Economics - Free Market System

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After firms become monopoly by merging, the monopolistic firms should have positive and negative both aspects. Firstly as positive effects, Pettinger, T. (2012) stated that monopolistic firms could provide a national network. Through it, consumers are able to obtain better coverage that reduces the number of station for information and both firms and government can reduce the cost. Moreover, they would research and develop new products to maintain the economies of scale. In addition, sometime government allow merger for monopoly since when an industry face a crisis for closing, merger could be beneficial to maintain the industry. However as the negative effect is bigger than positive, government wants to prevent merger. Monopoly by merger can induce diseconomies of scale and less choice and job losses. Most importantly, it can lead to net social cost and deadweight loss. According to Anderton (2008), if there are not externalities, the net social cost which is difference between social benefit and social cost is broken out due to the abnormal profit of monopoly. Also according to Makiw (2011) in the diagram 3 (Mankiw, 2011), government tries to maximize total surplus, social welfare in the socially efficient quantity where the demand is equal to marginal cost of firms. However as monopolist decides to choose the quantity that is inefficiently low and the price that is inefficiently high, deadweight losses are broken out. It is the social cost which burdens on large amount of consumers so that government desire to prevent that cost and make firms produce in optimal quantity and price. [pic 5][pic 6]

Merger is the very common strategy today among the businesses so that the example of merger can be found easily. In South Korea, according to an article from Wall Street Journal (2014) the South Korean mobile-messaging service Kakao Talk decided to merge with South Korean Internet – portal operator Daum to compete with dominant Internet – portal operater the Naver which tookover the Japanese mobile – messaging sevice Line. This merger is the horizontal merger since both companies are in same industry and stage. In the UK, according to BBC News (2009), T-mobile Orange in UK merged in 2009 so that it became the largest mobile service provider in the UK as overtook about 32% of the mobile market in the UK. Through this merger, efficiency was achieved by reducing price and consolidating provision of service so that consumers could be more convenient. This merger is also the horizontal merger which has same stage and same industry. Actually, both new firms emerged by merger has monopolistic power and each have positive and negative effect of merger. However, as there are negative effect of monopoly, government should intervene to prevent social cost.

According to Mankiw (2011), when monopolists obtain abnormal profit so that the net social cost and deadweight loss are broken out and market efficiency decrease, government intervene to recover the market competition. As a solution, Government can nationalize industries which are related to public utilities to guarantee the survival of citizens. But it can be inefficient because it does not have to meet the efficiency purpose set by government (economicsonline.co.uk, n. d.). By regulation, government can force monopolists to charge a price below normal profit so that government can protect profit of consumers and prevent deadweight loss. But if monopolist leave market since it cannot earn abnormal profit anymore, market failure can be broken out (economicsonline.co.uk, n. d.). In terms of train monopoly in the UK, through the yardstick competition, government can break up services of monopolists into several sections to compare the performance of one region against another.

Consequently, government should focus on the characteristic that every firm wants to maximize their profit and become monopoly so that they compete with others. Considering the objective of government is to maintain market efficiency and market efficiency is achieved by competition, government should provide policies, using the characteristic. Using the feature firms compete with each other to become monopoly, government should maintain the competition and prevent particular firm have monopolistic power except advantageous monopoly such as public utilities to make market operate efficiently without welfare losses.

Reference list

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Anderton A. (2008). Monopolistic competition. In: no editor Economics. 5th ed. UK: Causeway Press. P319-321.

Anderton A. (2008). Monopoly. In: no editor Economics. 5th ed. UK: Causeway Press. p312-318.

Lee, M. J. (2014). South Korean Messaging-App Maker Kakao to Buy Web Portal Daum.Available: http://online.wsj.com/news/articles/SB10001424052702304811904579584803764562082?KEYWORDS=South+Korean+Messaging-App+Maker+Kakao+to+Buy+Web+Portal+Daum&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Fa. Last accessed 29th July 2014.

Mankiw G. (2011). Chapter 15: Monopoly. In: no editor Principles of economics. 6th ed. UK: Cengage Learning. 311-313.

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Sandilands, T. (n. d). Example of a Company's Forward Integration.Available: http://smallbusiness.chron.com/example-companys-forward-integration-37601.html. Last accessed 29th July 2014.

Pettinger, T. (n. d). Diagram of Monopoly. Available: http://www.economicshelp.org/microessays/markets/monopoly-diagram/. Last accessed 29th July 2014.

n. a. (2009). T-Mobile and Orange in UK merger. Available: http://news.bbc.co.uk/2/hi/business/8243226.stm. Last accessed 29th July 2014.