Monopolists Are Free from Competition - Essay Example

? here) (Your here) (Type of assignment e.g. Test assignment) dropping the assignment) Macro & Micro economics a. The monopolists are free from competition. They are the price setters and not price takers. The absence of competition allows the monopolists to increase the price at any time because there is no other outward source to react to their new price. For a producer operating in perfect competition, when he raises the price of his product, his competitors do not raise their prices. As the demand for the producer’s product shifts to the products of the competitors, the producer is forced to resort to the original price. A monopolist does not have to worry about any such retaliation due to imperfect competition. There are too many barriers of entry into a monopolistic market for new firms. The biggest barrier is that of economy. A monopolist is able to produce his product at a very low cost and it is not possible for the other producers to produce at such a low cost. The competitors are not able to invest in capital like the monopolist invests. The technology that is available to the monopolist is also not available to the competitors. Therefore, the monopolist lowers the price of his product at such a level at which other producers cannot survive. This way, the competitors are driven out of the competition. When this happens, the monopolist raises the price of his product at his desired level again. Another aspect of monopoly is the network effect. The product of the monopolist has no close substitutes. The new consumers also tend to use the monopolist’s product because it becomes a social norm and a fashion. This is why the demand for his product is always likely to increase. This aspect also serves as a barrier of entry for new firms and as another incentive for monopolist to raise price. Patents and copyrights provide legal protection to a monopolist from competitors. Generally, a monopolist earns supernormal profit which means that the marginal revenue is lower than the price. The demand curve for the monopolist’s product is relatively inelastic. This means that any change in price does not affect the demand for the product. Monopoly is one of the rare scenarios in which the demand for the product is relatively inelastic. Normally, the price goes up in this case because it is very easy for the monopolist. In a competitive market, it is very hard to raise the price of the product because the competitors do not follow the new price. The demand for the product in perfect competition is perfectly elastic and there is no demand if a single firm raises its price. There is no such case in monopoly. A monopolist has a great influence on the consumers. There are times when a monopolist has to face some retaliation from the consumers when he raises the price unreasonably. In order to deal with this situation, he uses his control on supply. He cuts the level of supply at his own will and it becomes hard for the consumers to get their hands on the monopolist’s product. When they do find the product, they are willing to pay the price asked by the monopolist. This way, the monopolist curbs the reaction of the public and earns real economic profit during the process. However, he does lose some of his customers in the process because the demand for his product is not perfectly elastic and some of the customers are no longer able to afford the product. His ability to control supply and affect the consumers is another barrier for his competitors. Another tactic for a monopolist to make high profit is price discrimination. He segregates the market into two parts. The consumers who need his product more or have an ability to pay more are charged high prices. The rest of the consumers are charged lower prices. Price discrimination works successfully and is profitable when the elasticity of demand of one market is different from that of the separated market. This way, the monopolist earns more profit from the market whose elasticity of demand is relatively inelastic by charging a higher price. It is also very important that the monopolist is able to prevent the resale of his product. Otherwise, price discrimination would not be fruitful for him. The given statement is true for the scenarios presented so far but it is not always true. A monopolist enjoys great market power and he is likely to make supernormal profits at the expense of the consumers. In order to protect the interest of the consumers, the Government steps in. It usually takes control of the monopoly itself and includes it in the public sector. In many countries, electric and water supply companies are owned by the Governments. It prevents the monopolist from price discrimination. The Government sets a reasonable price which is mostly identical to the marginal revenue. In such cases, the monopolist is prevented from making supernormal profits. A monopoly owned by the Government adds a legal barrier for the entry of new firms as the new firms are not legally allowed to compete with the Government. Therefore, a monopoly which is regulated by the Government is out of the scope of the given statement. b. Oligopoly is a type of market in which very few sellers dominate the market. These sellers are aware of each other as every decision made by any seller influences all the sellers in oligopoly. If a seller lowers his price, all the other sellers respond by lowering their prices to a similar level. It is because they do not want their market share be lost to the seller who initiated the change in price. Like a perfectly competitive market, there is no reaction if a seller raises his price. The demand for his product falls and shifts to the products of the other sellers. Therefore, the seller is forced to restore the original price level. In oligopoly, the seller who manages to keep his costs the lowest enjoys the highest profits. The problem for firms operating in oligopoly is that of raising prices. When the total cost for a particular seller goes up in oligopoly, it might become inevitable for him to raise his price. Mostly, it happens simultaneously for the major firms in oligopoly but they are forced to keep their prices down because the other sellers are not likely to follow. In the case of bus companies, they face an uncertainty as to what would be the correct fare because they do not know what the other bus companies would charge. Normally, bus companies have monopolies on specific routes but nationally, bus companies do operate in oligopoly. During the 1980s, there were more than 200 airline companies at both national and international level in US. The level of competition was intense among these companies at that time. With the passage of time, the number of operating companies shrunk considerably because of mergers, decertification and liquidation of companies. As the number of operating companies decreased, the market share of existing companies increased. The airline industry falls into the category of oligopolies. Entry of new airline companies is extremely difficult and costly because of the lack of terminal space at the airports. Also, the existing airline companies have a firmly established market share and it is extremely difficult for a new airline company to compete with them. The existing airline companies, however, have to face a difficult situation when they have to set prices because of the other airline companies which have an almost equal market share. Airlines in US have been pricing their service in an irrational way since the Airline Deregulation Act was passed in 1978. The fares were doubled at once and very few travelers were able to pay them. The customers for whom it is mandatory to travel have to pay the full fare. Discounted rates are mostly targeted at discretionary travelers e.g. people travelling for vacation. To discourage the mandatory travelers from using discounted fares, restrictions like nonrefundability, advance purchase requirements and Saturday night stay-over obligations are used. However, there are still many complications in setting prices due to the mutual dependence of airline companies. Many times, different airline companies attach importance on a similar route because it is the most profitable one. The competition among the few airline companies forces them to keep their prices at a level. It is very difficult for a company to outdo others by lowering its prices because it becomes hard to cover its costs. However, if an airline company, which normally puts importance on other routes, enters the competition of that route, it is easy for it to offer its services at a lower price because it just has to cover its marginal costs and it is well-equipped already. This causes a problem for other companies because they have to lower their prices too. Hence, it becomes difficult for them to cover their costs. Therefore, it is very difficult for airline companies to set prices because of their mutual dependence. There is an uncertainty created due to the unexpected behavior and reaction of other airline companies. A similar scenario can easily be applied to logistics business. Few businesses compete with each other on various routes. Their pricing depends on route, distance and weight but when the oligopolistic factor enters, pricing becomes complex. It becomes very hard to ascertain what other businesses charge for specific weight and distance for a specific route. A logistics business operating in an oligopoly has to consider the prices charged by other businesses. The other businesses have to become wary of this fact too. It ultimately results in an uncertainty as to what is the price that is on level with the other businesses and covers the variable costs. They also have to keep an eye on each other all the time so that they can tale reactionary measures in a timely manner. c. When GDP data are used to compare the 'level of well-being' in different countries, the following factors must be taken into account: 1. Population Levels The population levels of different countries are not the same. If two countries have similar amount of GDP and the population levels are different, it would not mean that the two countries have performed at a similar level. The country having lower population would be regarded as having performed better because it has fewer units of labor. The per capita income of this country would be higher because the similar amount of National Income would have to be distributes among fewer number of people when compared with the country having higher level of population. The ‘level of well-being’ would be higher in the country with lower population level. 2. The Distribution of Income The distribution of income is also very important because in some economies, the rich get richer and the poor get poorer. The GDP, in such economies, does not reflect the correct per capita income because the standards of living are different. Intelligent and talented people are able to earn more than the unfortunate ones. The distribution of income is unequal in many economies. Inequality in distribution of income means that the growth rate is slow. It indicates that only a few sectors are growing and the others are facing retardation or no growth at all. If the distribution of income is disregarded, the GDP would be a poor indicator of level of well-being. 3. The Amount of Production That Takes Place Outside Markets. GDP accounts for only those transactions which take place in markets. It does not account for other transactions and most of them are illegal. Black markets are out of the scope of GDP. Also, smuggling of goods i.e. illegal import and export goes undetected in measurement of GDP. There are also many other crimes that have a negative impact on economies. Such crimes force an expenditure on policing and alarms. Crimes can result in a windfall gain for the person who has committed a crime. For the victim, it is a windfall loss. Crimes may actually increase the GDP of a country. There are also legal transactions that are not accounted for in GDP. For instance, the services of a housewife for her own house are unpaid. She receives a non-pecuniary satisfaction from her services. Though her services are productive, these are not included in GDP. When she prepares food for husband and children, the value of this food is not concluded in the GDP. A daycare centre provides its services at a value which is included in GDP. But the value of a greater care by a mother for her child is not. A new company may offer its goods or services free of charge when it is looking to establish itself in the market. Such free goods and services may cost a fortune to these companies but these are not to be included in the GDP of the country. There are also many voluntary services offered by various individuals during a year. These services are productive but are never included in GDP. Therefore, GDP cannot indicate the level of well-being if these transactions are not accounted for. 4. The Length of the Average Work Week. The length of average work week can vary from one country to another. In some economies, a work week consists of 40 hours i.e. 8 hours per 1 working day. In some economies, a work week might consist of 50 hours or even more. There are countries in the East in which a working week consists of 6 days instead of 5. Therefore, in some economies, more work is done to achieve a similar level of GDP which shows their inefficiency. A developed country requires lesser number of working hours than an under-developed one. This is because of the availability of better technology and technical know-how. In under-developed countries, more units of labor are employed than capital. A work that can be done by one machine might take 10 units of labor. Therefore, more units of labor are employed and more hours are required to do the work that a developed economy can do in much less time. Therefore, GDP calculation has to take this factor into account to provide with a better comparison. 5. The Level of Environmental Pollution. There are many social costs that are needed to be paid when economic activities are being performed. One of the major social costs is the emission of greenhouse gases, GHG. A lot of carbon is emitted into the atmosphere when electricity is produced. GHG is significantly contributing to the climate change and acid rain. Also, when a smoker purchases a cigarette, this transaction is included in the GDP but when that cigarette is smoked, it contributes in pollution and there is no adjustment for this social cost in GDP. Also, the smoke of the cigarette is very harmful for the smoker and can cause lung cancer. Passive smokers may also be affected by this smoke. It has been observed that pollution occurs in those areas the most in which GDP is growing. As the GDP of such countries continues to grow, they may be able to devote some resources to curb pollution. For instance, seven of the ten most polluted cities are in China according to World Health Organization (Mankiw, 2011). China is a developing country and it might be able to allocate some of its resources to curb the GHG and climate change in the future. References Wensveen J. G and Alexander T. Wells. Air Transportation. New York: Ashgate Publishing, 2007. Print. Mankiw, N. Gregory. Principles of Macroeconomics. New York: Cengage Learning, 2011. Print. p 211. Melvin & Boyes, Microeconomics. New York: Houghton Mifflin, 2002. Print. p 267. Nicholson & Snyder. Intermediate Microeconomics. New York: McGraw Hill, 2007. Print. p 379. Samuelson, P. and W. Nordhaus: Microeconomics. New York: McGraw-Hill, 2001. Print. Read More