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Economics - Monopolists

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Introduction

ECONOMICS 1 ESSAY MONOPOLISTS A pure monopolist is a single supplier of a good or service for which there is no close substitute. In this case the demand curve is fairly inelastic. Examples of monopolies prior to privatisation are British gas, British telecom and British rail. One firm has complete control over the supply of a good or service meaning one firm constitutes the entire industry. A small business or a company selling on a nationwide basis can have a monopoly. Few monopolists are likely to face no competition at all. In reality it is unusual for a firm to have complete control in an industry, as government often intervene to prevent such control. In the UK The Competition Commission states a monopoly exists when one firm has 25% of the market for a product. The more narrowly defined the product is the more number of monopolies there are. A seller prefers to have a monopoly than to have competition. For a firm to obtain a monopoly there must be barriers to entry that enable firms to receive monopoly profits in the long run. Barriers to entry are difficulties facing potential new competitors in an industry. For monopoly power to continue to exist in the long run there has to be a way the market is closed to entry. ...read more.

Middle

There are also artificial barriers which can be created through things like advertising and branding. The development of strong brand names is common. In the consumers mind a dominant brand name is associated with a specific firms product. Some examples are Tampax, Hoover and Durex. The brand image is taken to represent high quality. This acts as a barrier to entry as it is difficult and costly to attract consumers away from the strong brand names. The dominant firm may introduce price cuts to deter potential competition. Existing large monopolists may have budgets for advertising which potential new entrants to a market find it difficult to establish. The newcomer faces huge costs in coming up against such firms. Also due to economies of scale sometimes it's not profitable for more than one firm to exist in a market. A situation of natural monopoly may arise when economies of scale exist, costs increase less than proportionately to the increase in output. The long run average cost curve continues to fall as output increases making it very difficult for newcomers to compete with price. Within a natural monopoly the firm that is established is able to have very low average cost per unit. If a firm charges the price, which reflects the low average cost per unit, then no rival firm, can threaten its position. ...read more.

Conclusion

The marginal revenue curve lies below the average revenue curve on a diagram to reflect the ability to price discriminate. The monopolist has the power to determine either the level of output to be sold or the price at which the product will be sold. Having decided upon a price for sale the monopolist can only sell whatever the market demand is at that price, as the monopolist faces a normal downward sloping demand curve. Only price or output can be determined not both at the same time, to sell more of a given product the monopolist would have to cut the price. In this market structure the producer has more power than the consumer. Monopolists act against the interests of the public by restricting output or charging high prices. Comparing monopolies to the market structure of perfect competition, suggests that monopolies lead to a decrease in consumer welfare. The desire to maximise profits would mean prices are set far above average costs. Profit maximisation occurs where marginal cost is equal to marginal revenue. Monopolies can be innovative and use excess profit to develop new and better products. If the monopolists did passed on to the consumer the benefits of economies of scale, by charging lower prices then it may be more beneficial than a market comprised of lots of small firms. There must be a balance of profit maximisation and consumer welfare. ...read more.

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