Monopoly. The following is going to discuss that monopoly is always against the public interest. To compare with perfect competition (another extreme form), the potential strengths and weaknesses of monopoly will be presented and examine which one can be

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Public interest is virtual another way to describe consumers’ wants, namely, maximising utility at the lowest price and the best quality. This concept has been contributed by Jeremy Bentham and J.S. Mill referred to “the greatest happiness for the greatest number”. (Handout, 2004, the ‘public interest’) In the market structure, one extreme form, imperfect competition is known as monopoly. The following is going to discuss that monopoly is always against the public interest. To compare with perfect competition (another extreme form), the potential strengths and weaknesses of monopoly will be presented and examine which one can be best to serve the public interest.

First of all, a monopoly literally means a sole seller, it occurs when there is only one firm in the whole industry. But in practice, it is difficult to exist. Thus more than 25% market share in the industry is identified as monopoly by its legal definition. Meanwhile monopoly also exists in a certain region, e.g. a local water company dominates the local market as ‘natural monopoly’ which means that market may be too small to support more than one firm to achieve significant economies of scale. A major characteristic of monopoly is high barriers to entry. For example, a specific legal barrier protects monopoly in term of patent on essential processes, copyright and licenses and so on. At the same time, monopoly protects itself from competing through a variety of ways such as achieving great economies of scale, merger and takeover other companies and aggressive tactics etc. In case like this, the monopoly strongly erects the barriers to stop other rivals from entering or drive existing rivals out of the business. Furthermore some industries are considered to be unsuitable for competition, e.g. gas, electricity. Competition would lead to duplication of resources.

Unlike monopoly, perfect competition, another extreme form, is normally defined through a number of assumptions or conditions: a lager number of sellers and buyers are price taker, they have to accept market determined price. Sellers can sell as much as they wish at the prevailing price and buyers only buy a small proportion of the total goods available thus can not influence market price; Freedom entry, namely, no barriers to restrict; Homogeneous products means all goods are identical and can not be distinguished; Perfect knowledge makes sure the consumers and producers are full aware of prices, costs, and quantity of products. The determination of price, output and profit in the short run under perfect competition can be shown in figure1.

The firm faces a horizontal demand curve at price of Pe where it can sell all it produced but nothing at a price above Pe. The firm will produce output at MC=MR where is known as profit-maximising rule. “If the additional cost of producing an extra unit is less than the additional revenue gained by selling that unit, there will be an increase in profit. Whereas if marginal cost of an additional unit is greater than marginal revenue, there will be a decrease in profit.” (Handout, 2004, the model of perfect competition) Thus profit will be maximised just at MC=MR. It involves the firm, under perfect competition, can obtain supernormal profit during the short-run. The profit has been illustrated by the shade area. However the monopoly, in the short-run, is only one firm in the industry, therefore the firm’s demand curve is also industry demand curve. Demand under monopoly tends to be less elastic at each price whereby monopolist can raise price and consumers have no substitute firm to choose within the industry. Firm is a price maker even though the increase of price will still lead to the reduction of quantity demand. It is illustrated by figure2:

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As the same as perfect competition, in the short-run monopolist can maximise the profit where MR=MC. The supernormal profit (abnormal profit) earned is shown by the shade area. As there are lots of barriers erected to prevent supernormal profit being competed away, so the profits will be maintain in the long-run. The firm will produce output where MR=long-run MC. To compare the two structures in the short-run that can be seen by figure3:

Assume that they both face the same demand curve and the same cost curve. The monopolist will produce Qm at ...

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