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TELECOM GIANTS FACE HEAVY FINES IN

MONOPOLY PROBE
Authorities are investigating the mainland's two telecommunications
giants for monopolising broadband internet services - the first case
against big state-owned enterprises since the anti-monopoly law was
introduced in 2008. The top economic planning agency, the National
Development and Reform Commission (NDRC), said China Telecom
and China Unicom accounted for more than two-thirds of the
broadband market and had used that dominant position to fix prices.
If convicted, the companies face combined fines of 8 billion yuan
(HK$9.8 billion).
The investigations send a warning that the government will enforce
the anti-monopoly law against all companies, whether state-owned, domestic or foreign. Economists
yesterday generally saw it as a positive step, although they cautioned against interpreting this as a signal that
Beijing was ready to allow full competition between private business and state corporates.
"The Chinese government knows that monopolies can hurt the economy," said Mao Yushi, a prominent
mainland economist. "The problem is that monopolies are in the interest of a few privileged groups." Kevin Li
Shanyou, a professor at the China Europe International Business School, welcomed the news. "China has an
anti-monopoly law but it has been hibernating," Li said. "If it cannot apply to state-owned enterprises that are
operating a crude monopoly, what else can it apply to?"
Li said dissatisfaction over monopolistic state-owned enterprises was high because of the numerous service
fees they charged. "Beijing says these enterprises make huge profits and hails that as an achievement," he
said. "But the more profitable these companies are, the worse it is for the industry because they strangle the
vitality of small and medium-sized enterprises." The NDRC said revenue from the broadband business of China
Telecom was about 50 billion yuan a year, while that of China Unicom was nearing 30 billion yuan.
The two companies face penalties of up to 10 per cent of their annual revenue if found violating the law.

Questions

1. Define the following terms

a. Monopoly [2 marks]
b. Profits [2 marks]
2. With the help of a diagram, explain how a monopolistic firm can achieve abnormal profits. [4 marks]

3. With the help of a diagram, explain whether or not a monopolist will be able to achieve
[4 marks]
allocative efficiency.
4. Using information from the text/data and your knowledge of economics, evaluate the
decision of the Chinese government to enforce the anti-monopoly law against telecom [8 marks]
companies.

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