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Is the existence of a monopoly against The public interest?

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Introduction

Intro to Economic Analysis essay 2 Spring Term Alastair Snook Is the existence of a monopoly against The public interest? Using diagrams explain the conditions under which this might be true and also the conditions under which this may not be true. A monopoly is defined as the sole supplier of a good or service with no close substitutes in a given price range. A pure monopoly will therefore have a 100% market share i.e. the firm is the industry. They exist and can only remain as monopolies if there are high barriers to entry to the industry. In the case of a natural monopoly, economies of scale are so large that any new entrant would find it impossible to match the costs and prices of the established firm in the industry. Other barriers to entry include legal barriers such as patents, natural cost advantages such as ownership of all key sites in the industry, marketing barriers such as advertising, and restrictive practises designed to force any competition to leave the market. ...read more.

Middle

This comparison is shown below: Monopolistic firms are also less likely to produce on their AC curve due to 'X-inefficiency'. This is where a company becomes too large to organise efficiently, meaning organisational slack. It is basically wastefulness and because monopolies are complacent they don't have the pressure to cut costs so there will be no incentive to be efficient. Another argument against monopolies is the way there is allocative inefficiency. This is because monopolies create 'contrived scarcity' by limiting the supply of the good or service. Price is greater than MC, and some consumers are therefore unable to purchase the good at this price. Other arguments against monopolies include that lack of competition will prevent a monopoly from innovating or developing new products. Also that monopolies can abuse their market position by charging different customers different prices for the same good or service in order to increase their supernormal profits. This is also known as price discrimination. ...read more.

Conclusion

It can be seen that monopolies can produce stability and variety. Variety produced by firms in amore competitive market can sometimes be seen as a wasteful duplication of resources (i.e. do we really need 37 varieties of toilet to choose from?). Prices may be more stable in a monopoly as well. Governments need to make a decision concerning its attitudes to large firms in the economy. Should it split them up or promote such firms. Competition policy therefore reflects the attitude towards monopoly. At the moment the UK has a pragmatic approach where monopoly can be good or bad. I t uses the monopolies and mergers commission to use a case-by-case approach. Competition policy is a government policy to influence the degree of competition in individual markets within the economy. Governments can also attempt to correct market failure caused by monopolies by taxing supernormal profit away, set maximum price levels, subsidise production, nationalise the industry, break it up or reduce entry barriers. In the past economists have generally come out against monopolies and in favour of competitive markets. However, this is clearly not conclusive as monopolies have many potential advantages and disadvantages. ...read more.

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Response to the question

This essay engages superbly with the task, exploring various arguments favouring monopolies and those criticising them. I would note that if this task had said "Is the existence of a monopoly always against the public interest?" with the keyword always, ...

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Response to the question

This essay engages superbly with the task, exploring various arguments favouring monopolies and those criticising them. I would note that if this task had said "Is the existence of a monopoly always against the public interest?" with the keyword always, there would've needed to be much more evaluation here. However, as it stands, the essay gets away with a poor judgement saying it is inconclusive. I would've wanted to see a stronger justified judgement, drawing upon the significances of each advantage and disadvantage, showing the ability to evaluate evidence rather than sitting on the fence.

Level of analysis

The analysis in this essay is strong, however with the diagrams not showing up, I can only assume they were right! The conditions of a monopoly are well explained, and this allows a good foundation for an argument. The concept of profit maximisation is often a difficult one, but this essay is a good example of a simple explanation. If I were doing this essay, I would take the time to quickly define marginal cost and marginal revenue to display my understanding further. Similarly, this essay has mentioned supernormal profits without defining normal profits. It is key to mention that normal profits include the cost of the entrepreneur staying in the industry, so a normal profit is when total costs equal total revenues. The diagrams are well explained, and it was good to see a discussion of efficiency as this focuses on the public interest. I would've liked to have seen the benefit of efficiency to the public being explained more explicitly, however! What I particularly like about this essay is the awareness of many arguments, including names such as Schumpter. This shows that it isn't as clear cut, and what this essay does strongly is explain these arguments and evaluates their significance!

Quality of writing

This essay is structured well, having a clear introduction and conclusion. This allows for a focused argument throughout, always pointing the argument towards the public interest. I have read many similar essays where they simply discuss the advantages and disadvantages of monopolies, and this may get the analysis marks, but it does not show the ability to evaluate and directly answer the question. The spelling, punctuation and grammar in this essay are strong. The style is excellent using phrases such as "without monopolies you could argue" and "therefore on this evidence" making a convincing argument. This essay should be admired!


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Reviewed by groat 28/02/2012

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