• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

To what extent do you consider monopolies to be in the public interest?

Extracts from this document...


To what extent do you consider monopolies to be in the public interest? A monopoly refers to a market in which there is a single seller of a good or service for which there are no close substitutes. The demand curve for the firm is the same as the demand curve for the market. Monopolies will profit maximise in the short and long run, however they may choose other pricing strategies to maintain market share or profit levels in the long run. In comparison to a perfectly competitive market, a monopoly makes abnormal profits in the long run due to the high inelasticity of the its demand curve and low average costs. A perfectly competitive market on the other hand makes normal profits in the long as abnormal profits are competed away by new firms entering the market; thus meaning that perfectly competitive markets have high levels of output with lower prices for consumers. The deadweight welfare loss symbolised by the green triangle shows the loss of welfare to both consumers and producers. The red rectangle shows the abnormal profit for the monopolist, meaning that monopolies can charge consumers high prices for goods as there aren't any viable substitutes in the market. Consumers are quite insensitive to the price because they can either have the product or not and they cannot shop around elsewhere, therefore the monopolist has great control over the consumer and price. However, a monopoly will find it hard to sustain such levels of abnormal profit in the long run simply because profits are a signal to other competitors that the current market being monopolised is one worth investing in. ...read more.


Although monopolies have the means to invest in research and development, they might opt out of pushing the boundaries of technology and restrict innovation. One example is when Microsoft, who control 97% of the home operating systems market, buy out new ideas and shelf them rather than producing them. They essentially dictate the progression in technology for their market as they decide which ideas are put forward and made or which ones are shelved. Nevertheless restricted innovation is better than no technological progression because in a perfectly competitive market firms would be making a normal profit therefore they wouldn't have the means to invest in research and development, thus leaving the market stagnant and unable to move forward. At least with a monopoly, new products are consistently being made to satisfy demand. A firm may have substantial domestic monopoly power but faces intensive competition from overseas producers, which limits their market power and helps keep prices down for consumers. Steel producer, Corus Steel which was taken over by Indian group Tata Steel, is the biggest in the UK, however in terms of the global market, its net income in 2005 was a mere 13.4% of Mittal Steel's net income. Mittal Steel had sufficient funding to gain from inorganic economies of scale by merging with Arcelor to become Arcelor Mittal, the world's largest steel producer. Therefore a monopoly has to be taken in terms of the global market rather than its relative position in domestic market. ...read more.


because poor processes and systems meant that customers received poor service. Therefore to ensure that that they aren't fined, monopolists vary their price strategies for different products, by perhaps using a revenue maximising strategy in which they produce at the level of output at which marginal revenue equals zero. Alternatively, they could sales maximise where average cost equals average revenue. Both these strategies would lead to a fall in the price for the consumer. The essential argument against monopolists is that they are free to charge a high price to consumers and thus make large abnormal profits. Yet, with strict regulation agencies set up, any company can be fined up to 10% of their revenue thus meaning they would be eager to cut prices to keep their consumers satisfied. Even though there aren't any other incumbents in the market, monopolists behave as if they were in a competitively perfect market, investing money into research and development to further the progress of their products. Given that many monopolies do not have a guaranteed run of abnormal profits they would always have to think of new ways to ensure that other competitors cannot join the market. They are the ones in turn that make the major advancements in science and technology, or in fact can buy out good ideas to guarantee that an innovative idea has enough financial backing to be produced. As said by Milton Friedman, "markets work, governments don't". By leaving a monopoly market to grow by itself means that the consumer will benefit largely in the long run even if they have to pay a slightly higher price in the short run. ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. Marked by a teacher

    Supermarkets in UK - An oligopily

    5 star(s)

    Tesco has been heavily criticized by the media in both the UK and Ireland among other places over its comparatively more ruthless and harsh business tactics compared to its rivals, all of whom stand charged, like Tesco, of bullying farmers to lower their prices to unsustainable levels.

  2. What are the implications for economic welfare of a market structure changing from perfect ...

    In this situation, the deadweight loss of monopoly is increased which includes original deadweight loss plus the lost producer surplus. From the standpoint of society, the additional costs of monopoly are wasteful because rent seeking uses resources that do not produce any wealth.

  1. "Discuss and evaluate the proposition that perfect competition is a more efficient market structure ...

    Third, monopoly doesn't encourage efficiency in production. This implies that there could be an organizational slack characterized by costs that are higher than necessary. This is called X- Inefficiency, a term invented by economist Harvey Leibenstein5. Some economists do not agree with this point, arguing that X-Inefficiency is more a gain to the monopolist rather than a social cost.

  2. Evaluate the role played by barriers to entry in the long run

    That is P=MR=AR . What is long run and why is it different to short run? "The short run is a period of time in which one some variables change or economic processes work."

  1. what is economics

    water were to increase by 10%, demand would hardly fall - maybe by 1% * This would produce an estimate of PED to be -0.1 * This is price inelastic or price insensitive, meaning that the quantity demanded is not particularly responsive to a change in its price * If

  2. Assess the strengths and weaknesses of the Dutch and English East india Companies as ...

    Rivals that came along the way were often frustrated and eliminated without much effort. The monopolies brought the Companies enormous profits. In addition, the development of shipping equipment and later the industrial Revolution back in Europe gave the Companies technological advantage over their European and Asian counterparts, enabling them to maintain monopoly and control territory.

  1. 'Although corporate pricing decisions are influenced by many different factors, fundamentally prices will reflect ...

    A managed house is a pub run by an employee of the brewer; a tied house is operated by a tenant who pays a rent to the brewer and earns a living from the profit generated by the pub. In both types of pub the brewer-owner is able to restrict the range of beers offered for sale.

  2. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    Natural cost advantages make one firm unique, and therefore will have more revenue. It might be a particular firm situated in an isolated area of town. Legal barriers are a way that governments play in barriers to entry. This is a barrier that a government enforces, in the way it may allow privileges to certain companies rather than others.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work