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What are the implications for economic welfare of a market structure changing from perfect competition to a monopoly charging a single price? To what extent would you modify your conclusion if the monopoly practiced price discrimination?

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Introduction

What are the implications for economic welfare of a market structure changing from perfect competition to a monopoly charging a single price? To what extent would you modify your conclusion if the monopoly practiced price discrimination? Market structure deals with issues that how many buyers and sellers are in the market, whether they make identical or differentiated products, and whether firms can readily enter or exit the market. Market structure is a description of the degree of competition in a market. There are four types of market structure, perfect competition, monopolistic competition, oligopoly and monopoly. The extremes of market structures are perfect competition on the one hand, and monopoly on the other. The different structure of a market determines their efficiency in the use of scarce resources and has different implications for economic welfare. In this essay, I will explain and discuss the implications of welfare when market structure changing from perfect competition to monopoly. In perfectly competitive markets, every firm is a price taker and has no influence on the market price. There are many sellers with identical products and no barriers to entry or exit. To be truly perfectly competitive, all market participants should have complete information for making optimal choices. ...read more.

Middle

The graph below demonstrates the long-run equilibrium in a perfectly competitive market. From the graph, we observe that price equals ATC, so the profit is zero. The firm is producing the quantity where ATC is at its minimum point. All firms wish to minimize the cost of producing a given quantity because reducing costs increase profits. If the firm did not choose to minimize the cost of producing its output by producing on its cost curves, ATC would increase and profit would be less than zero. So all firms under perfect competition are forced to produce at the quantity where its ATC is at the minimum point. But under monopoly, there is a productive inefficiency. The graph above shows the long-run equilibrium for a monopoly. Price is greater than ATC so the profit is greater than or equal to zero. The firm is not producing the quantity where ATC is at its minimum point. Therefore, the monopoly results in productive inefficiency. On the other hand, in the long-run, monopoly has the incentive to innovation. Obviously, the innovation reduces TC and result in higher profits. The additional profit is the incentive to innovate to the firm. In perfect competition, the long-run equilibrium is where profit equals zero. ...read more.

Conclusion

Producer surplus equals total economic welfare in perfect competition. Deadweight loss with perfect price discrimination is eliminated. So perfect price discrimination achieves efficiency. "The more perfectly the monopoly can price discriminate, the closer its output gets to the competitive output and the more efficient is the outcome." (Economics, fifth edition, Michael P) But in perfect competition the economic welfare is the sum of producer surplus and consumer surplus while the producer gets it all under perfect price discrimination. In conclusion, perfect competition results in allocative and productive efficiency. When market structure changing from perfect competition to monopoly charging a single price, there is a deadweight loss to the society. The resources are not used efficiently. Meanwhile, there is redistribution from consumers to the monopoly producer. Moreover, the monopoly leads productive inefficiency because of lack of pressure. But on the other hand, monopoly has the incentive to innovation. It may benefit from the economies of scale. From these standpoints, monopoly is more efficient than we thought. If monopoly practices price discrimination, the economic welfare will increase up to the total surplus in the perfect competition. The price discrimination increases the efficiency of monopoly. "The more perfectly the monopoly can price discriminate, the closer its output gets to the competitive output and the more efficient is the outcome." (Economics, fifth edition, Michael P) However, there is a transfer of surplus from consumer to producer. ...read more.

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