|A London cab aka a Hackney carriage,|
Picture courtesy of wikipedia.org
These Hackney carriages could be considered as having monopoly power in the private car hire market in London. There is a reduction in consumer surplus under a monopoly (as seen in the diagram below), which translates to a loss in economic welfare. For people using ‘black cabs’ this means that they have to pay at least £2.40 for their journey, and that’s only the minimum cost. There is also the requirement that drivers pass ‘The Knowledge’. This exam, where all 25,000 streets and approximately 20,000 landmarks of London have to be memorised, is effectively a barrier to entry, as prospective drivers take on average two to four years to pass the test.
|As well as a net loss of consumer surplus, consumers may also have to accept a reduction in quantity supplied under a monopoly.|
Diagram courtesy of beta.tutor2u.net
I think competition is good for consumers. It forces firms in the market to develop the services they offer and there is greater consumer sovereignty under competition. Firms have to reduce the prices of their goods and services to stay competitive, thus accepting smaller profits. Above all, the consumer enjoys having a selection of products to choose from. Simple evidence of how competition benefits the consumer comes from our earlier example of London cabs and Uber. Following Uber’s entry into the market, black cab drivers have begun offering deals via apps that mean reduced fares for passengers. So is competition good for consumers? Even though some may try to stop it (an example is the proposed restrictions* upon Uber in London), it looks like that’s the case.