International Business & Economy Understanding free market monopolies

Understanding free market monopolies




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By: Yew Chii Ming

The Competition Commission of Singapore (CCS) has been investigating claims of alleged anti-competitive actions engaged by an online food delivery provider after complaints were received. The anti-competitive behaviour in question was the exclusive agreements that the food delivery provider forged with restaurants. The said restaurants in the agreements are allowed to use only delivery services provided that specific provider. Therefore, customers who wish to order from a restaurant engaged in an exclusive agreement has to use that specific food delivery provider.

The CCS is a statutory board under the Ministry of Trade and Industry (MTI) whose role is to enforce the Competition Act. The purpose of the Competition Act is to prevent anti-competitive actions as such actions hinder market competition. The government believes that consumers can benefit from market competition.

According to a press release by the CCS, “businesses with a dominant market position are prohibited from preventing their competitors from competing effectively or shutting them out of the market through exclusive business practices such as exclusive agreements with their suppliers or customers. If such conduct is found to harm competition, CCS can take enforcement action.” CCS’s concern is such agreements by dominant market players amount to an entry barrier to entrants to market and it prevents market competition from occurring. This prevents consumers from enjoying the benefits of market competition.

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At the center of the CCS’s reasoning is that the dominance of a player or possibly a few will prevent market competition from happening. The other reason is that such exclusive agreements prevent market competition from occurring effectively.

However, the CCS’s concerns are unfounded.  The CSS has failed to distinguish between two kinds of monopolies, one caused by artificial barriers to entry erected by the government itself, and one that is the product of superior productivity and quality on the part of the firm.

The latter is a genuine “free market monopoly” that can be maintained only by the constant satisfaction of consumer interest. The former version, also called a “coercive monopoly”, is the more common example and merits our attention. Such monopolies are a creature of the state, for they arise and are maintained only because of government intervention such as subsidies and licensing.

A recent example is farm subsidies in the United States of America. These farm subsidies are typically awarded to farms with a larger output. The negative impact is that small farms will find themselves at a comparative disadvantage and may be forced to shut down or be brought out by the larger farms, which are typical owned by large agricultural companies. A local example is that of Singtel, which has for many years been Singapore’s sole telecommunications company in Singapore. Singtel’s monopoly was perpetuated by the government till it liberalise the market.

In the current context, the online food delivery firm cannot charge exorbitant rates for its services and offer poor services if they so wish to maintain a sizeable market share. If high prices are charged, the first effect is that customers will be less likely to order food through A and switch to another service provider B. This forces A to reduce its delivery charges if it wants to retain its market share and ensure its business remains profitable. If this does not happen, the restaurants will eventually notice that customers that order takeaways through the delivery providers decrease. The restaurants will be then forced to choose another delivery service provider once their existing agreement lapses.  Thus, there exists a natural market mechanism ensuring consumer welfare.

The exclusive agreements in the context of food delivery are similar to the occurrence of exclusive distributors of products. Concerns about such agreements hampering market competition are unfounded. In fact, as explained in the previous paragraph, poor service and high price will dissuade the restaurant from renewing such agreements.  There is also no reason to suppose why restaurants will sign such agreements in the first place. As reported in this article, some restaurants find it convenient while others like the service provided. As CCS chief executive Toh Han Li puts it, “Instead of relying on exclusive business practices, businesses should compete on merit”. Perhaps Toh Han Li should have realised, the companies probably earned such agreements through merit. Simply going into an exclusive agreement with a new startup or a company with poor reputation is irrational and does nothing to help the restaurant attract and retain customers.

Restaurants might find it preferable to stick to many delivery providers depending on their business strategy as it allows them to access a range of customers. Sticking to one delivery provider prevents them from accessing potential customers that patronize other alternatives. Such practices can be seen in other industries such as in retail and supermarkets. It is common to find a brand of clothing or shoe in the stores of multiple distributors rather than simply one.  Consumers can visit both Cold Storage and Fairprice if they wish to buy Coca Cola. The interest in ensuring access to a range of customers prevents businesses from recklessly entering into exclusive agreements.

Lastly, there is no moral basis for CCS to have a say in the business dealings between the online food delivery providers and the restaurants. Such dealings are private, voluntary and consensual exchanges that deserve our respect. These transactions do not any form of aggression against anyone’s person or property. No one is physically forcing the customer to use a certain delivery service provider.  CCS thus has no role in policing the market economically and morally. Such an activist role merely helps to create victimless crimes while companies who run afoul of the law are fleeced through the threat of fines.

About Chii Ming

chii mingI am currently studying mechanical engineering in National University of Singapore. Additionally, I am minoring in political science as part of interest in political philosophy and politics. I was born a statist with naïve beliefs that only government interventions can create a utopia. This changed when I coincidentally came across a Ron Paul video on Youtube in 2009. Ron Paul is a now retired Congressman who served in the House of Representatives and ran for the Republican Presidential Nomination in 2008 and 2012.

Republished from Libertarian Society Singapore.Follow us on Social Media

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