Government Intervention in Market Structures

Learning Outcomes

Explain what is considered an abuse of market power
Discuss the ways governments can regulate market power of firms
Using a diagram, discuss regulating natural monopolies through using either Marginal Cost Pricing or Average Cost Pricing.

What is considered Abuse of Market Power?

As we have seen, despite the market power they possess, large dominant firms can bring some benefits such as innovation, R&D, and economies of scale. However, as we have seen, these firms also produce at a point where P>MC, resulting in a marker failure due to the welfare loss created. As we have discussed, this may be an acceptable trade off if the benefits outweigh the costs, such as product differentiation, improved consumer choice and new technologies/innovations.

However, what if the costs outweigh the benefits. This may be true if firms decide to engage in activities that restrict competition or reduce competition. Such activities include:

Charging very high prices.
Using Aggressive Tactics, such as predatory pricing.
Collusion such as forming cartels or informal collusion.
Forcing consumers to buy additional products only offered by that firm (Apple is currently battling an EU ruling that all phone chargers must be universal. See below for more info)
Favouring certain consumers over others.

Of the market structures we have looked at, Monopolies have the highest level of market power, followed by Oligopolies (and the incentive to collude) and then finally Monopolistic competition who have the lower level of market power.

Forms of Government Intervention for abuse of Market Power

Legislation to Protect Competition

Governments can use legislation and laws to encourage competition and prevent collusion. These laws are known as Competition Policy. Firms found guilty of breaching these laws (for example, colluding on price), will face fines. Similarly, firms that may possess a large market share, may be forced to break up the businesses into smaller firms, in order to encourage competition. Governments may set a % of market share in which a firm is considered a monopoly for example.

As we discussed in the section on Oligopolies, governments may face difficulties in proving firms have broke these laws, or may not enforce them as strictly as other countries. Similarly, many of these laws may be difficult to interpret or unspecific, thereby making it difficult to enforce the laws fully to prevent firms from abusing their market power.

Leglisaltion for Aquisitions and Mergers

It is possible for firms to takeover (Aquire) or join (Merge) with another firm. There are a number of reasons why firms may takeover or merge with others such as entering new markets, increasing market share or aquiring new assets. However, governments may regulate these to ensure that by acquiring or merging with other firms, the new firm created does not become too large to be able to abuse its newly gained market power. As mentioned above, if the merger creates a new firm over the % considered a monopoly.

For example, in 2019, the UKs Competition and Market Authorities (CMA) blocked a merger between the UKs 2nd and 3rd largest supermarkets due to the power this would give to new firm. (Read more here)

Nationalising/Government Control of Natural Monopolies

Governments may chose to nationalise firms who posses a natural monopoly. By bringing these firms into public ownership, the government is able to set the price of the goods being sold (for example electricity, water and gas prices). In theory, public ownership can help reduce allocative and productive inefficiencies as they are not aiming to profit maximise. However, public ownership may also lead to higher inefficiencies, as political priorities may conflict with the aims of minimising costs. This and the general lack of incentive to be productive efficient may lead to higher prices. On top of this, higher operating costs of nationalised industries leads to higher spending for governments, presenting an oppourtunity cost for spending on goods such as merit goods.

The general trend over the past decades has been to privatise state owned industries as oppose to nationalise, in order to focus on efficiency.

Case Study: Renationalisation of UK Rail Services

In recent years, parts of the UK rail network have been brought back under public ownership following concerns about poor service, rising fares, and lack of investment under private operators. A notable example is the East Coast Main Line, which has been renationalised several times after private firms such as Virgin Trains and National Express failed to meet contractual and financial commitments.

Regulation of Natural Monopolies

Another option available to governments is to regulate privately owned natural monopolies. For these policies, the natural monopoly remains privately owned, however, the government intervenes to ensure socially desirable outcomes.

Marginal Cost Pricing

Marginal Cost Pricing forces the firm to have to sell the product for a Price equal to the Marginal Cost (P=MC). This would be the allocative efficient level of output However, forcing firms to sell at a point where P=MC will cause the firm to make a loss, as we can see in the diagram, when AR=MC, the firms AC curve is greater than its AR curve, hence the firm will make a loss.

This in turn causes the firms to have to shut down and no longer operate. Therefore, whilst the prices would be regulated, the loss making firm may be forced to exit the market and no longer provide the good.

Average Cost Pricing

In this policy, governments force the natural monopoly to sell at P=AC. This means the firm is forced to sell the product at the cost of producing it. At this point, AR=AC and therefore the firm is making normal profits. We can see this in the diagram on the right where P=AC, AR=AC and the firm produces an output of Qac.

Case Study 1: Apple v. EU and Universal Device Chargers

The European Union (EU) has long sought to reduce electronic waste and improve consumer convenience by standardizing charging devices for electronic devices. A significant development in this effort occurred in 2022 when the European Parliament passed legislation requiring all small and medium-sized electronic devices sold in the EU to use a common charging standard—USB-C—by the end of 2024. This regulation directly impacts Apple, whose proprietary Lightning connector has been a hallmark of its devices since 2012. The case highlights the tension between regulatory efforts to promote standardization and corporate strategies to maintain ecosystem control and differentiation.

Background: Apple and the EU's Push for Universal Chargers

For over a decade, the EU has pushed for universal chargers to address growing concerns about electronic waste and consumer frustration with incompatible charging systems. According to the EU, unused and discarded chargers generate approximately 11,000 metric tons of electronic waste annually. By mandating a universal charging standard, the EU aims to reduce this waste, save consumers an estimated €250 million annually on unnecessary charger purchases, and simplify device use.

Apple has resisted these efforts, arguing that the shift to USB-C would stifle innovation, create new electronic waste as Lightning accessories become obsolete, and inconvenience its existing customer base. As of 2022, Apple controlled approximately 23% of the global smartphone market and 32% of the European market, making its compliance with the law critical to the legislation’s impact. Apple's proprietary Lightning connector has not only served as a revenue stream through accessory licensing under its MFi (Made for iPhone) program but also helped maintain the company's tightly integrated ecosystem.

The EU Directive and Its Implications

Under the EU legislation, all new smartphones, tablets, and other small electronics sold in the EU must use USB-C ports for charging by December 28, 2024. Apple will need to transition its devices to USB-C, marking a significant departure from its long-standing proprietary approach. The regulation also includes provisions for wireless charging, aiming to future-proof the policy as wireless technologies become more prevalent.

The directive aligns with consumer preferences and market trends. By 2021, USB-C had become the standard for many Android devices, offering faster charging and data transfer speeds compared to Apple’s Lightning technology. Surveys indicated that 76% of EU citizens supported universal chargers, citing convenience and reduced costs. Additionally, several independent studies suggested that transitioning to USB-C would significantly reduce electronic waste, as users could reuse existing cables across devices.

Apple’s Position and Response

Apple has expressed concerns about the regulation, claiming that it limits technological progress. The company argues that by mandating a specific standard, the EU might discourage companies from developing better alternatives. Apple has also highlighted potential waste generated by the transition, as consumers discard millions of Lightning cables and accessories. Despite these arguments, Apple has begun preparing for compliance. In 2023, the company introduced USB-C ports on its iPhone 15 models, signaling its shift toward the mandated standard ahead of the deadline.

While Apple’s compliance addresses the regulatory requirements, the company has also taken steps to preserve its ecosystem’s profitability. For instance, reports indicate that Apple is exploring accessory certification for USB-C cables, similar to its MFi program for Lightning connectors, allowing the company to maintain control over accessory compatibility and quality.

Broader Implications

The EU’s directive has set a global precedent, influencing policies in other regions and sparking broader discussions about standardization. For example, lawmakers in the United States and India have explored similar regulations, citing the EU model as a template. This global shift could accelerate the adoption of universal charging standards, potentially benefiting consumers worldwide.

Economically, the regulation underscores the EU’s influence in shaping global technology practices. As the world’s third-largest smartphone market, the EU has the leverage to compel multinational companies like Apple to adapt their products globally rather than create region-specific versions. This shift not only benefits consumers within the EU but also simplifies device use for Apple customers outside the region.

Conclusion

The Apple v. EU case over universal chargers illustrates the challenges of balancing corporate interests, consumer welfare, and environmental sustainability. While Apple’s initial resistance highlighted the difficulties of transitioning entrenched ecosystems, the company’s eventual adoption of USB-C demonstrates the power of regulatory bodies in shaping industry practices. By promoting standardization, the EU aims to reduce electronic waste, save consumers money, and simplify device usage, setting a model for other regions to follow. As the December 2024 deadline approaches, the long-term impact of the regulation will serve as a critical case study in the intersection of regulation, innovation, and sustainability.

Case Study 2: Blocked Merger

In February 2019, the 2nd and 3rd largest supermarkets proposed a merger. This would have seen them combine their businesses to form one large firm and become the UK's largest grocery retailer. The short 2 minute video to the left discusses the proposal. The two short videos below discuss the outcomes of the UK's Competition and Markets Authority's investigation into the proposed merger, as well as the result to block the merger from happening.

The Role of the Competition and Markets Authority (CMA) in Regulating UK Markets

In a market economy, competition plays a central role in ensuring that resources are allocated efficiently, firms innovate, and consumers benefit from lower prices and greater choice. However, markets do not always work perfectly. Left unchecked, firms may attempt to restrict competition through collusion, predatory behaviour, or excessive concentration of market power. To prevent these outcomes, the UK established the Competition and Markets Authority (CMA) in 2014. The CMA is an independent non-ministerial government department responsible for promoting competition and making markets work well for consumers, businesses, and the wider economy. Its role is fundamental in maintaining the conditions for competitive markets and safeguarding consumer welfare.

One of the CMA’s most important responsibilities is to regulate mergers and acquisitions. When two firms propose to merge, the CMA assesses whether the deal could significantly reduce competition, a situation referred to as a substantial lessening of competition. If a merger would create a monopoly or leave too few competitors in the market, the CMA has the authority to block it or impose conditions known as remedies. Remedies might involve requiring one of the firms to sell off part of its business before the merger is allowed to proceed. A high-profile example was the CMA’s decision in 2019 to block the merger of Sainsbury’s and Asda, two of the UK’s largest supermarket chains. The regulator argued that the merger would lead to higher prices, lower quality, and reduced choice for consumers, especially in the grocery and fuel markets. This demonstrates how the CMA acts to preserve consumer welfare by preventing excessive market concentration.

Another major area of the CMA’s work is tackling cartels and other anti-competitive agreements between firms. A cartel occurs when firms collude to fix prices, limit production, or divide up markets between themselves. Such behaviour undermines competition and directly harms consumers by inflating prices and reducing choice. The CMA has wide-ranging powers to investigate cartels, impose fines of up to 10 per cent of a company’s global turnover, and in the most serious cases, pursue criminal prosecution of individuals involved. In 2020, for example, the CMA fined several pharmaceutical companies over £260 million for exploiting their market position to overcharge the NHS for hydrocortisone tablets. This case illustrates the CMA’s role not only in protecting consumers, but also in safeguarding taxpayers and the public sector from excessive costs.

The CMA also acts against the abuse of market dominance by powerful firms. A business with a dominant market share, often defined as controlling more than 40 per cent of a market, must not use this power to restrict competition unfairly. Abuse of dominance may take the form of predatory pricing, where a firm deliberately lowers prices to force rivals out of the market, or refusal to supply essential facilities to competitors. Both practices reduce competition in the long run and risk harming consumers once rivals are eliminated. The CMA can impose significant fines on firms found guilty of abusing market power and can order them to change their conduct to restore fair competition.

Beyond individual cases, the CMA also conducts broader market studies and investigations into entire industries. These investigations allow the regulator to examine whether structural or behavioural issues are causing markets to function poorly. If problems are identified, the CMA may recommend government policy reforms, impose regulations on firms, or launch a more detailed market investigation. For instance, the CMA has investigated the UK energy market amid concerns about high consumer bills and limited switching between suppliers. Such interventions show how the CMA seeks not only to punish anti-competitive behaviour but also to improve the overall functioning of markets for the benefit of households and businesses.

Evaluation of the CMA

Strengths

Independent from government, meaning its decisions are based on evidence rather than political influence.
Strong legal powers to block mergers, fine firms, and prosecute anti-competitive behaviour, which helps deter firms from engaging in collusion or abuse of dominance.
Provides high-profile examples such as blocking the Sainsbury’s–Asda merger, which demonstrate clear consumer benefits.
Helps improve efficiency and fairness in entire industries through market studies and investigations.

Weaknesses

Investigations can be lengthy and complex, which may delay action and allow harm to consumers to continue in the meantime.
The CMA’s resources are limited compared to the scale of the economy, meaning some anti-competitive behaviour may go undetected.
Globalisation reduces its effectiveness, since multinational firms may operate beyond the CMA’s jurisdiction and can exploit regulatory gaps.
Some critics argue that penalties are not always large enough to change firm behaviour, especially for very large corporations.

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