Economies of Scale - Research Paper Example

Micro Economic Essay Monopoly A company has a monopoly power if it is faced with a downward-slopping demand curve for what it produces; that is, if it is not perfectly competitive. I will create research questions on the Monopoly topic and try to answer them using print editions or books as research references. Why does monopoly occur in a given industry? In simple terms, the question is about the sources of monopoly power. In the book, “Modern Economic Theory” by Mukherjee Sampat, this author tries considers the following as the most important sources: Economies of scale A big company can sell the product at a lower price per unit than a smaller company can and can reduce prices to exclude competition. The giant company then dominates the market. The author refers to a monopoly that arises from economies of scale as a natural monopoly (Mukherjee 333). If the average cost goes down over the whole range of demand, then one seller can offer the product at a lower cost per unit, and more effectively than multiple suppliers. The market may start with numerous sellers, but naturally ends up with one seller that can take advantage in the best way to decrease the average cost. Public utilities such as natural gas sellers, electricity distributers, and garbage collectors have natural monopoly inclinations. A market that experiences decrease in average costs is likely to lead to a natural monopoly. Laws or Government policies Monopoly may come up because of artificial legal barriers to new firms’ entrance to an industry. The law provides that no other organization can offer this service (Mukherjee 335). For instance, the law in India does not permit any other firm to supply Indian currency except the Reserve Bank. Government policies can be in different forms, though they all aim at limiting what a business can do, where particular products or prices become mandatory while others are illegalized. The ideal form of regulating monopoly may involve forcing a business to set equal prices to its marginal costs. Prohibitions may include anti-competitive agreements and referrals to the completion commission in which an agreement can be reached to correct the offending area of dispute. Ownership of raw materials or Control over Raw Materials A company may dominate the market of a product if it totally controls the supply of raw materials. If it is a sole owner of the raw materials, it can keep new competitors out of the industry (Sandhu and Jain 308). A commodity of the same value can therefore not be manufactured to compete in the market. This will mean that the owner can utilize it to enjoy full power of monopoly. Patents A patent may give an exclusive right to the patent holder to produce a given product. Such rights are granted to an inventor of a product or technique, which is a legal right to a monopoly. When a company invents in a methodology of production, the patent law gives such an inventor special control in the use of the product invented. This makes competition almost impossible since no other group or personnel can access this means of production. Patents are to prevent other firms to produce the same products as the original inventor. Business Mergers A company may achieve monopoly merely by buying out its rivals. Such a firm can merge with rivalry firms to get a high joined market share for the new more complex firm. Once combined, the former opponents no longer compete with each other and acquire the monopoly status. Monopoly is characterized by different factors such as the use of price discrimination where a firm may charge various prices of similar products from dissimilar buyers. What can be done to limit the efficiency loss resulting from monopoly? Because the inefficiency is due to reduction in output originating from monopolists’ search for high profits, there are suggestions that the government can use to excise tax. However, such a solution just reduces efficiency even further. The following solutions can be applicable: Subsidies The actual solution might be to provide monopolists a subsidy per unit of production. To notice how the losses and gains are distributed in a society, the preferably subsidized monopolists produce similar quantity at the same price as the competitive market. Thus, the surplus of the consumers is the same in both cases. The monopolist gets both the revenue from the subsidy and the competitive surplus of the producers; the latter is accrued from taxpayers (Landsburg 318). Price ceilings It is likely to set the price ceiling either too low or too high. If set extremely high, its impact will be diminished; deadweight loss will be limited but not excluded altogether. If set low, deadweight loss will be experienced due to underproduction. Very low settings will lead to greater deadweight than with a free monopoly. A price ceiling on the competitive firm may cause a shortage as quantity supplied is exceeded by demand quantity. Consequently, although the legal cost paid by consumers may be cheaper due to a price ceiling, the real cost paid to come up again may be greater that the original cost they paid prior to the price control. Rate-of-return regulation Many monopolists are required to set prices in a manner that they will not earn more than a “normal” return rate on capital investment. It requires that no firm can cover its costs at the competitive price (Landsburg 320). However, a monopoly producer may be able to feature in the industry and succeed. A rate of return regulation will help to identify a number of returns that rare regarded equitable for monopolies, in relation to the prices provided for goods and services. The main secret behind this is to protect consumers from being charged excessive prices for the products for the reason that there are no multiple suppliers to compete in the market. This means that the monopoly firm on a certain product may not have a big range of incentives to curtail prices, because the percentage realized in the rate of return regulation limits the quantity of net profit to be generated. Works Cited Landsburg, Steven. Price Theory and Applications (with Economic Applications, Infotrac 2- Semester Printed Access Card). New York: Cengage Learning, 2010. Print. Mukherjee, Sampat. Modern Economic Theory. New York: New Age International, 2007. Print. Sandhu , AS and Jain, TR. Microeconomics. Cambridge: FK Publications. Print. Read More