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Outline the economic argument against monopoly. Is there anything which can be said in favour of firms which have monopoly power?

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Introduction

EC 103 Principles of Economics: Microeconomics: Outline the economic argument against monopoly. Is there anything which can be said in favour of firms which have monopoly power? EC 103 Principles of Economics: Outline the economic argument against monopoly. Is there anything which can be said in favour of firms which have monopoly power? A Monopoly exists where only one seller or potential seller is in a particular industry, and the monopolist set's the price to a preferred level of profit. There are no substitutes for the product, which means if the consumer requires or needs to the product, they have to purchase the product off the monopolist firm. There is a very high efficient scale, with barriers of entry into the industry, which means that entry cannot be achieved into the market by small-scale production. The Demand curve for the firm is the industry's demand curve, meaning that all demand is controlled by the firm. A monopoly is the opposite of perfect competition, where there are many buyers and sellers and where there is free entry to the market. Unlike under perfect competition, a monopolies marginal revenue is always below actual revenue and it faces the demand curve directly. It could be said that a monopoly practices unfair competition, due to the extreme high barriers it sets for competition to enter the industry. Some monopolies are state owned, and are not necessarily run for profit. ...read more.

Middle

As the monopolistic firm is the only one in the industry, it can decide what price to set and then choose the maximised profit margin. Therefore a monopolist may choose to produce only a certain amounts of goods to sell at the chosen price. This represents a welfare loss since the society desires to have more of the good produced to increase its net social benefit but the monopoly restricts the output, so not all consumers can have the product. Some economies have a patent system. Inventors of new processes get a temporary monopoly for a fixed period. Therefore customers are only subject to a monopoly for a fixed amount of time then barriers to entry are lowered so that competition and thus price reduction occur to give consumers more value for money. Regulators such as the Monopoly and Mergers commission maybe used to prevent mergers by firms to create monopolies, which would arguably be against public interest. The existence of monopolies and the high profit margins that they obtain encourages those from outside the industry to destroy monopolies by trying to "leapfrog" the technology used in the industry. This is called the process of creative destruction. For example, the monopoly of canals was destroyed by invention of railways. This theory would tend to suggest monopolies are good because they create more inventors to try to improve technology, but this would still arise in the existence of another monopoly for the new technology and restrict further competition. ...read more.

Conclusion

Monopolies can also discriminate towards the income of the consumer. An example of income discrimination would be that of a hairdresser. They can charge lower prices for OAP's, and higher prices for business customers. Monopolies however do not all work in the same way. It depends on what type of industry the monopoly is over. If the product is a necessity for example, people will have to buy the product regardless of how much it costs. However, if the monopolist has a monopoly over a luxury item, people can afford to go without the item and therefore they don't have as much monopoly power taking the strain off consumers. So-called state monopolies can be better for the economy in certain industries. Economics of scale are so great, such as water, that the monopoly can be termed "natural". Whereas most monopolies have the theory of charging high prices and earning supernormal profits, natural monopolies work quite differently. As natural monopolies have quite substantial economies of scale, the monopoly price they set could be lower and therefore output will be higher than that of competition. In this situation, a monopoly would be preferred rather than a competitive industry, as competition in large sectors, such as railways and water industries, would lead to duplication of investment, which would be wasteful for resources. In conclusion, it can be said that monopoly power can have its good and bad points on the economy. Depending in which industry the monopoly produces and the type of economy it operates in will depend on what effects it has. ...read more.

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