Monopoly Market Structure - Essay Example

In the operating system of monopoly there is usually one firm that provides the majority of the products and services sold and there may be a handful of smaller firms that might have little or no impact on the large dominant firm Because of the lack of competition the firms in the monopoly makes super normal economic profit which attracts other firms to enter the market. However there are quite some barriers for the new entrants (Mike Moffatt). The technology may be such as to exhibit substantial economies of scale which require only a single plant if the economies are to be fully reaped.

For example in transport, electricity, and communications there are substantial economies which can be realized only at large scales of output. The size of the market may not allow the existence of more than a single large plant. In those conditions it is said that the market creates a natural monopoly and it is usually the government in such cases undertakes the production and distribution of the commodity or service so as to avoid the exploitation of the consumers. There is an ongoing debate about the advantages and disadvantages of monopoly.

"The consensus seems to be that the economic case for and against monopoly needs to be judged on a case by case basis- particularly when assessing the impact on economic welfare" (Tutor2u). (1) Economies of Scale and Low. Advantages and Disadvantages of MonopolyThere is an ongoing debate about the advantages and disadvantages of monopoly. "The consensus seems to be that the economic case for and against monopoly needs to be judged on a case by case basis- particularly when assessing the impact on economic welfare" (Tutor2u).

There are certain distinct benefits accruing out of monopoly. These are:(1) Economies of Scale and Lower Prices - Because the monopoly producers often provide the goods or services on a large scale the producer may be able to take advantage of the economies of scale leading to a reduction in the total cost of production. Although this may increase the profits of the monopolist sometimes the higher efficiency in production may be passed on to the consumer in the form of lower prices for the product or service.(2) Regulation of Monopoly - Since there is always the possibility of economic welfare loss arising from the exploitation of monopoly power there are governmental regulations which can control the annual price increases and can also introduce fresh competition in certain industries which is beneficial to the consumers.(3) Research and Development, and Innovation - There is the necessity for the large firms to remain competitive globally to earn supernormal profits.

Some part of the supernormal profits might be used to make research and development programmes which have the potential to bring new and innovative products and services into the market for the benefit of the consumers. (4) Price Discrimination - Some form or price discrimination being adopted by the monopolists may benefit the consumers.(5) Domestic