The strategy adopted by Vue Cinemas to acquire Ster Century posed a potential threat to ticket prices because the company would gain monopoly power to control the pricing of products in the industry. Monopolies are companies with exclusive control in the market and in a monopolistic competition market prices are controlled by an individual company. Monopolistic companies price their products by considering the cost of production, the profit margin and government taxes. Therefore, the concept of competition is not considered in the pricing strategy and this makes such companies to set higher prices.
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When a company acquires other companies in the industry the level of competition reduces and control over the market is achieved. The prices set by monopolistic companies are oppressive to the consumers because no competition forces cause such companies to reduce or offer favorable prices to their consumers. Such companies do not consider customer satisfaction as a priority but they embark on making more profits. Thus, Vue’s monopoly at Basingstoke posed a potential threat to ticket prices because no competitor would exist in the market after implementation of the strategy (Baumol & Blinder, 2009).
Consumers have limited choices when monopolistic market systems are allowed to operate in the market. Monopolistic companies produce the most profitable and efficient products without considering the taste and demand of the consumers. Consumers have no choice and they are made to accept the available products in the market. Consumer choice increases when many companies exist in the market and governments have made efforts to reduce monopolies as a policy to improve the number of products available to consumers. Monopolistic companies are not innovative and product differentiation is not common. This occurs as a result of few challenge and lack of the motivation to satisfy consumers (Thompson, 1988).
The quality of products decreases when monopolistic market systems exist in the market. Monopolies experience no challenge to manufacture better quality products. When competition prevails in the market all companies aim at satisfying their customers by offering the best quality products. This causes the companies to improve their production system by developing innovative methods of production. Monopolistic companies do not aim at maximizing customer satisfaction by focus on profit maximization. The strategy by Vue Cinemas to create a monopolistic environment by acquiring Ster Century would reduce the quality of products offered in the market (Gitman & McDaniel, 2008).
Herfindahl Hirschman Index (HHI)
The Herfindahl Hirschman Index is used to measure how a particular market is concentrated depending on number and size of companies in the market. To obtain the Herfindahl Hirschman Index you sum up the square of the share of each firm in the market. The HHI obtained is used to determine how a certain market is concentrated for example a HHI value of 1800 indicates a highly concentrated market. The index is affected by mergers and acquisitions and the Competition Commission uses the HHI to determine whether mergers are acquisitions should be allowed in the market.
The Department of Justice uses the HHI to determine whether antitrust laws have been adhered to or not. The HHI is also used to determine when a monopoly is developing. The HHI runs from a scale of zero to 10,000. A scale of 10,000 indicates that one firm has exclusive control or a hundred percent control of the market. When the HHI scale is less than 1000 this means that the market is not concentrated and this is the preferred scale. Any merger or acquisition that may cause the HHI scale to exceed 1000 leads to antitrust action. The companies involved in such a deal are restricted from establishing the merger or acquisition because it violates the legal provisions (Griffiths & Wall, 1984).
According to Griffiths & Wall (1984) the formulae for computing the HHI is:
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HHI before the acquisition
HHI = s1^2 + s2^2 + s3^2 +… + sn^2 = 409 x 12.24 + 73 x 2.18 = 5,165.30
HHI after the acquisition
HHI = 482 x 14.42 + 0 x 0 =6,950.44
The HHI provides that the acquisition could increase the concentration in the market and hence, the level of competition will decline.
Competition Commission and the share of supply test
According to Competition Commission (2011) “the UK Competition Commission is an independent body responsible for investigating mergers, markets and other inquiries related to regulated industries under United Kingdom competition law” (p. 1). The commission regulates competition in all markets in the United Kingdom to enhance fair business activities in the market. The commission encourages business strategies and policies which do not hinder competition in the market by creating equal opportunities to all entrepreneurs in the market (Clarke & Morgan, 2006)..
The HHI obtained is used to determine how a certain market is concentrated for example a HHI value of 1800 indicates a highly concentrated market. The index is affected by mergers and acquisitions and the Competition Commission uses the HHI to determine whether mergers are acquisitions should be allowed in the market. The Department of Justice uses the HHI to determine whether antitrust laws have been adhered to or not. The HHI is also used to determine when a monopoly is developing. The HHI runs from a scale of zero to 10,000. A scale of 10,000 indicates that one firm has exclusive control or a hundred percent control of the market. When the HHI scale is less than 1000 this means that the market is not concentrated and this is the preferred scale. Any merger or acquisition that may cause the HHI scale to exceed 1000 leads to antitrust action (Griffiths & Wall, 1984).
Vue can use behavioural remedies to ensure that the establishment of the acquisition does not affect the business activities in the market. This can be achieved by pricing the products according to the forces of demand and supply. This will provide the customers with better opportunities of obtaining the products at fair prices. The company should come up with a better pricing strategy that reflects the level of supply and demand in the market (Utton, 2003).
Vue should offer products of the best quality. By assuring consumers that they will be able to offer quality products this will help remove the negative impacts of monopoly activities. The company should operate similar to firms in a competitive environment by developing innovative products. The company should come up with technologies which enable the production of quality products (Gal, 2003).
A wide range of products should be offered in the market to provide the customers with a variety of choices. This can be achieved by developing better methods of production and to differentiate the existing products. Product differentiation should be enhanced by encouraging employees to become more innovative (Gal, 2003).
Reasons for forcing Vue to divest one of its Basingstoke cinemas
The Competition Commission has the mandate to ensure that organizations in the market have equal opportunities and that competition prevails in the market. Encouraging companies to divest their operations helps increase competition in the market. Competition is healthy in the market because it helps improve the quality of products offered in the market as well as allowing consumers enjoy lower prices. The Competition Commission has the mandate to protect the interest of consumers and business entities.
By forcing Vue to divest one of its Basingstoke cinemas, the competition commission wanted to ensure that the prices of the products offered by the firm are stable and that they reflect the true market value. On the other hand, the commission aimed at ensuring that the quality of products offered by the firm is high. The commission is also concerned about ensuring that customers enjoy a variety of products in the market. All these conditions can be fulfilled in a competitive market and that is why there was need to get rid of monopoly system. The commission forced Vue to divest its business operations to protect the welfare of the customers, other businesses and other concerned stakeholders.
List of references
Baumol, W. J. &. Blinder, A. S. (2009). Economics: Principles and Policy. Oxford, Cengage Learning.
Clarke, R. & Morgan, E. J. (2006). New developments in UK and EU competition policy. Massachusetts, Edward Elgar Publishing.
Competition Commission (2011). Welcome to the Competition Commission. Web.
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Gal, M. S. (2003). Competition policy for small market economies. Harvard, Harvard University Press.
Gitman, L. J. & McDaniel, C. (2008). The Future of Business: The Essentials. New York, NY: Cengage Learning.
Thompson, A. R. (1988). Microeconomics. New Jersy, NJ: Addison-Wesley Pub.
Utton, M. A. (2003). Market dominance and antitrust policy. Chicago, Edward Elgar Publishing.