Although price and supply levels may not benefit the consumer the monopoly is producing at a much lower cost (at MR, MCm intersection) and so is using society’s resources more efficiently, thus being productively efficient. To determine whether a monopoly is a benefit to society the gain in productive efficiency must be bigger than the loss in consumer surplus. Elasticity of demand and the degree of economies of scale prevalent will effect the relative sizes of these areas.
Monopolistic and perfect competition behave very similarly with normal profits being made in the long run. However whereas perfect competition is allocatively efficient monopolistic competition is not because prices are higher and supply lower, the products are heterogeneous, as opposed to the homogeneous products created by perfect competition. These additional costs which lead to the price rise from methods of differentiation of products such as advertising, and packaging. These are the wastes of competition. The result is that the monopolistic competition has a downward sloping demand curve in the short run, as opposed to the completely elastic demand curve of the perfectly competitive firm. Although supernormal profits are made in the short run, in the long run forms will enter the market and thus create normal profits. The differences can be shown on the graph below:
In an oligopoly there is a certain degree of competition as no one firm will have a direct monopoly unless they collude and share the profits, if they behave as so there is no competition and therefor should be treated as a monopoly. If they do not collude then a variety of positions can be taken up on their price/supply diagram. If like a monopoly it chooses to set price at where the MC MR intersection hits the demand curve then supernormal profits will be achieved and profit will be maximised. However the firm will be neither productively or allocatively efficient. If it chooses to set price where MC and AR meet then it will gain allocative efficiency and will still have supernormal profits, but will not be maximising profits. The third possible situation will be where AC meets AR; at this point normal profits will be made. An oligopoly has this ability because it has sufficient market share to be able to dictate price and supply, and therefore can, like a monopoly choose. This can be shown on the graph overleaf.
The disadvantages of competition are that productive efficiency cannot be obtained through any given market situation whether it be perfect, monopolistic or in an oligopoly. However this can be achieved in a monopoly situation. Further to this allocative efficiency is not guaranteed unless the market is perfectly competitive, but in all other markets wastes of competition occur that wouldn’t need to happen (but probably) would in a natural monopoly such as a water company.
2.) The Retail Price Maintenance scheme had a direct effect on the demand and supply at a basic level in whichever markets it was enforced. One good example of a recently abandoned scheme was in the pharmaceuticals industry, many medicines of a non-prescription type were sold at a fixed rate e.g. paracetamol. The idea was to fix prices at such a rate that small independent chemists were able to survive, as it was illegal for the supermarkets to undercut the prices that the chemists were offering, as they were unable to benefit from economies of scale. The benefit of keeping Chemists in business that they offer personal advice and service that the supermarkets do not offer. This is not accounted for when consumers purchase medicine, the rpm was able to rectify this to a certain extent.
However the retail price maintenance mechanism has been abolished. The result in the case pharmaceuticals will be one that is relatively simple. Previous to the withdrawal the markets demand and supply graph was as such:
The graph shows that the current market position is restricting supply marginally and causing consumer waste. Once the RPM is removed then the market would revert back to the normal equilibrium position. However game theory may become essential as some firms, benefiting from buying power, may wish to lower prices to a level below equilibrium, and create a price war. A price war usually ends up with the smallest playing either going bankrupt or being bought out by a bigger player, either way creating a monopoly or oligopoly positions for the top firms.
With this example it is likely that the removal of the rpm will create lower prices and a small increase in consumption. However in an opposite scenario the removal of a RPM may have a different effect.
If a good has positive externalities such as university education, if left up to market forces it will be under consumed. Currently students only contribute £1,000 per year, where top universities such as Oxford wish to charge £20,000 per year. Here the Government has a RPM of £1000 and so it is consumed more than it would be than if tuition fees were £20,000 per year. We can see this in the graph below:
If the Government did not force the price to be lower then consumption would be reduced. The maintenance of such a mechanism is justified by the benefits to society that occur, that far outweigh any benefit. If the market was left to market forces, this would be to the detriment of society.
To conclude the when the retail price mechanism is removed there are changed to the markets price and consumption as it reverts back to the natural equilibrium, whether it be increased, or reduced consumption. However the removal of the RPM may have a whole range of social impacts that cannot be taken into account in a graph, such as a loss of advice and service quality with chemists, or fewer highly educated individuals in the case of universities.
