Monopolistic trends: Prevention is better than cure


“Capitalism works better from every perspective when economic decision makers are forced to share power with those who will be affected by those decisions.”

                                                                                                                                       – Bernie Frank

Bernie Frank along with Chris Dodd authored the famous Dodd-Frank Report, which put regulations on the financial industry following the 2008 global financial meltdown. A major lesson from the 2008 Global Financial Crisis, which led to the Great Recession, is that lack of proper regulation of the financial sector could lead to excesses culminating in    systemic problems impacting the entire economy. When firms grow too big in an unregulated environment, and risky economic decisions are made with short-term objectives, these firms can collapse causing systemic failures. Economic  decision-making by a few large players can impact the livelihood of millions of people who have   nothing to do with those decisions.

Capitalism promotes competition. Competitive markets benefit all stakeholders. But capitalism needs effective regulation. In the absence of  competition, monopolies emerge exploiting consumers, destroying rivals and corrupting the system through their enormous power. Crony  capitalism can do great damage not only to the economy but to the democratic political system too. That’s why economists argue for prevention of monopolies.

This is the age of mega corporations. The market cap of FAANGs – Facebook, Apple, Amazon,  Netflix and Google (Alphabet) – is around $5 trillion. With humongous wealth and dominant market position mega corporations might become monopolies eliminating the benefits of competition. The objective of anti-monopoly legislation is to prevent the emergence of monopolies.

A recent Joint Party Report by the US Congress accused Google, Amazon, Facebook and Apple of monopolistic actions. Anti-monopoly legislation in the US has a great track record of breaking up potential monopolies.  As early as 1911 the US oil giant Standard Oil was broken up into 34 companies by the US Supreme Court. In 1984 the telecom giant AT &T was broken up into seven regional companies. Giants like Microsoft and IBM were accused of misusing their monopoly power. Actions like these are necessary to ensure that capitalism works for the “greatest good of the greatest number.”

Size alone poses no problem

Liberalization enabled successful Indian companies to grow. Some of these large companies have contributed substantially to India’s economic growth and development. For instance, TCS,  which has grown to become the second most  valuable company in India with a market cap of around Rs 8 trillion, now employs more than 450000 employees- 2 lakhs more than that of SBI. Companies like TCS have grown big in a highly competitive environment and pose no threat. There are many examples like this. So, the     problem is not with size but with dominant market   position.

Monopolistic tendencies in some crucial     segments

There are a few undesirable trends in some sectors where market share is becoming dominant with potential monopolistic trends. For instance, India’s telecom market is now a near duopoly. Many telecom companies have gone bankrupt with implications beyond the industry. Large bankruptcies in the telecom industry have contributed to rising NPAs in the banking sector with its disastrous consequences. Another undesirable development is the monopoly trend in some crucial infrastructure segments. In the 2019 airport auctions all six airports had gone to the Adani group. This trend needs to be curbed.

Regulators have to be extra vigilant

India continues to be a vibrant competitive economy. But the rising monopoly trends in some segments are disturbing signals. This emerging monopoly trends are the consequences of many factors. Shortsighted regulators, governments   trying to squeeze maximum revenue from the  industry and a judiciary interpreting the law in letter rather than looking at the issue from a holistic perspective…all have contributed to this undesirable trend. Many telecom companies in India have gone bankrupt contributing to the rising NPAs of India’s fragile banking system. The telecom bankruptcy is largely the consequence of the cutthroat competition unleashed in the industry by RIL Jio’s price war. When Jio disrupted the telecom market with free voice calls and dirt-cheap data rivals approached the Competition Commission of India accusing Jio of predatory pricing. But the CCI rejected the case and gave a ruling that RIL Jio is not a dominant player. Now Jio has a dominant market share of more than 35 percent and is the only profitable firm in the industry. Regulators have to be farsighted to spot emerging dominant firms. The SC judgment in the AGR case has added to the woes of the industry. In effect India’s telecom industry has now become a duopoly.

Nobody can legally fault the Adani group walking away with all the six airports in the auctions. But this trend needs to be curbed with appropriate provisions in the next round of airport auctions.

The Indian economy is likely to emerge strong post-Covid with sharp rebound in economic growth. Sustained high growth is essential for addressing the challenges that the nation face. A competitive market economy alone can deliver sustained high growth.

First published in Economic Times.


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