen a credit agreement which is deemed to be extortionate and a consumer is also given the right to complete payment of hire purchase or credit agreements early and obtain a rebate of the credit charges.