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

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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.  Firms wishing to diversify their range of products or to integrate horizontally into another market would be looking for companies making abnormal profits.  If they had the sufficient financial capabilities to invest they would try and compete away the existing abnormal profits.  An example of this is when Virgin entered the satellite television market to compete with Sky, whilst being a leading passenger flight carrier across the transatlantic.  Virgin was a dominant player in an oligopolistic market until air transport rules changed to allow new airlines to obtain landing slots at popular airports; after which Virgin have diversified into the mobile, media and train market.

High barriers to entry are designed to block potential entrants from entering a market profitably.  They seek to protect the power of existing firms and maintaining the abnormal profits.  George Stigler, 1982 winner of the Nobel Prize for Economics, defined a barrier to entry as
“a cost of producing that must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.”  Some of these barriers occur naturally, whereas others are strengthened by monopolies in order to maintain or enhance their market position.

In a competitive industry, a single price is set to all of its consumers unless different price targeting strategies are employed.  Yet, monopolists not only have the ability to charge a higher price than competitive firms supplying the same product, but they also have the ability to charge significantly different prices to different customers for the same product.  By operating under such policies a monopolist can maximise its profits by charging a separate profit-maximising price for each type or group of customers, i.e. those on different income levels, professions, geographic locations or education levels.  A prime example of this is how Transport for London subsidises local transport and buses for those in full time education and those who have an oyster card.  This price discrimination arises with respect to a person’s ability and willingness to pay.        

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Nonetheless, the ability to successfully engage in price discrimination depends on the degree of separation of markets, which measures how difficult and expensive it is for buyers to trade a product in between themselves.  If a product is easy for buyers to resell, then buyers would have an incentive to buy in bulk and resell, opening up a new market with a price lower than what the monopolist was offering.  One way of attempting to stop this new market from forming would be by cutting prices, so that there would be no incentive to undermine the price set by the ...

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