The importance of competition policy
An Office of Fair Trading case study

Below is a list of Business Case Studies case studies organised alphabetically by company. To view more companies, please choose a letter from the list below.

Page 5: Monopolies

Where a company or group of companies has a sizeable share of a market, it can have sufficient market power to harm competitors and consumers. Excessive prices and reductions in quality of service are typical examples of what happens when the absence of effective competition allows the exploitation of a monopoly position within a market.

Although a monopolist is often thought of as the sole supplier to a particular market, the Fair Trading Act uses a wider definition. A monopoly is a situation where a company purchases or supplies at least 25of all the goods or services of a particular type within the UK, or part of the UK. A group of companies that together meet the same minimum 25share and adopt a similar practice which affects competition adversely is known as a complex monopoly.

To establish whether a 25market share has competitive significance, it is necessary to define the relevant market. This requires close examination of two factors.

  • The geographical limits of the market: this is determined by factors such as transport costs and the nature of the product or service. For example, the boundaries for a market in funeral services are likely to be narrowly drawn but those for insurance are nationwide.
  • Substitutability of other products: if there is a close substitute for a particular product, that product will be part of a wider market. Substitutability depends on whether customers would switch after a relative price rise. For example, a price rise in butter might result in a shift to margarine. The two products are then part of the same market.

Having defined the market, the Director General looks at whether the monopolist has power in the market which it can exploit or abuse. Market power does not come from market share alone. It may be gained from a leading brand name, or from ownership of a resource needed by competitors. It also depends on the effectiveness of competition from any other suppliers, barriers to entering the market and possibly the strength of buyers. For example, a firm may seek to drive out competition by selling below cost, aiming to making excessive profits from high price rises once competition is eliminated (know as predatory pricing). To prevent others re entering the market and undercutting it once it starts to raise prices, the firm needs a barrier to entry in addition to market share. This could be high start up costs or a limited resource.

There is no assumption that monopolies are bad in themselves, since the monopolist may not have the power or the desire to abuse its position. Some monopolies may be inevitable because it is more efficient to have a single producer in a particular market, rather than a competitive structure. The railway network is one example of such a natural monopoly. These monopolies normally have their own regulator.

The Director General keeps an eye on all markets and conducts preliminary investigations where concerns arise. If these concerns are justified the Director General may seek undertakings from the monopolist to remedy matters. Alternatively, the MMC may be asked to investigate. The MMC looks at the market generally to determine whether there is exploitation of a monopoly situation and whether it is damaging to the public interest. Its findings are then reported to the Secretary of State who decides what action to take, in conjunction with the Director General.

Office of Fair Trading | The importance of competition policy