Introduction
In Britain, a monopoly can derive very well in products and services which are by nature requiring huge investments and most of the services they offer are public goods. For example, the UK electricity industry has been for a long period under a monopoly. Another one is the Railway industry which has been a monopoly before the privatization which introduced a competitor but using the same line. In theory, a monopoly derives well in an environment where there is one seller but many consumers. If we look at the case of British Telecom which was a monopoly before it was privatized and entry of mobile companies it was difficult for any person to start a business offering fixed-line because fixed-line require the use of some facilities in the public arena.
It will be very expensive for the private sector to venture into the business of fixed-line because the fixed-line requires the laying of holes around the roadside and they need protection from the state security agencies. This will be expensive if they decide to venture into the business to assist them in carrying out this duty.
In theory, a monopoly succeeds where the product and services offered do not have a close substitute. For sure British Telkom survived for many years without a substitute but the emergency of mobiles made the services of a company very expensive but because of inefficiencies the company started heading south in terms of performance which forces privatization in the industry. These two factors which are known as a single producer and seller and a product without close substitutes have facilitated the existence of monopolies in our markets.
The demand curve facing the monopolist
The products supplied by the monopolist in our markets had been successful for a long period but the politicians worked for the downfall of the monopoly and its benefits to its corporation. These monopolies started making losses until the public demanded better services which prompted the privatization of various companies to have privatized monopolies which eventually promoted the existence of competitors. The results of monopoly in various industries were due to large operations that require huge financial outlay unlike other businesses with competitors which do not require huge financial outlay. As demand increases for these products i.e. for electricity, fifth line railway, inefficiency cropped in thus affecting service delivery although demand was there.
These monopolies tried to improve efficiency in management through marketing and distribution but they failed because of political efficiency. Since they were monopolies demand remained but profitability went down, unlike private-sector monopolies. For example, the cost of transmitting and distributing electricity went up and the company remained unprofitable but after privatization these companies became profitable. In a normal monopoly the profits output revenue graph will be as follows:
In this case, a monopoly is making a profit, unlike the private sector where there are no abnormal profits a monopoly makes abnormal profits. However public institutions including railway and Telcom Company remained unprofitable an issue that pushed a government to sell the shares to the public to make it profitable. The British railway and telecom are classic examples of failed monopolies but have been assisted to remain profitable after the entry of monopolies.
The role of competition in business
Competition is very important for any business to succeed. A monopoly that operates without competition, increases prices to the level they wish. But worse still a monopoly owned by the government remains a poor performer in the market because of political interference.
Even if a company is owned by the state but has competitors the company will perform well because of good governance which will be implemented because the management will fear losing the competitor in case they mismanage the institution. But competition assists companies to embrace good management in their operations. It is through good management that proper marketing strategies are laid down, the best suited Human Resource is recruited and good business ethics are practices. A company without competitors will have arrogant and non-caring managers to the members of the public.
Without competition, a monopoly especially one owned by the government will develop a tendency of cronyisms as well as become arrogant because of the idea that they are invisible as well as protected by political forces who are involved in the appointment of their managers. These companies will shield themselves from the outside world as though it does not exist. There was something referred to as the Rank and Yank appraisal system in this type of monopolies of their performance. This system eliminated everybody in the system who disagreed with them and this helped to humiliate these monopolies when they started performing poorly.
In monopolies owned by the government, whistle-blowing becomes a nightmare to whistle-blowers because they will be humiliated by political cronies as well as humiliated by political appointees. In brief, completion introduces corporate governance in this type of companies making them responsible for their operations. Managers who are faced with completion employ strategic principles in order for the company to succeed. The procedures and principles of such a company are carefully and skillfully prepared to have the company succeed in the long run, however, a company without competition will eventually collapse due to political interference and unplanned winking.
Price determination under monopoly
Price determination under monopoly doesn’t depend on the demand curve but depends on the cost of production in the private sector. However, in the monopolies owned by the government, these monopolies determine their price through government policies that may not be based on cost.
However, these regulated industries used to enjoy protection from the state up to the point they has become arrogant and started failing in their operations. The introduction of competition into the industry uncovered many various weaknesses in the regulated industry players. In a competitive market, various companies compete for the market. It’s upon the best-suited company to work modalities that will assist these companies to grow financially.
In the industry, various competition strategies were applied one was vertical integration where efficiency was improved because a company like British electricity was split into various companies performing different duties but offering substitute products to the other. This actually brought fair play and safeguarded the public from unfair competition. The introduction to completion ensured that culture and ethics were introduced that suited a profitable environment. The utility industry in the UK was regulated thus technology in the organization was not well taken care of.
These monopolies under utility survive mostly because were subsidies and these subsidies help them to impress some technology although technologies embraced by them have not assisted them much in their operations. However, the introduction of regulative competition ensured that anti-competition practices were eliminated and proper reforms were carried out in order to make the companies more productive.
This idea of competition in the utility industry helped in ensuring publicly owned companies remained in business without exploiting consumers although the type of competition introduced was not similar to the existing competition in other sectors because the utility sector usually offers unique services which require huge capital outlay and the private sector will not be able to operate.
These industries have also failed because of the regulation provided by the regulatory bodies. Although the implementation of privatization failed much which produced fake companies that ended up matching again to take advantage of economies of scale at least privatization assisted them to grow.
UK electricity
In the UK electricity industry, there is a lot of government regulations especially the EU environmental legislation. This stipulates that companies should be wary of carbon emissions to the environment. This is likely to lock many of them that may not have complied with this legislation by 2015. A company in the industry can acquire more companies and widen its market share as a result of the exit of those companies that would not have complied with regulations. When a company is owned by the regulated private it performed well than a publicly owned monopoly. Other examples such monopolies include Railway Corporation.
Price discriminating in normal monopoly
Generally, the monopolist charges only one price from all purchasers of his commodity. But sometimes this is not the case. The monopolist can charge different prices from different people provided these people from different people, provided these people from different markets or belong to what is called ‘non competing groups’. This is known as price discrimination.
A monopolist will find what this strategy increases total profits as compared with a policy of charging the same price if two conditions are met:
The markets must display differences in the price elasticity of demand for the product. This implies that differences in marginal revenue in different markets are associated with any particular price. Given identical cost conditions, if that a price at which marginal cost and marginal revenue are equated in one market will not be associated with equality of MC and MR in another. Profit maximization in all markets, therefore, implies variations in price between markets.
Secondly, in order for price discrimination to be effective, it must not be possible for purchasers in a cheap market to sell the product in a dear market. It is possible then in the long run the price differential cannot be sustained. Thus, there must be barriers of some kind between markets. These may be:
- Geographical (home and export markets)
- Temporal (peak and off-peak travel) or
- Based on the age of status (child or adult, working or senior citizen).
Privatization
Privatization came at the right time when most utility industry players who were monopolies on their right started failing because of inefficiency. Privatization introduced private investors to the company changing ownership and decision-making structure. The classic example was the case of British Telecom which introduced a new brand to the system of management and the company started engaging in expansion programs and strategic alliances.
Concerning the issue of character, the utility industry debacle tends to be character-based. The public monopolies people have to be the fine people they portray themselves to be. Maybe it was the corporate culture under which they operated that led to their problems. Maybe we have got what we can call “separation thesis” a case whereby an individual, for reasons that are fully tied to the corporate culture as well as the expectation of the society, adopted like their own an ethic which is associated with their role as manager which was separate from the individual ethics. These may be the kind of people who are good but acted faultily because of the notion that their managerial roles demand they perform in a certain unethical way.
Companies like British Telecom have got codes of ethics that prohibited the managers as well as executives from being involved in other business entities that participate in business with their own company. The codes of ethics are voluntary and therefore can easily be set aside by the board of directors. The legal structure allowed managers, to a larger extent to be able to enter the arrangements, constituting to conflict of interest. Of course, the managers and executives have got a fiduciary duty that acts within the best of the company’s interest as well as its shareholders. However, the law leaves some significant discretion to the managers and the executives to put into effect their own business judgment about what is in the finest interest of the company.
References
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Smith R & Emshweller, J (2006) How two wall street journals reporters uncovered the lies that destroyed faith in cooperate America, Newyork Diane company publishing.