Need to explain monop mc=mr
But pc mc=p
However, this is only the case when considering the assumptions that cost curves for both the monopoly and perfect competition is the same. In reality, this is unlikely to be the case. We would expect that the monopoly would produce at economies of scale because this is a key advantage for them. They have the chance to benefit from it, which can result in the of monopoly being reduced, so that in fact it is preferable to competition. We would expect that the cost curves for both monopoly and perfect competition would be different. We would expect the monopoly cost curve to be lower. Therefore, if the cost curve for monopoly is lower, then the monopoly can produce cost savings to set against the dead-weight welfare loss. This allows higher consumer surplus than competition. Due to the lower cost curve, the output would be higher and the price would be low; this is beneficial for the consumers. Shown in dia below
From an economic point of view, there are many reasons that monopoly power is considered negative. An important reason is efficiency loss. We expect all firms, competitors or not, to minimise costs of production. If it doesn’t minimise costs, then it will go out of business in the long run, due to the new entrants attracted by the abnormal profit. Therefore, the increase in competition causes the abnormal profit to be competed away. However, this does not apply to monopolies because there is no competition in the market structure. This causes the monopolies not to be efficient. This is because they have no incentive to become efficient, as they are complacent. The fact that costs are not minimised by effective management is called x-efficient. However, in a natural monopoly, where the economies of scale are really high, they could be efficient due to the shape of the long run average cost curve. This could allow them to be productively efficient.
Another factor, which would consider that monopoly power, is negative. From an economic view, is the resource costs involved. The cost of maintaining a monopoly in its position is really high, which can in most ways be seen as the misusing of scarce resources. A monopoly, to get to its position, will require resources, for example, barriers to entry. This use of resources allows monopolies to be in their position and can be seen as misused because resources are being used and no extra output is being produces. However, it is likely that vast amounts of resources will be used to get them into their position. Also, due to the difficulty of obtaining licences, the only other legal way is the heavy use of resources. Discuss?
From an economic viewpoint there is one factor that would consider monopoly power to be negative is the predatory pricing. A monopoly is able to decrease their prices to such an extent that it is impossible for new firms to enter the industry. This is because it is not possible for new entrants to maintain cost, charging a low price as well as producing effective amounts of abnormal profit as the monopoly. This decreases the level of competition in the industry. However, although this may be the case, it is beneficial for the consumers as they benefit from the low prices charged.
Although there are many factors, which assume and agree with the fact that monopoly power is negative, there are also positive, beneficial aspects of monopoly power.
From the consumers’ view, one factor, which is beneficial of monopolies, is the predatory pricing. This is because the decreasing of prices to decrease the potential competition by any new entrants into the industry is beneficial for the consumers. However, it is possible that this is a short-term policy to decrease competition and then raise price in the long run.
Another factor, which is beneficial to the consumer of monopoly power, is the existence of natural monopolies. A natural monopoly is defined in economics as an industry where the fixed cost of the capital goods is so high that it is not profitable for a second firm to enter and compete. There is a "natural" reason for this industry being a monopoly, namely that the economies of scale require one, rather than several, firms. Small-scale ownership would be less efficient. As well as being productively efficient, natural monopolies have low prices, which is favourable to consumers. However, although this could be the case, it is unlikely because there are not many natural monopolies that exist.
From an economic point of view, monopoly power could be considered to be beneficial because they are able to participate in innovation. Long-term abnormal profit can give monopolies the incentive to invest more heavily in research and development. This investment could cause lower prices, which the monopoly can use to give a return on the initial capital costs. However, under certain circumstances this may not be the case because there is no certainty that the monopolist will innovate. The security of very limited competition means there are no immediate market pressures on the monopolists to reduce costs and innovate at all. Also, monopolies may not innovate because it would mean that their costs would be high in the short-run. Develop the however more
Overall, there are many negative impacts of monopoly power; however, there are also benefits, both to the consumer and from an economic view. We can definitely reach the conclusion that monopoly power is not always negative as there are advantages. However, overall, the disadvantages do overpower the advantages of monopoly power when considering the view economically or form the consumers’ view
