Monopoly and Monopoly Power in Microeconomics - Admission/Application Essay Example

? monopoly and monopoly power in microeconomics A market structure is defined as the situation where there are many firms in the market and they produce identical products. Some of the types of market structures are monopolistic competition, oligopoly, duopoly, monopoly, perfect competition and monopsony. The essay will talk about monopoly which is a form of market structure. It will also put emphasis on monopoly power. The impacts the monopoly power can have on the consumers and the impacts it can have on the operation of the markets will be the topic of discussion. Introduction The word “competitive” means ‘not monopolies’. A market structure that does not satisfy the assumptions of perfect competition is regarded as the market of imperfect competition. This type of market does not operate under the rules of perfect competition. The imperfect competitive market structure resembles the conditions of the realistic market where there is existence of monopolistic competitors as well as oligopolists. These competitors tend to dominate the conditions of the market. The number and size of the participating firms, the conditions of entry can be regarded as the elements of the structure of the market. In this type of market structure a firm has the ability to affect the prices. In spite of being close substitutes, the products can be differentiated and advertising and branding plays a major role in this type of market. A large number of sellers exist in the market. The market structure is characterized by freedom of entry and exit. Monopolistic competition along with oligopoly constitutes the structure of imperfect competition. Firms that are imperfectly competitive offer many products. The products are offered at administered prices. The price changes are costly and slower. The prime prediction of the theory of monopolistic competition is that firms will produce at the level where marginal cost equals marginal revenue in the short run. However in the long run, the firms will operate at zero profit levels and the demand curve will be tangential to the average total cost curve. Body A monopoly is said to exist when there is only supplier in the market. Thus monopoly is characterized by lack of competition. Size of the business is immaterial in characterizing monopolies. A small business unit also may have the monopoly power. When there is only one firm in the market it is quite unlikely that it would accept the market price. It will have the potential to recognize the influence it can have on the market and set the price accordingly. It will choose that level of output which will maximize the profits. One can view as the monopolist choosing the price and allowing the consumers to choose the quantity they wish to buy or the monopolist can limit the quantity and allow the consumers to decide the price they wish to pay. The first approach is probably more natural while the second approach is more convenient analytically. A certain business can take a particular share of the market through integration which is two types-horizontal and vertical. The former type indicates a situation when two businesses which are operating in the same industry collide to one at the same stage of production. The later form of integration refers to acquiring a business at different stages of production in the same industry (Causes of monopoly). A natural monopoly is said to exist when high initial costs is associated with the starting a business. In some cases it is most efficient for the production process to be concentrated on a single firm. Since it is efficient to continue with natural monopolies the governments or the authorities regulate the operative ones to enhance the welfare of the consumers. Absolute monopoly occurs when a single seller operates in the market and there are no close substitutes. A monopolist maximizes its profits by producing at the point where marginal revenue equals marginal cost. The monopolist can accrue maximum revenue at the point where marginal revenue is zero. Normal profit occurs at the point where average cost equals average revenue. In the monopoly market the seller acts as the price maker while the buyer is the price taker. The entire market demand curve is faced by the monopolist and profits persist both in the long and in the short run. The profits of the monopolist are not a social cost. It is just a transfer of surplus from the consumers to the producer (Central Washington University, 2003, 7-9). Barriers to entry can help to maintain the monopoly power. The barriers to entry includes economies of large scale production, predatory pricing, limit pricing, perpetual ownership of resources that are scarce, high set up costs, advertising, loyalty schemes and brand loyalty and contracts that are exclusive. In the monopoly market the choice of the basket of goods will very narrow from the consumers’ point of view. The consumers have no alternative but to buy the goods offered by the monopolist. The monopolist exploits their position by charging high prices for the goods. The monopolists limit the output entry into the market and thus create an artificial excess demand in the market which provides the opportunity to increase the price level. The above two costs of monopoly will lead to loss of consumers surplus. Consumer sovereignty is eroded away when the monopolist gains power over the consumers. Asymmetric information is also present in the market. The monopolist may have better knowledge than the consumer and they can use that to their own advantage. Due to lack of competition, the monopolist has no incentive to reduce the average costs to minimum and this result to productive inefficiency. It is not necessary for a monopolist to set price equal to the marginal cost. One of the examples of market failure is monopoly power. Market failure takes place when a sole or a group of firms has the potential to influence the price of the market. The monopolist has the power to set their own price. This leads to allocative inefficiency. In the market of monopoly, there is net welfare loss. The loss in community benefit is regarded as the welfare loss (Economics online). A net welfare loss can be defined as any welfare gains that are less than any loss in welfare which resulted from economic transaction or intervention of the government. The impact of the monopoly can be evaluated through welfare analysis. The monopoly market employs less people than the competitive market. As the level of output is lower in the market of monopoly, the level of employment is also lower. However there are some benefits to monopoly as well. The firm operating in the operating in the monopoly market can produce at low costs because of economies of scale and pass on the savings to the consumers. The savings accrued can also be used to increase the profits and so there is little incentive for this kind of behavior. The monopolists may involve themselves in new innovations once they are protected from competition. As there are barriers to entry, the firms may protect their innovations from copying. The monopolists have the potential to generate revenues from export for a national economy. It may be difficult to assess the existence of monopoly power. Many methodologies and sources are in practice that talks about the methods to determine the existence of monopoly power. But a simple method to judge the monopoly power cannot be applied due to information constraints. However in some instances the problem can be eased. The ability of the firm to influence the price will not be durable in cases where entry into the market is easy. It is regardless of the share of the firm in the market (Klotz, 2008, 10). Conclusion It becomes very difficult for new firms to enter into a market once the existing firm has gained a strong foothold. The resources cannot be diverted to the areas where it is needed as the monopolist will erect barriers for other firms. Market failure is one of the characteristics of the monopoly market. Monopolies are generally undesirable on the part of the consumers as it leads to price increase and they are more likely to be inefficient. But monopolies can emerge as the best outcome for some industries where there are substantial economies of scale. One needs to account for the barriers to entry while examining the dominance of a firm as well as in determining whether some kind of conduct from the part of the firm can deter entry for other firms from participating in the market. Suggested areas of further Research In spite of criticisms regarding the market leadership of firms, the investment in the research and development would pave the way for innovations. The research can be extended to study the social costs of monopoly and various rent seeking activities. If understanding of the competitive processes is the aim, then time calls for developing a verified theory of the structure of the market as well as behavior that is relevant to an economy experiencing constant change. The new theory should not only take into account the processes which tends to satisfy the wants and needs but also the changing structure of the market responsible in bringing mutual adaptation. Works Cited Economics, “causes of monopoly”. tutor2u.net. n.d. Web. 16th April, 2012. http://tutor2u.net/economics/content/topics/monopoly/causes_of_monopoly.htm Central Washington University, “Market Structures: Monopoly”. cwu.edu. 2003. Web. 16th April, 2012. https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=11&ved=0CH0QFjAK&url=http%3A%2F%2Fwww.cwu.edu%2F~dhedrick%2FEcon%2520201%2FPowerpoints%2FEcon%2520201%2520Fall%25202003%2520Week%25208b%2520Monopoly.ppt&ei=lryLT4POKZDOrQeeucnNCw&usg=AFQjCNHuJgwfOTaEPt8MySTopwqniL9vkA. Economics online, “Monopoly Power”. economicsonline.co.uk. n.d. Web. 16th April, 2012. http://www.economicsonline.co.uk/Market_failures/Monopoly_power.html Bibliography Klotz, T., “MONOPOLY POWER: USE, PROOF AND RELATIONSHIP TO ANTICOMPETITIVE EFFECTS IN SECTION 2 CASES”. ftc.gov. 2008. p. 2 Web. 16th April, 2012. http://www.ftc.gov/os/sectiontwohearings/docs/section2monopolypower.pdf Wauthy, X. and Gabszewicz, J., “ANOTHER PERVERSE EFFECT OF MONOPOLY POWER”. centres.fusl.ac.be. 2000. p. 5 Web. 16th April, 2012. http://centres.fusl.ac.be/CEREC/document/2001/cerec2001_1.pdf Acquaye, A., and Traxler, G., “Monopoly Power, Price Discrimination, and Access to Biotechnology Innovations”. agbioforum.org. p. 6 Web. 16th April, 2012. http://agbioforum.org/v8n23/v8n23a09-acquaye.pdf Chen, Z., “Defining buyer power”. http://http-server.carleton.ca. p. 10 Web. 16th April, 2012. http://http-server.carleton.ca/~zchen/Defining%20Buyer%20Power%20Revised.pdf Urzua, C., “Distributive and Regional Effects of Monopoly Power”. alejandria.ccm.itesm.mx. p. 3 Web. 16th April, 2012. http://alejandria.ccm.itesm.mx/egap/documentos/EGAP-2009-04.pdf Read More