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Demand And Supply - Case Study Example

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Client’s 16 August 2013 This paper will extensively shed light upon a monopoly, in addition to this it will also throw light upon the causes of a monopoly and with the help of a case study a monopoly will be explained in detail…
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Demand And Supply
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Download file to see previous pages ld. (Harberger, AC) In an attempt to completely understand and describe the monopoly, causes, types and relevant issues, it becomes necessary to approach the subject from as a simplistic nature as possible, to stay aligned with the underlying microeconomic structure. Based on the fact that within the market place the root of everything comes down to supply and demand, this is altered by monopolistic practices and therefore society tends to disfavor monopolies as practicing on an unfair basis, and creating barriers of entry to firms wishing to enter the market for profit generation, as well as from the perspective of the consumer, being that the monopoly is unfairly regulating prices, by restricting output and therefore is extracting a price without allowing market forces to determine the correct supply and demand balance of the given commodity. Essentially when dealing with a monopoly consumers are at the mercy of the price determination of that monopoly, which they control via total output restriction and subsequent economic welfare reduction. The Existence of the Monopoly The monopoly comes about when there is little or no competition, normally the latter. The monopoly will always persist based on the barriers to entry for any rival company or concern attempting to enter the market place. Barriers to entry protect a monopoly and at times can even be state sponsored, via legal framework or even finance. The barriers to entry for rival firms include: Legal Barriers – these take the form of legal framework where a government will only allow a producer to supply a product, for example if one considers the first class mail deliver in the United States which USPS is the only allowed deliverer. Patents – similar to legal barriers due to the legal framework that will support a holder of a patent, although this issue is debatable around the cost of research and development in the patent creation process. A certain school of thought agreeing with the patent barrier, claims government encouraged innovation incentive, whilst others will claim consumer deprivation due to excessive price fixing. Examples would be the pharmaceutical companies that hold patents on medical drugs, Pfizer who manufactures Viagra – they are the patent holders and are therefore the only company entitled to produce and sell the drug. Control of strategic resources – this would entail a holder of mineral rights or mining rights of a commodity that must be present in order to produce the end product. An example is De Beers controlling 90% of the world’s diamond production (Wessels, W.J). Natural Barriers – also called economies of scale. This is related to the mere cost of establishment within a given industry. It is too expensive and capital intensive to enter the market on a profitable basis. An example of this would be the various utility companies in any given economy. One can safely deduce that monopolies will continue to exist, as long as there are governments who sponsor such activity, as well as when companies are in the position to be able to create a barrier to entry, via ...Download file to see next pagesRead More
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