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The ways in which monopolist can develop are from successful internal growth of a business or through mergers. The different types of mergers are horizontal and vertical integration

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Introduction

Monopoly The definition of monopoly in theory is when one firm produces the whole output of a given industry. These are mostly natural monopolies e.g.: Thames water. The definition implies that other firms are not able to enter the market because of barriers to entry. These normally take the form of some cost advantages which are available to the monopolist, but which are not available to newcomers. The most likely reason for this is the existence of economies of scale which require a producer to obtain large sales in order to reduce costs to the minimum possible. The other definition of monopoly is defined as being where one firm has 25% share of the total market output e.g.: Tesco. Characteristics of a monopoly are: * No Competition, as they are the only supplier of a good or service * Abnormal Profits, because monopolies are price makers so are able to charge any price that they want * Barriers to entry, large barriers to entry preventing other firms entering the market * Imperfect information * Non-homogenous products, produce variety of goods so that it is difficult for other firms to copy them The ways in which monopolist can develop are from successful internal growth of a business or through mergers. ...read more.

Middle

They can influence the goods and services that consumers want through the use of advertising. Monopolies are price makers so are able to charge any price that they want. Main objective of the firm is to make abnormal profit and increase their market share which leads to the problems with monopolies being inefficient both allocatively and productively. Comparing monopoly to perfect competition, the firm in perfect competition would be at the lowest point on its average cost curve, while in monopoly, in order to increase price, the firm will reduce output. This means that the firm sells the last unit produced at a price which exceeds the actual cost of producing that unit. So the economy does not achieve allocative efficiency, since the price does not equal marginal cost. If the industry is taken over by a monopolist the profit-maximising point (MC=MR) is at price Pmon and output Q2. The monopolist is able to charge a higher price restrict total output and thereby reduce economic welfare. The rise in price to Pmon reduces consumer surplus. Some of this reduction in consumer welfare is a pure transfer to the producer through higher profits, but some of the loss is not reassigned to any other economic agent. ...read more.

Conclusion

The theory of contestable market suggests that even if there is only one seller, the seller may be forced to act as if there were many more. Sellers have the incentive to act in this way because it will increase profits. A perfectly contestable market is one in which entry and exit is absolutely costless. In such a market, competitive pressures supplied by the threat of entry as well as by the pressure of actually current rivals, can prevent monopoly behaviour of higher prices and restricted output. Everyone has a problem with monopolies from the economist to consumers for their own reasons. Economist have problems with monopolist because of the deadweight loss, whereas the consumer have problems because they feel that monopolies take advantage of their power by charging consumer higher prices. According to the theory of contestable markets there is a way of dealing with monopolies without the intervention of the government. This to me is the best solution as it allows the free market to run its course and consumers are not taken advantage of. However I do see the drawback to this solution as it does not always come about as many monopolies in the UK and worldwide are far too big to fear competition. ?? ?? ?? ?? Haroon Shabbir Monopoly Essay 1 ...read more.

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