If there are a number of substitutes available, the prices of which compare favourably with the price of the monopo¬list's product, his market power will be very limited.

Monopoly power has been defined as the ability to earn long-run abnormal profits. We know from our analysis of perfect competition that this will only be possible if there are some effective barriers to the entry of new firms. The more effective the restrictions on the emergence of new firms, the greater will be the power of the monopolist to exploit the consumer by charging prices well above his average cost.

Monopolistic practices

Although the word 'monopoly' conjures up a picture of a single large firm, this is by no means the general form taken by monopoly organisation. Much more pervasive in the structure of industry, prior to the UK legislation on monopolies, was the situation where groups of indepen¬dently controlled firms actively collaborated in operating agreements to restrict competition within an industry. If an industry is made up of say 10 or 20 firms but they agree to restrict competition between themselves, say by means of a price agreement, then we have a monopoly situation. Effectively the buyers are facing a single seller.

A report by the UK Monopolies Commission in 1955 indicated that such restrictive trade practices were a common feature of the business world. As already noted, many of these practices have now been abandoned or declared ille¬gal, but it might be interesting to look at some those which were widely practised.

Exclusive dealing and collective boycott

Producers agree to supply only recognised dealers, nor¬mally only one dealer in each area, on condition that the dealer does not stock the products of any producer outside the group (or trade association).

Should the dealer break the agreement, all members of the group agree to withhold supplies from the offender. This practice has proved a very effective restriction on competi¬tion for it means that any new firms would find it extrem|fl difficult to secure market outlets for their products.

Price and output agreements

The firms in an industry (or the majority of them) may agree not to compete on price and, where the product is fairly standardised, they may agree to charge common prices. The agreed price is normally well above the average costs of the more efficient firms since, in order to persuade enough firms to join the scheme to make it operational, the price must be high enough to provide profits for the less effi¬cient. In order to make the price effective, a price agreement is usually supported by a complementary agreement to limit output (e.g. firms agree to accept output quotas).

Cartels

In its most developed form a cartel comprises a selling syndicate, formed by a group of firms, through which the outputs of the member firms are marketed. The syndicate or selling agency pays the producers a fixed price for their out¬puts and markets the product as a single seller. Profits are distributed to member firms in proportion to outputs. Marketing boards such as the British Milk Marketing Board are, in fact, a type of cartel.

Collusive tendering

There are many goods which are not produced 'in anticipation of demand', but are made 'to order*. The buy¬ers announce their requirements by publishing a specifica¬tion and producers are invited to tender for the contract to supply. This is the normal procedure in the building indus¬try, the civil engineering industry, ship-building, and heavy engineering. The preparation of a tender for the building of a bridge or the erection of large industrial plant can be an expensive operation and, since only one firm can succeed in getting the contract, the unsuccessful bidders incur heavy nonrecoverable expenses. In some industries producers have combined to eliminate competition by means of schemes which ensure that the available contracts are shared out between the cooperating firms. This may be done by the var¬ious firms agreeing not to submit lower tenders than the firm which is entitled to the next contract.

The pooling of patents

In some industries, especially the technically advanced Industries, competition may be seriously restricted when the existing firms combine for the purpose of pooling the. patents held by individual firms. Technical cooperation of this type means that the firms which are party to the agree¬ment have access to a substantial amount of technical expertise and specialised equipment which is denied to any potential competitors.

Resale price maintenance

This is the practice whereby the manufacturer fixes the. price of his product at each stage of distribution. Although the goods are being distributed by independent wholesalers and retailers they are obliged to charge prices which are laid down by the manufacturers. It means, of course, that the profit margins at these subsequent stages are being fixed by the manufacturers. Resale price maintenance can be enforced by manufacturers either collectively or individual¬ly by the threat of withholding supplies if the distributor breaks the price agreement. At one time in the UK manu¬facturers were given the right to enforce RPM through the courts. RPM is a practice which prevents price competition taking place at the retail stage. Shops cannot pass on any improvements in efficiency in the form of lower prices. It almost certainly maintains prices at higher levels than would be the case if RPM were not in force. Manufacturers anx¬ious to maintain the maximum number of retail outlets tend to fix retail prices at levels which give satisfactory profits to the less efficient retailers. Legislation in 1964 effectively ended the practice of RPM in the UK.

Discriminating monopoly

One of the criticisms of monopoly is based on the fact I that a monopolist is often able to discriminate in his pricing policy. He can charge different prices in different markets for the same commodity. Three basic conditions are neces¬sary for such a policy to be effective and profitable.

1. In order to charge different prices the seller must be able to control the supply otherwise competitors would undersell him in the dearer market. Only a monopolist has the power to determine the price (or prices) at which he sells his commodity.

2. The markets must be clearly separated so that those paying lower prices cannot resell to those paying higher prices.

3. The demand conditions in the separate markets must be different so that total profits may be increased by charg¬ing different prices. It is really a matter of separating a group of consumers willing to pay higher prices from those that are only able or willing to pay lower prices.

We have plenty of evidence from our everyday experience to show that these conditions can be met. Markets may be sep¬arated by a time barrier. Most passenger transport undertak¬ings charge cheaper rates for off-peak journeys. Electricity and telephone charges are varied according to the time at which they are consumed. These are examples of services which can¬not be transferred from the cheaper to the dearer market.

Markets may be separated by transport costs and tariffs. Firms often sell their goods more cheaply in export markets than in the home market. The price differential, of course, cannot exceed the cost of transporting the good back to the home market plus any tariff on imports.

A third type of price discrimination is found where it is possible to separate buyers into clearly defined groups. Before the National Health Service was established doctors commonly charged lower fees to poorer patients than to their wealthier clients. Milk is sold more cheaply to indus¬trial users than to householders. Electricity charges also vary according to the type of consumer.

Price discrimination means that some groups are charged higher prices than others and although this may be regarded as an 'unfair' practice it is possible for price dis-crimination to be beneficial. Where it leads to a great expan¬sion of sales and output and a significant fall in average costs of production, even those in the higher priced market may be obtaining goods at lower prices than they would be charged in a single market. For example, a large export market (gained by selling at prices lower than the home price) may lead to economies of scale which benefit home consumers even though the home price is higher than the export price.

Monopoly and competition — some comparisons Prices and outputs

Economic theory indicates that, under monopoly, out¬put will be lower and price will be higher than would be the case under perfect competition. We have seen that firms in a perfect market produce where price equals marginal cost, and competition between these firms forces price down¬wards until it is equal to minimum average cost.

A monopolist, however, has the power to restrict market: supply and he will adjust his output until marginal revenue equals marginal cost. At this output, price is greater than marginal cost, and greater than average cost

Under perfect competition, PRICE = MC = AC Under monopoly, PRICE > MC and PRICE > AC This is probably the major argument against monopoly. Critics point to the power to exploit consumers by charging prices well above average cost and they assume that the desire for profits will lead to the abuse of this market power. Allied to this argument is the charge that monopolists can indulge in price discrimination and oblige one group of consumers to subsidise another group. The argument here is not against the principle of subsidisation, but against the system which allows the monopo-list to decide which group should benefit and which group lose. Economies of scale

The argument that monopoly will lead to higher prices I and lower outputs is based upon the assumption that, if a competitive industry were monopolised, the costs of pro-duction would be unaffected. This is not very realistic. If a number of small competing firms are combined into one large integrated enterprise then many of the economies become attainable. These economies of scale, if achieved, would mean that the cost curves of the monopolist would be lower than those of a competitive industry.

In industries where there are many competing firms I each producing its own particular design or model (e.g.

parts and components in electrical and mechanical engi¬neering), monopolisation would make possible a much greater degree of standardisation. This would be an impor¬tant factor in making larger scale production possible.

It may be that in some industries the total market (e.g. for some small standardised part for motor cars) could be supplied by one firm of optimum size. In this case a single supplier would operate at much lower cost than several smaller competing firms.

The economies of scale argument in favour of monopoly is very strong in the case of the public utilities supplying water, gas, electricity, and telephone services. In all these industries fixed costs form a very high proportion of total costs and com¬petition would mean a wasteful duplication of fixed capital. A number of competing firms would have fixed costs similar to those of a single supplier (e.g. competing electricity supply companies would all have to lay main services), but they would each have only a fraction of the total market over which to spread their fixed costs. Average cost would be much high¬er in a competitive industry than in a monopoly.

Economies of scale are attainable where the monopoly takes the form of a unified enterprise which takes advantage of the possibilities arising from rationalisation and standard¬isation. It does not follow that these gains will always be achieved by a monopoly organisation, neither does it neces¬sarily follow that any economies so achieved will be passed on to consumers in the form of lower prices.

Efficiency and innovation

Those who believe in the virtues of competition argue that the absence of such competition will lead to less effi¬cient production. The monopolist is not "kept on his toes' by the pressures from competing producers. He does not have the same incentive to improve his product and his methods as does a firm in a competitive framework. On the other hand it is pointed out that, when there is a single supplier, much of the 'waste' of competitive advertising is eliminated. Competition may lead to an excessive variety of product which prevents the industry achieving economies from large-scale production.

The monopolist, of course, does have an incentive to improve his performance since any reduction in costs means larger profits. The fact that a monopolist is earning profits, cannot, in itself, be taken as an indication that the firm is efficient since a monopolist can use his market power to raise prices in order to cover costs.

The lack of competition is often used to support the view that monopoly leads to a slowing down of the rate of technical progress. The monopolist, it is argued, has little incentive to innovate, that is, to develop new products and new techniques of production. If he does not innovate, his control of the market means that he can still make profits. The competitive firm, however, may fear that if it does not innovate it will lose its market to its competitors who will take advantage of new developments. Monopoly is also accused of retarding technical progress by restricting the entry of new firms. It is important that entrepreneurs with progressive ideas should be free to put them to the test in the open market. When an industry is monopolised, this source of new ideas may be lost to the community.

On the other hand there is much support for the view that monopoly organisation encourages technical progress. A unified monopoly is more likely to have the resources required for research and development than a small firm in a competitive market. In addition the monopolist has more incentive to innovate since his secure market ensures that he obtains all the gains from any successful new technique or product. He can, moreover, retain these gains over the long run. Under competition any innovation will soon be copied and the gains to the innovator will be short-lived (although the patent laws provide some protection).

Stability

One argument in favour of monopoly is that it provides greater stability of output and prices. In a competitive market producers respond to market signals (i.e. price changes) in the expected manner. If an increase in demand leads to higher prices, producers will react by revising their production plans upwards. But the aggregate effect of a very large number of individual decisions to raise output is likely to be excess sup¬ply in the next marketing period. This will lead to a sharp fall in prices and producers will revise their output plans down¬wards. Again, the total effect is likely to be an over-adjust¬ment and a severe shortage in the next marketing period with a corresponding rise in prices. A highly competitive market, especially where there is a substantial time lag between the decision to produce and the availability of supplies, is likely to be characterised by fairly extensive price swings.

A monopolist, on the other hand, is likely to react to demand changes in a more effective manner. He supplies the total market and should be capable of estimating the true extent of market trends much more accurately than a small firm supplying a tiny part of the market.

His adjustments of output, therefore, are likely to bring about an equilibrium situation fairly quickly. This particular argument provides the basis for many cartels (often govern¬ment inspired) in the markets for agricultural products such as coffee, cocoa, and milk.

Monopolistic competition (Imperfect competition)

Perfect competition is not to be found in the real world and absolute or pure monopoly is also virtually impossible to achieve since it implies operating in the absence of competi¬tion (i.e. no substitutes). While it is not difficult for a firm to become a sole supplier (by the use of brand names and trade marks) it is extremely difficult to achieve a situation where there are no substitutes for the product. A more realistic def¬inition of monopoly would be 'a sole supplier of a commod¬ity for which there are no very good substitutes'. In fact the> degree of monopoly in the real world tends to be judged on I the basis of the share of the total market accounted for by any particular supplier. If a single enterprise accounted for, say, 50 per cent of the total market, it would be deemed to have a significant degree of monopoly power (i.e. the power to influence the prices of the products in this market).

Product differentiation

Modern capitalism is characterised by a large number of 'limited' monopolies. They are sole suppliers of branded goods, but other firms compete with them by selling similar goods with different brand names. This is the market situa¬tion describes as monopolistic or imperfect competing. Thus the commodities produced by any one industry are not homogeneous; the goods are differentiated by branding and the use of trade marks. The individual firm has a monopoly position (e.g. only ICI can supply Dulux), but it faces keen competition from firms supplying very similar goods. It has, therefore, only a limited degree of monopoly power — how much depends upon the extent to which firms are free to enter the industry. Product differentiation is emphasised (some would say, created) by the practice of competitive advertising which is, perhaps, the most striking feature of monopolistic competition.

Advertising is employed to heighten in the consumer's mind the differences between Brand X and Brand Y. It is important to realise that we are concerned with the differ-entiation of goods in the economic sense and not in the technical sense. Two branded products may be almost iden¬tical in their technical features or chemical composition, but if advertising and other selling practices have created different images in the consumer's mind, then these prod¬ucts are different from our point of view because the con¬sumer will be prepared to pay different prices for them.

Oligopoly

In many industries, especially the science-based, and technologically advanced industries, we find a market situa¬tion known as oligopoly. As the name implies, this is where the market is dominated 'by the few'. In other words, a small number of very large firms account for practically the whole output of the industry. Good examples of oligopoly are to be found in the industries producing oil, detergents, tyres, motor cars, synthetic fibres, and cigarettes.

Where there are important technical economies of scale to be gained, the processes of merger and amalgamation, have drastically reduced the number of firms in an industry and brought into being some very large business units. In several industries in the UK more than 90 per cent of the market is supplied by no more than three or four firms.

Competition among the few, especially where each one of the few is a giant firm supplying a significant share of the market, presents very difficult problems in economic analy¬sis. Oligopoly does not really fit into the framework we have used for monopoly and perfect competition for the simple reason that we cannot use the assumption that 'other things remain equal'. Remember that the demand curves used in the preceding analysis are drawn on the assumption that if a firm changes its price other things will not change. We can¬not make this assumption for oligopoly because each firm has such a powerful influence on the total market that any change in its marketing policies is almost certain to provoke some reaction from its rivals. But what that reaction will be is uncertain. If a firm cuts its price it may finish up with increased sales, or it may find itself selling less. It all depends on how its rivals react. If they counter-attack by making even larger price cuts, the firm which started the process may well lose some of its market. If its competitors react with relatively smaller price cuts, the firm may be able to increase its share of the market. The uncertainty about what happens when an oligopolist changes his price means that we cannot use the normal demand curve in analysing the determination of output.

Non-price competition

This unpleasant prospect encourages oligopolists to favour some sort of tacit agreement on prices. They may decide to accept price leadership from the largest firm — moving their prices in line with that firm's prices, or arrange in some other way for their prices to stay in line (although in most countries restrictive price agreements are illegal).

The level at which prices are fixed depends upon the effectiveness of the barriers to entry. Where these are not very restrictive, prices may be very little higher than the competitive price, but, if the existing firms are very large, the barriers are likely to be formidable and prices could be fixed much higher than the competitive price.

The reluctance to indulge in price competition has given rise to many types of non-price competition. We are all familiar with the free gift schemes, the use of trading stamps, and 'special offers'. Firms also compete on the bases of bet¬ter or more attractive packaging, improved after-sales ser¬vice, and more luxurious retail outlets. The most important form of non-price competition, of course, is advertising.

Do firms maximise profits?

In the real world of imperfect competition, firms have some degree of discretion in determining the prices of then products. In the previous discussions on this subject it has been assumed that firms will always adjust prices or outputs so as to maximise profits. There is much argument as to whether this is a realistic assumption about the behaviour of firms in modern industrialised societies. The validity of the assumption of profit maximisation has been questioned on several grounds.

1. It has been pointed out that many business people are

not aware of the concepts of marginal revenue and margin-

al cost and, of those who do have knowledge of these ideas,

many would find it extremely difficult to obtain any precise

measurements of MC and MR. It is sometimes said, there-

fore, that firms do not maximise profits because they lack

the knowledge necessary for them to do so.

But even if the foregoing assertions are true, they do not destroy the profit-maximisation theory. If business people try to increase profits by trial and error adjustments of their prices, they will be tending towards the output where MR e MC, even if they are unaware of these concepts.

2. If firms tried to maintain output at the point where MR Щ MC, it is likely that prices would be very unstable because firms would have to adjust price and output levels following every change in cost and demand conditions. Many firms are reluctant to carry out frequent changes in price because such changes impose administrative costs and they lead to a loss of goodwill on the part of their customers. Instead of making frequent changes in price so as to equate MR and MC and maximise profits in the short-run, firms may be more concerned with the longer run effects of their pricing policies, that is, they will take into account the effects of today's prices on tomorrow's sales. It has been suggested that this type of behaviour does not conflict with the idea that firms try to maximise profits since they are attempting to maximise long-run rather than short-run profits.

3. Some studies of business people's activities have led to the view that, rather than trying to maximise profits, some firms tend to opt for a 'quiet life'. They seem content with some acceptable level of profit which might be less than they could earn if they adopted more fiercely competitive poli¬cies. Managements may be reluctant to accept the increased risks and pressures which go with more aggressive and ambi¬tious practices. While this option may be available to a firm with some degree of monopoly power, firms in very compet¬itive markets, where no firms has any significant market power, must attempt to maximise profits in order to survive.

4. The fact that larger firms are not directly controlled by shareholders (the people most likely to be interested in profit-maximisation), but by professional managers pro¬vides another basis for criticising the theory of profit-max-; imisation. The status, prestige, and remuneration of man¬agers is closely linked to the size of the firm and it is likely, therefore, that such people will be more interested in man imising sales rather than maximising profits. They cannot be indifferent to the profit and loss account of the firm, but, having achieved a level of profit which they believe will sat¬isfy shareholders, managers are more inclined to make sales-maximisation their major objective.

5. Several investigations into business practices have revealed the fact that a large number of firms fix their prices on what is described as a full-cost basis. Estimates are pre¬pared of the firm's average total cost. There is evidence that this may be constant over a wide range of output. To this average cost figure management adds some conventional profit margin (described as the 'mark-up') and this deter¬mines the price at which the product is marketed. Sales are determined by what the market will absorb at this price (i.e. by demand). Under this system the critical decision is the extent of the mark-up. It seems that the mark-up is perio^H ically adjusted in the light of changes in demand conditions and the extent of competition from other firms. If this is so, full-cost pricing may be the industrialist's way of moving towards the price/output combination which yields maxi¬mum profits.

We must recognise the fact that there is no theory of the. behaviour of the firm which commands general acceptance. Firms clearly can have several goals, for example, profits, stability, maximum sales, protecting their share of the mar¬ket, management status, and so on. There is no theory which successfully embraces all these aspects of decision¬making. The assumption of profit-maximisation is useful because it is simple to understand and enables us to con¬struct a theory of business behaviour. It possibly describes the way in which firms behave at least as well as any other plausible assumption.

MONOPOLY AND PUBLIC POLICY

Thebasesofthepolicy

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 produc¬ers), 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 thepublic inter¬est, 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 pub¬lic 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 exampe, monopoly in the home mar¬ket 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 work¬ing 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 exami¬nation of monopoly situations and to decide each case on its merits. Nevertheless there is a presumption that monopoly is against the public interest.

Thepublicinterest

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 pol¬icy 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 con-sider all matters which appear in the particular circum¬stances relevant and among other things the need to achieve the production, treatment and distribution by the most effi-cient and economical means of goods of such types andin 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 develop¬ment 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 plati¬tudes, 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 efficien¬cy 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 tech-niques 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 effi¬ciency, 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 dis¬tribution of industry and employment in the UK. The aim of promoting competition, therefore, will not be the over¬riding consideration. An increase in monopoly power (e.g. by merger) which, it is believed, would improve employ¬ment prospects in, say, a development area would most probably be judged to be in the public interest.

Identifyingmonopoly

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 leg¬islation has reduced the market share which is considered to be primafacieevidence of monopoly to onequarter.

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 substan¬tially 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.

Themachineryofcontrol

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).

1. Restrictivetradepractices.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.

2. 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. TheDirector-GeneralofFairTrading(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 watch¬dog in the market place. The Office of Fair Trading operates m three main areas.

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

ii Consumer credit.

iii Consumer affairs.

2. TheMonopoliesandMergersCommission(MMC)

This organisation formerly known as the Monopolies Commission was established by the 1948 Monopolies and Restrictive Practices Act. The functions of the MMC are to investigate monopolies and proposed mergers referred to them and to report on whether they consider the existing situation 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 commis¬sioners 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 toenforce its recom¬mendations; whether any actionistakenonthefindings 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 investiga¬tions of monopolies and mergers at any one time. In practice the MMC is able, on average, to produce about 6 monopoly reports and 6merger 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 refer¬ences 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 M MC'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 pub¬lic knowledge of the way in which the business world con¬ducts 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 recom¬mendations for the control or modification of firms' poli¬cies. These have included proposals for price reductions; government supervision of prices, costs and profits; the low¬ering of tariffs on competing imports; substantial reductions in advertising and other selling costsandtheprohibition 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 DO 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 all 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. Jn 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 restrain¬ing effects of merger control are certainly greater than the official statistics indicate because many merger proposals are dropped after informal consultations with the DG FT.

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 will 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; ВИЯ

(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 forthis 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 con¬cern 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 thatgovern¬ment 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 respon¬sible for safeguarding the interest of consumers. He propos¬es 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.