Abuse of Dominant Position

Abuse of dominant position

Second part

Demonization of dominant position, an exaggeration ?

Using the word of ''demonization'' may seem irrelevant, but makes sense from that moment on we consider everything that has been said before, how the United States as well as the European Union are condemning it, also the important amount of lawsuits concerning this subject.
There is indeed nowadays a kind of a propaganda against too important companies, propaganda that comes straight from the States themselves.
Nonetheless, if we take a look at the not so distant history of those States, we can easily notice that this demonization hasn't always existed. For instance, the British East India Company was given by the British Empire itself, through a Royal Charter, a monopoly upon the trade between the British Empire and it's colony, India. This company has largely contributed to extend the British Empire power.
An interesting example is also the famous company, Standard Oil, founded by Rockefeller, which was till 1911 dominating the oil industry in the United States. Although it has been dismantled through the federal antitrust law, one can't deny that this company contributed to lower the prices of oil together with a modernization of the oil industry.

Satirical cartoon, 1904 - Standard Oil as an octopus, showing the importance of this “demonization”, also strongly evocative of Cold War propaganda.

Though, this diabolization is a fact. Google, Microsoft, Apple, are usually presented as huge companies aiming to earn more and more money thanks to defenceless consumers, whom choices are nullified by those leading companies.
Is nonetheless the existence of leaders in dominant position on the market such a bad situation ?
I will try to show you that this can be positive, or at least not so negative, and debatable.

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Schumpeter

First of all, as a theoretical introduction, I will mention the theories of Schumpeter. Defending the existence of dominant position on the market is quite a tough position, and only a very few people do or did. Amongst them is the most famous economist, one of the most influential of the 20th century, Joseph Schumpeter and his Growth Theory.
According to him, the dynamics of Capitalism are lead by innovation, by the capacity for companies to get into a position of monopoly as a reward of their efforts both in the economic and technical perspectives.
Schumpeter puts the entrepreneurs in the very centre of his theory, thanks to the ''Unternehmergeist'', which corresponds to the spirit of entrepreneurs, insides the companies. Those economical agents drive innovation (thus the capitalist system) through companies who are powerful enough to invest, to research and develop themselves.
Therefore, holders of monopolies will exploit and create innovative activities in order to continue their position. Those monopolies are, according to him, necessary to develop new products and in a larger way, to develop the economy. This is what we call the Schumpeterian assumption.

Thus, the State (as well as the European Union …), shall not struggle against monopolistic and dominant position : The existence of dominant position is a just reward to companies and firms labour in undertaking.
Moreover, according to him, the main innovations always came not from companies subjected to vehement competition, but from companies that were in a dominant position. This he explained by the fact that only dominant companies can afford to fund research activities, hoping to maintain their technological power, thus their dominant position.
He even goes further in his theory, telling not only that the State shall not fight dominant positions, but per contra support them. This support can be held in legal way, granting patents to innovative companies in order to protect their innovations and their monopolies.
Schumpeter describes for instance Henry Ford as the model of entrepreneur, especially with the production of the Ford T at very low prices which granted to Ford's firm a large monopoly in the United States in the 1910s. This dominant position over the car industry was a reward to Ford's innovation in the field of production, using new theories of mass production, Fordism.

In conclusion, dominant positions are a reward for leading companies that are able to keep this position through innovation – but we must not forget that those positions are highly unstable, since a total monopoly is impossible in a free market economy : an important effort is required from leading companies if they want to keep their leading position, and this effort is beneficial for the economy.

Schumpeter lived in the first part of the 20th century. Yet nowadays, we can mention some significant examples of the importance that can have a dominant position in the market.

British Railways (BR)

British Railways is a society that was founded in 1948 after the Transport Act, union of four large railway companies, the ''Big Four'', in order to modernize the British rail network. The British State gave a legal and natural monopoly to this newborn society, which was the only one on the market.
In the mid-90s, after a long process that began under Thatcher administration, the Railways act of 1993 materialized British Rail's privatisation and partition between tens of franchises.

What were the effects of this dismantlement of a society in dominant position ?
Underinvestment in equipment, ageing network (rails, trains, train stations …), also underinvestment in human capital – Large decrease of the service offered along with a large increase of prices for customers.
In addition, Railtrack, one of the most important offspring of British Railways, has since then been taken over by a public company – as the government realized it was better before.

This case is thus representative of the fact that a leading society alone on a market can be better for the service offered and for the customers than several small companies and franchises struggling together to control the same market shares at the expense of consumers.

Électricité de France

I will now introduce an other case, much more recent and strongly related to the EU legislation.
EDF is the main society of production, transport and distribution of electricity in France and in the world. It was created in 1946 through a law that instituted in France a monopoly for electricity production as well as a the gathering of around 1500 small energy producers in a single national company.
In 2000, the European liberalisation directive concerning the opening up of electricity market was transposed into French law : EDF is not in a monopoly situation any more, 70% of the consumers can now decide who will be their electricity supplier. In July 2007, the whole French electricity market is opened to competition.
Five years later, there are 12 different electricity suppliers. Nonetheless, only 5% of the consumers have left EDF for a new one.
Brussels demands more and more competition in one of the most integrated and optimized electrical network, where EDF still owes all the means of production. Because of Brussels’s directives, EDF is forced to sell some of its production to reseller, at prices fixed by the government. One may wonder if this odd requirement to use intermediaries in the electricity field is not one of the cause of electricity prices growth.
The prices are indeed growing up in France since 2007, even though, one of the EU announced goal was to reduce the bill consumers have to pay : +5% from 2009 to 2011, +2.9% from 2011 to June 2012 – a recent Senate report even forecast a growth of 50% of the French consumer electricity bill by 2020.
European willingness to dismantle EDF's dominant position seems even more absurd considered that France already practised the lowest electricity prices in Europe.

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Finally, one may cross-examine the legitimacy of these anti-trusts laws and actions relative to antitrust and competition policies.
Could it not just be a game of power between the politics and some societies that may be too powerful ?
There are nevertheless arguments in favour of monopolistic positions : the innovation and technical innovation, simplicity for the consumer …
Beyond that, one may also not forget that some arguments against dominant position are not always correct in reality (e.g. the lowering of electricity prices in France).
It is therefore in my opinion important not to be fooled by a possible demonization of those big corporations that actually do well, and to identify the difference between ''dominant positions'' and their possible misapplication or abuse …

BRANDEN N., ''Monopolies'' in Commons fallacies about capitalism, June 1962, http://book.zi5.me/books/read/1717/8 DINOPOULOS E., ŞENER F., New Directions in Schumpeterian Theory, February 2007, 16pp, http://bear.warrington.ufl.edu/dinopoulos/PDF/schumpeteriangrowth.pdf

MARTIN B., ''The high public price of Britain's private railway'', November 2010, in Public world http://www.publicworld.org/files/britrail.pdf

PRUD'HOMME R., ''Faut-il augmenter le prix de l'électricité ?'', in Le Monde, 27th August 2012, http://www.lemonde.fr/idees/article/2012/08/27/faut-il-augmenter-le-prix-de-l-electricite_1751963_3232.html