Monopoly, Merger and Cartel -Three Key Issues in Competition
Hu, Tzu-Shun
Senior Specialist, Taiwan FTC
Vientiane, Lao PDR
7-8 March 2006
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Market Structure
Highly Competitive
Perfect Competition
Farming
Stocks
Currencies
High Degree of Market Power
Monopolistic Competition
Restaurants
Small Builders
Solicitors
Oligopoly
Supermarkets
Banks
Electrical Goods
Monopoly
Gas
Water
Electricity
Telecommunications
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Give me answers , please.

Which market structure(s) do you
prefer?why?

Well, different people have different answers:

if your are consumers, you prefer…

if you are …
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Money! Money!
Monopoly! Monopoly!
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Question 1
Monopoly and Competition: Which One is better?
Diverging views:

The libertarian view

The innovator view
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The libertarian view:
Adam Smith
(1723-1790)
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 the
anonymous free market is a
guarantee for political freedom
 government
interference brings
us on the road to serfdom
Milton Friedman
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The innovator view:
Joseph A. Schumpeter
(1883-1950)
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Why should there be
anything wrong
with monopoly?
The performance of large firms with respect to
R&D is much better than those of small firms
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Competition
Price
Short run profits
Long run equilibrium
L(S)MC
L(S)ATC
L(S)AVC
CE
Shut
down
min LAC
q3
q2 q1
Output
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Given a set of alternative allocations and a
set of individuals, a movement from one
alternative allocation to another that can
make at least one individual better off,
without making any other individual worse
off
Long-run equilibrium
1. Pareto efficiency (P = MC)
2. Productive efficiency
3. Allocative efficiency
Min LAC
Minimum
efficiency scale
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Monopoly
P
Income transfer
Lost Consumer Surplus
Deadweight
Loss
Pm
A
B
C
PC
Because of the
higher
price,
consumers lose
A+B and
producer
gains A-C.
AR
Social welfare =
Consumers’ surplus
+ producers’
surplus
Social welfare =
public interest
MC
MR
Qm
QC
Quantity
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Disadvantages
1. Higher price, lower production
2. Deadweight loss ( P > MC)
3. Rent seeking
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
The social costs of
P
monopoly are
unfortunately often
much higher than the P*
DWL.

Every producer has
an incentive to
establish a monopoly.

He is willing to spend
the monopoly profits
(at least some of it) to
bring him in that
position.
Rent
seeking
MC
AR
MR
Q*
Quantity
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Advantages
1. Economies of scale (or scope)
2. Ability of innovation
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A firm may be monopolist (dominant) for several reasons:
1.The firm may have an exclusive licence.
2.The firm is natural monopoly.
3.The firm has operated more efficiency than its competitors.
Note:
1.monopoly (dominance) is not per se illegal.
2.competition authority will be concerned only if the firm
misuses its market power to deter entry of potential
competitors or to substantially lessen competition
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Types of Misuse of Market Power
(Abuse of A Dominant Position)
1. Excessive pricing
2. Predatory pricing selling at
below cost for the purpose of
driving out competitors
3. Refusals to deal
4. Price discrimination a practice
where by a firm charges
different customers or classes of
customers different prices for
the same good for reasons
unrelated to costs
5. Exclusive dealing requiring a
retailer or distributor not to sell
products competing with the
supplier's products
6. Tie-ins
7. Third line forcing requiring
purchasers of one product to
purchase other products from
named suppliers
8. Territorial restrictions the
retailer or distributor may not
resell outside of a defined
territory
9. Customer restrictions the retailer
or distributor may only deal
with specified customers
10. Resale price maintenance
minimum price at which the
product may be resold to
customers
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Question 2

Do you want to your enterprise is as large as
Microsoft?

Yes, but how can I let my enterprise grow up?
 Internal Growth

External Growth
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Types of Merger
Internal Growth
Horizontal Merger
Growth of Firms
Vertical Merger
External Growth
(Merger)
Conglomerate
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Horizontal Merger：two competitors combine
Primary
Secondary
Mobile
Manufacturers
New Mobile
Manufacturer
Tertiary
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Vertical Merger：one company acquires a
supplier/customer
Vertical Merger
Backwards –
acquisition takes
place towards the
source
Primary
Secondary
Manufacturer
Tertiary
Retail Stores
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Primary
Dairy Farming Cooperative
Secondary
Cheese Processing
Plant
Vertical Merger
Forwards –
acquisition takes
place towards the
market
Tertiary
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Conglomerate ：two firms from different
industries combine
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Why should mergers occur?
Motives
Cost Savings
External growth may be cheaper
than internal growth – acquiring
an underperforming or young
firm may represent a cost
effective method of growth
Managerial Rewards
External growth may satisfy
managerial objectives – power,
influence, status
Shareholder Value
Improve the value of the overall
business for shareholders
Asset Stripping
Selling off valuable parts of the
business
Economies of Scale(Scope)
The advantages of large scale
production that lead to lower unit
costs
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Efficiency
Improve technical, productive or
allocative efficiency
Synergy
The whole is more efficient than the sum
of the parts (2 + 2 = 5!)
Risk Bearing
–
Diversification to spread risks
Control of Markets
-- Gain some form of monopoly
power
– Control supply
– Secure outlets
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Competition restraint
Horizontal
-- might directly reduce competition significantly
( lessen the number of firms, increase market power,
and may make conspiracy)
Vertical
-- possibility of cut-off supply to the competitors
Conglomerate
-- deep pockets, internal cross-subsidization, may
facilitate predatory pricing
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P
Cost-saving
Deadweight
Loss
P2
P1
AC1
B
A
AC2
AR
Q2
Q1
Quantity
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Merger control
Criterion
Economic Benefit > Competition Restraint
(cost-saving)
( deadweight loss)
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“What shall I do about it? They say this is no
concerted practice but their way to greet each other!“
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“People of the same trade seldom meet
together, even for merriment and
diversion, but the conversation ends in
a conspiracy against the public, or in
some contrivance to raise prices.”
Adam Smith, The Wealth of Nations
(1776)
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Why Investigate Concerted Action:
The Monopoly Problem
A monopolist creates artificial scarcity of its
product by producing less and selling it at a higher
price than if it faced competition.
Firms, by entering into horizontal or vertical
agreements, may be able to collectively exercise
monopoly power, thereby doing the same harm to
competition and consumers as a monopolist.
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Types of Concerted Action
Horizontal Agreement
(Cartel, Collusion)
Price Fixing
Bid Rigging
Market Division
Concerted Action
Hard
Core
Cartel
Vertical Agreement
Tying
Exclusive dealing
Resale Price Maintenance
(RPM)
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How Horizontal Agreements May
Benefit/Harm Competition
Benefit
1. Economies of Scale
2. Economies of Scope
3. Sharing or spreading of
risk.
Harm
1. International Cartels
-- DRAM Cartel
-- Graphite Electrodes
Cartel
-- Lysine Cartel
-- Vitamins Cartel
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How Vertical Agreements May
Benefit/Harm Competition
Benefit
Harm
1. Lowering transaction costs. 1. Eliminating competition
2. Assuring a steady supply
through “foreclosure”.
of key input.
2. Raising barriers to entry
3. Eliminating negative
or “raising rivals’ cost.’
externalities.
3. Creating distributors’ or
4. Getting around another
manufacturers’ cartels.
company’s exercise of
market power.
5. Preventing “free riding”.
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Exemption
1.
2.
3.
4.
unifying the specifications or models of goods for the
purpose of reducing costs, improving quality, or
increasing efficiency;
joint research and development on goods or markets for
the purpose of upgrading technology, improving quality,
reducing costs, or increasing efficiency;
each developing a separate and specialized area for the
purpose of rationalizing operations;
entering into agreements concerning solely the
competition in foreign markets for the purpose of
securing or promoting exports;
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5.
joint acts in regards to the importation of foreign goods
for the purpose of strengthening trade;
6. joint acts limiting the quantity of production and sales,
equipment, or prices for the purpose of meeting the
demand orderly, while in economic downturn, the market
price of products is lower than the average production
costs so that the enterprises in a particular industry have
difficulty to maintain their business or encounter a
situation of overproduction; or
7. joint acts for the purpose of improving operational
efficiency or strengthening the competitiveness of smallmedium enterprises.
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New Policies for Cartels
The Need for International Cooperation
Bilateral Agreements
• Arrange Comparable economies
• Imbalance of interest if large with small
economy
Regional Integration
FTA negotiations in many regions; some involve
common competition rules as a longer-term
objective.
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Leniency Program : To encourage a member of a
cartel to confess and implicate its co-conspirators
with first-hand, direct“insider” evidence about
their clandestine meetings and communications,
an enforcement agency may promise a smaller fine,
shorter sentence, less restrictive order, or
complete amnesty (immunity).
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