Monopoly in Parking Economics - Essay Example

In modern times, a monopoly market describes the production of goods or services that have no close substitute. Monopoly markets arise by ensuring that there is one supplier, protected from competition by barriers restricting the entry of new firms into that market. These restrictions include natural barriers, ownership barriers and legal barriers. A natural monopoly utilizes economies of scale to enable a single firm to supply an entire market at the cheapest cost. Ownership barriers occur when a firm owns large portions of a resource hence their ability to control production, price of the resource and price of the finished product. Legal barriers restrict competition through methods such as patents or copyrights, public franchises and government licenses (Duffy, 119).

Price discrimination and single-price markets are the two main price strategies utilized in monopolies. For most monopolies, low prices facilitate larger output; therefore, a single price strategy is efficient in determining output and price. Single price monopoly involves selling its entire output unit at similar prices to all customers. This strategy builds on the flux in demand for goods. In an elastic environment, a single price monopoly works best by increasing the production of a unit and reducing the selling price thereby, increasing marginal revenue that translates to profits. However, in a rigid demand market setting, a fall in price in the output translates to a decrease in total revenue. In such markets, monopolies reduce the number of units produced and increase the price of each unit. This will decrease the total cost but increase the income profits (Duffy, 120).

In a perfect competition market, equilibrium occurs when the demand is equal to supply regarding unit quantity and price. On the other hand, equilibrium in a single-price monopoly market occurs when the marginal revenue and the marginal cost are equal. Monopoly equilibrium relies on a higher price smaller output strategy. Perfect market competition is more efficient than a monopoly market because the marginal social benefits and the marginal social costs are equal. This equilibrium describes the maximization of consumer surplus and producer surplus hence the production of efficient output. Firms that run a monopoly are not able to get maximum outputs from the available inputs. In summary, marginal social benefit exceeds marginal social cost leading to deadweight loss. However, this discrepancy can be averted through rent-seeking which is the process of redirecting the surplus from a single-price monopoly market to create more monopolies (Duffy, 124).

Price discrimination strategy involves selling different units of the same product or service for different prices. This strategy may seem unfair, but studies show that there is a more equitable distribution of resources in a price-discrimination monopoly than in a single-price monopoly. This strategy also increases the profits of a firm in various ways. Through price discrimination among groups of buyer or types of goods, a firm captures surplus in the market and convert it into profit. Another method is perfect price discrimination which involves selling each unit at the highest possible amount consumers are willing to spend. Perfect price discrimination eliminates dead weight and increases the income profit. However, perfect price discrimination tends to increase rent-seeking which leads to the inefficiency of the price discrimination monopoly (McEachern, 216).

Monopoly regulations work about two main theories namely social interest theory and capture theory. In natural monopolies, price and output are under regulation by marginal cost pricing rule that aligns the cost of output with that of marginal cost. As such, the quantity in demand is equal to marginal costs. Much as this rule ensures the production of efficient output it results in losses for the firm. Firms have several options they can pursue, to cover these losses. One of them is seeking approval to price discriminate to recover from marginal cost pricing. A monopoly can also receive government subsidies equal to the losses suffered. Average cost pricing can also mitigate these losses. However, this strategy has two regulations, rate of return and price cap regulation. Under rate of return, a firm justifies its prices by showing that they do not exceed any target rates. This may result in pummeling profits as the firm increases the price of its outputs. Under price cap regulation, the firm has a specified price at which its goods should not exceed. Under this rule, a firm can lower its prices but increase its production to maximize profit (McEachern, 334).