Not all monopolies are natural monopolies. Dominance may emerge in a market through the internal growth of firms, through technical innovation and patent protection, or through merger, and this dominance may or may not reflect underlying cost advantages associated with a concentrated industrial structure. In the United Kingdom, policy towards monopolies and mergers is enforced by the Competition Commission (CC) – formerly (up to 1999) the Monopolies and Mergers Commission (MMC). The CC was first established (as the Monopolies and Restrictive Practices Commission) in 1948, but its present responsibilities are set out in the 1973 and 1998 Competition Acts. Recent statutes concerning the privatisation programme have added to the CC's responsibilities by permitting the relevant regulatory bodies to refer possible licence modifications or certain other matters to the Commission. The Commission may also be asked to undertake enquiries into the efficiency of the nationalized industries (see Module 8). In this section we are concerned with the original functions of the CC, i.e. policy towards industries not subject to statutory regulation.
Two possible approaches to monopoly policy may be contrasted. In one approach any monopoly position would be viewed as undesirable per se. Enforcement would then concentrate exclusively on determining whether or not a monopoly existed and, if so, on establishing the action that should be taken to remedy the situation.
In the US the prevailing approach to anti-trust during the 1960s reflected the per se rule. In the event of a merger, for example, evidence of efficiency gains from the merger was not considered relevant. When Proctor and Gamble attempted to acquire Clorox (both firms manufactured bleach) the Federal Trade Commission reasoned that ‘Economic efficiency or any other social benefit resulting from a merger is pertinent only in so far as it may tend to promote or retard the vigor of competition’. The Supreme Court was even more explicit: ‘Possible economies cannot be used as a defense to illegality’. This per se approach has been relaxed in the US more recently (see below) but can be found in European Union Law. A merger is prohibited if it ‘creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market’. Otherwise it is permitted. There is no efficiency defence even though such defences exist in the law of many individual member states of the Union.
Source: Quotes from Williamson (1985)
The alternative approach to monopoly policy is the cost–benefit view. In this approach there is no presumption that a monopoly situation or a merger is undesirable. If the perceived benefits of having a good or service produced by a monopolist outweigh the cost then it would be counter-productive to break up the monopoly into smaller units. In Britain, policy has always been based, at least implicitly, on this second view.
There is no presumption in UK legislation that either monopolies or mergers are necessarily against the public interest. Under section 84 of the 1973 Fair Trading Act the MMC (now the CC) may consider any matter which appears to be relevant to the public interest. The 1973 Act then sets out a list of illustrative criteria for judging individual cases such as promoting the interests of consumers, encouraging cost reductions, encouraging new products, maintaining a ‘balanced’ distribution of industry and employment and so forth. Section 18 (1) of the 1998 Competition Act is more proscriptive in outlawing ‘any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market’ – the Chapter II prohibition. Here again, however, it is still the ‘abuse’ rather than the ‘dominant position’ itself that is illegal. The 1998 Act borrows directly from Article 82 (originally article 86) of the EC Treaty. It does not define ‘abuse’ but gives some examples of proscribed conduct. These include imposing ‘unfair purchase or selling prices or other unfair trading conditions’ ; limiting output or technical developments; applying discriminatory terms for equivalent transactions; and imposing other restrictions or obligations on customers.
Source: Parker (2000) reviews UK competition policy in the context of the European Union.
In the US recent trends have been towards a cost–benefit interpretation of anti-trust legislation. ‘If the parties to the merger establish by clear and convincing evidence that a merger will achieve such efficiencies, the Department will consider those efficiencies in deciding to challenge the merger’ (Department of Justice Merger Guidelines 1984 Sec.3.5). Note here, however, that the burden of proof is on the company concerned to demonstrate benefit rather than on the anti-trust authorities to demonstrate harm.
A cost–benefit approach to monopoly policy has been reinforced by the difficulty faced by public authorities in providing simple objective and robust guidelines capable of identifying situations which are against the public interest per se. Different interpretations can be placed upon the same evidence. Consider the following list of factors which might be relevant to the ‘public interest’ in the case of a dominant supplier in a market.
High rates of return seem to indicate restrictions on competition which would otherwise reduce profits to normal levels. However, a more dynamic view of the competitive process suggests the possibility that profits are a result of successful innovation or entrepreneurial endeavour.
If an industry is dominated by one or a few firms this may reflect a successful attempt to exclude new entry by exploiting available entry barriers. Again there are alternative explanations, however. One is that the industry is a natural monopoly or duopoly and that the force of potential competition ensures that price is set so as not to attract new entry. Further the very definition of market concentration requires us to specify what we mean by a particular market. In the UK a monopoly reference can be made by the Director General of Fair Trading to the CC concerning situations where a single firm (or in complex cases a group of firms operating a concerted policy) ‘supply or receive at least one quarter of the goods or services of a particular description in the United Kingdom or a specified part thereof’. There is usually considerable scope for disagreement about the relevant description of the good or service traded with firms pointing to the wide scope for substitution between their product and others.
This may be viewed as a strategic device to deter a competitor from entering a market. It makes credible an implicit threat to respond aggressively by cutting price and increasing output. A more benign view might be that the investment programme of the firm merely represents a prudent anticipation of future growth in demand and that delay in increasing capacity is a more likely indicator of monopoly power.
A common view of advertising in the 1950s and 1960s was that by differentiating the product in the mind of the consumer it would reduce the elasticity of demand which would result in higher prices and profits. It also created an artificial entry barrier by forcing potential entrants to devote similar resources to advertising their product. On the other hand, it can be claimed that advertising establishes important (reputational capital’ that by building up a durable customer-supplier relationship customers are saved the costs of shopping around and confidence in the quality of the product is established.
Attempts have been made to judge whether a market is competitive by reference to the pricing decisions of incumbents. The reduction of a product's price following the entry of a new competitor, for example, can be seen as ‘predatory’, a ploy designed to drive the interloper from the market. But attempting to match the price and quality characteristics of other producers might equally well be seen as the essence of competitive behaviour. It would be perverse to discourage competitive reactions to events in the interests of maintaining competition.
The absence of any simple and enforceable rules based on objective evidence inevitably leads to a more discretionary case by case approach to monopoly policy. This puts firms and the relevant government agencies once more in a bargaining situation. In the UK, for example, negotiations in the case of mergers may take place at several stages. There is a primary stage at which the Director General of Fair Trading formulates advice to the Secretary of State on whether a bid should be referred to the CC. If referred, the parties concerned and interested third parties attend ‘hearings’ at which the main issues are investigated. These hearings ‘are conducted as an investigation, and not in an adversarial manner … The main parties are given every opportunity to explain their cases’ (MMC 1990 p. 8). Finally, in the event of a merger being found to operate against the public interest, undertakings may be sought to dispose of shares or to refrain from completing the merger. If a merger has been completed and is found to operate against the public interest, an order may provide for the division of a company by the sale of some of its assets.
In the face of this procedure it is not surprising that take-over bidders have begun to look ahead and have attempted to compress these various stages into a single bargain. Companies at the preliminary stage may adjust the terms of their bids by restructuring them in ways acceptable to the Director General of Fair Trading.
The Case of the Guinness bid for Distillers
One of the most celebrated take-over battles of the 1980s was the contest between Argyll and Guinness for control of Distillers. One of the less well-known aspects of this case concerns the role of the Office of Fair Trading. Argyll was the first to bid for Distillers. A rival and, to the Distillers' management, more welcome bid then came from Guinness. Guinness, however, had a problem in that the combination of their own whisky brand, Bells, and the brands of whisky they would acquire with Distillers would give them a market share in excess of one quarter. In the case of mergers, one or both of two criteria must be satisfied for a reference to the MMC. The combined enterprises must account for more than one quarter of the market of a particular good or service, and/or the gross value of the worldwide assets taken over must exceed £70 million. It does not follow that all cases which satisfy these conditions will be referred. The MMC investigates only a small proportion of ‘qualifying’ mergers. For example in 1993 there were 5 referrals out of 197 qualifying mergers (OFT 1993). However, in this situation of a contested bid, it became important to Argyll that the Guinness bid should be referred, and equally important to Guinness that it should not.
Fallon and Srodes describe the hectic events at this time. In the midst of an acrimonious advertising battle (of a type now banned by the ‘voluntary’ City Code of Takeovers and Mergers) ‘Saunders (of Guinness) was also presenting his carefully reasoned and worked out case to the Office of Fair Trading, using many of the statistics accumulated when he bought Bells’ (p.217). In spite of his efforts, the Guinness bid was referred. There was no question of waiting for an MMC report and Saunders responded innovatively. ‘He proposed to withdraw his first bid, and make a second one, which would involve stripping out some of Distillers brands and selling them to another party, thus reducing the monopolies element’ (p. 219). This procedure of restructuring bids following negotiations with the OFT has affinities with the regulatory system in the United States. There, however, the negotiations can proceed within the framework of established merger guidelines which at present do not exist in the UK.
Source: Fallon and Srodes (1987)
