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This essay compares examples of real world economics found in three studies written in 1996 with examples of commonly taught 'textbook' economics to come to the conclusion that some monopolies have displayed lower prices, an

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Introduction

Introduction. Throughout economics, it is a time honoured assumption that monopolies are theoretically less efficient than competitive counterparts. I will show, through the comparison of examples of theory and through examples of real world economic conditions how it is that in some particular cases monopoly can be shown to be more efficient than competitive behaviour. This essay compares examples of real world economics found in three studies written in 1996 with examples of commonly taught 'textbook' economics to come to the conclusion that some monopolies have displayed lower prices, an absence of adverse selection, and other beneficial characteristics than competitive firms could possibly do, given that these firms operate in the same type of markets. Background: competition and price. To begin with, a definition of 'competition' is required in order to approach the answer from the correct angle. Competition: The situation when anybody who wants to buy or sell has a choice of possible suppliers or customers. With perfect competition there are so many suppliers and customers, with such good contact between them, that all traders ignore the effects of their own supplies or purchases on the market, and act as price-takers, able to buy or sell any quantity at a price which they [alone] cannot influence. Such intense competition is rather unusual in real life. The more usual condition is monopolistic or imperfect competition, with a limited number of buyers or sellers. In this case buyers or, more usually, sellers realize that the amount they can trade is affected by the price they offer. ...read more.

Middle

and partially as a competitive market (in other areas). The main arguments that von Ungern-Sternberg has are that the state monopolies charged lower 'premia' (essentially prices) for similar products to the competitive companies' products. His reasons here are that the state run monopolies do not need to spend as much money on advertising and administration as the competitively run companies. The conclusion is that the state monopolies 'outperform'12 the private sector firms. von Ungern-Sternberg's paper, whilst suggesting that "the state run monopolies are considerably cheaper than the private insurance companies"13, also shows that there is a lack of choice for the consumer. Whilst there are overall lower premia on the state side, there also exists a lack of choice due to the state companies being "single product companies".14 This lack of choice is not necessarily a bad thing. In the paper, von Ungern-Sternberg shows how less competition may benefit consumers through the removal of all competition in order to provide these low price levels. Where innovation is concerned, we should be aware that of all markets, housing insurance markets have a level of innovation that is surprisingly low. So low that we can call such markets "static markets" - and this is apparent from over the past 100 years.15 Lastly, what would letting the private companies compete against the state run monopolies mean for the consumer? Firstly, this would only work in a 'situation of complete information'16 As we have seen, it would mean a raising of premia prices and, due to the static situation of insurance markets it would not mean any increase in the quality or range of products available. ...read more.

Conclusion

Overall then, we have shown that competition is not necessarily beneficial for the consumers. Bibliography. Begg, D., Fischer, S., & Dornbusch, R., Economics, (British Edit.), McGraw-Hill, Maidenhead, England (UK), 1984 Frank, R., Microeconomics and Behaviour, (International Edit.), McGraw-Hill, New York (USA), 2003. Frank, R., and Bernanke, B., Principles of Economics, (Second Edit.), McGraw-Hill, New York (USA), 2004 Frech III, H.E., & J.C. Samprane, Jr., 1980, "The welfare loss of excess non-price competition: The case of property-liability insurance regulation." The Journal of Law and Economics, vol.23, pp.429-440. Finsinger, J., The performance of property-liability insurance firms under the German regulatory system, Zeitschrift fur die gesamte Staatswirtschaft, The Journal of Institutional and Theoretical Economics, vol. 139, pp.473-489, 1983. Varian, H., Intermediate Microeconomics, A Modern Approach, Fifth Edit., W.W. Norton & Co., London, New York, 1999. Online Bibliography. Epple, K., & Sch�fer, R., The transition from monopoly to competition: The case of housing insurance in Baden-Wtirttemberg, European Economic Review, pp.1123-1131, 1996. http://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6V64-3VW8NC3-29-1&_cdi=5804&_user=1026342&_orig=browse&_coverDate=04%2F30%2F1996&_sk=999599996&view=c&wchp=dGLbVlb-zSkzV&md5=3186e7326828b554e15af278a1f1c569&ie=/sdarticle.pdf Saturday, November 26, 2005 Peltzman, S., The Effects of Automobile Safety Regulation, The Journal of Political Economy, Vol. 83, No. 4., 1975, pp. 677-726. http://links.jstor.org/sici?sici=0022-3808%28197508%2983%3A4%3C677%3ATEOASR%3E2.0.CO%3B2-U, Saturday, November 26, 2005 Felder, S., Fire insurance in Germany: A comparison of price-performance between state monopolies and competitive regions, European Economic Review, vol.40, pp.1133-1141, 1996. http://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6V64-3VW8NC3-2B-1&_cdi=5804&_user=1026342&_orig=browse&_coverDate=04%2F30%2F1996&_sk=999599996&view=c&wchp=dGLbVlb-zSkzV&md5=c7912380824fdba223cb4fdc0029d8ad&ie=/sdarticle.pdf Saturday, November 26, 2005 von Ungern-Sternberg, T., The limits of competition: Housing insurance in Switzerland, European Economic Review, vol.40, pp.1111-21, 1996. http://www.sciencedirect.com/science?_ob=MImg&_imagekey=B6V64-3VW8NC3-28-1&_cdi=5804&_user=1026342&_orig=browse&_coverDate=04%2F30%2F1996&_sk=999599996&view=c&wchp=dGLbVlb-zSkzV&md5=34dc6c8149c1da83eb7d4edfd25243ae&ie=/sdarticle.pdf Saturday, November 26, 2005 John Black, "Competition", A Dictionary of Economics, Oxford University Press, 2002, Oxford Reference Online, Oxford University Press, http://www.oxfordreference.com/views/ENTRY.html?subview=Main&entry=t19.e486 16 November 2005 The Wall Street Journal, December 23, 1974, in Schenk, R., Insurance, Saint Joseph's College, Indiana, http://ingrimayne.saintjoe.edu/econ/RiskExclusion/Risk. ...read more.

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