Advantages and Disadvantages of Monopoly in Serving Public or Consumer Interests - Research Paper Example

 The definition of Monopoly is 'it exists when there is only one supplier of a product or service' (BPP Business Organizations, Pg 106). This essay would discuss a monopoly, the factors which affect it and how these factors tend to change both the supply and demand of products in the market. It would further conclude if monopoly is the working suitably for this society or not. Introduction The definition of Monopoly is 'it exists when there is only one supplier of a product or service' (BPP Business Organizations, Pg 106). Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. If a pure monopoly is viewed from a consumers point it is quite undesirable, while if it's viewed from a business point of view it is a way to maximize profits. A definition of Oligopoly is 'when there are a few large suppliers, whose business decisions affect each other.' (BPP Business Organizations, Pg 108) This happens when only a few firms are operating in the market. There are not many producers and a lot of buyers thus the action of one producer could affect the authority of the other one. Though they cannot set up a price of their own as in a monopoly but at times they turn into friendly competitors and work together by forming a Cartel (An agreement between two or more firms in the same industry to co-operate in fixing prices and/or carving up the market and restricting the amount of output the produce.) A definition of Perfect Competition is 'it exists when there are so many people in the market, and other conditions are such, that no one can influence the price, all other things being equal.' (BPP Business Organizations, Page 105) Nowadays there is a slight possibility that a place consists of Perfect Competition. In a perfect competition there is very less impact of an individual buyer and seller on the market. The goods sold are same and information is perfect. Firms only earn a limited amount of profit from which they can survive. As the market is full of competition the management is perfect and every firm is trying to progress in the field of making goods. These three market strategies help forming the basic policies of a market. These three are important in their own ways. While Monopoly has a really adverse effect on the management policies, it on the other hand has benefits like maximizing one's profits. Monopolistic competition and Oligopoly can’t be separated easily and specifically. Despite the fact a three-firm industry is supposed to be an oligopoly and a 3,000 firm industry with 30 firms can be either have oligopolistic or monopolistic competition. For instance, convenience stores in a big city are certainly monopolistically competitive. Though, convenience stores in a smaller town might very well be oligopoly. Oligopoly is almost the same as monopoly because at times the limited firms in the market join hands to form a stable price and thus having no competition between them. This therefore creates somewhat the same situation like in monopoly. While on the other hand Perfect Competition is the most efficient if viewed from the consumer's point of view. It has many firms in the market which produce the same product which creates an environment of competition and this enforces the firm's to improve their over all set up so they have less or no inefficiency in their whole set-up. This makes them produce a better product and sell it in the market with a reasonable price. Therefore a consumer benefits a lot from this type of market. Monopoly Monopoly has a diminishing effect on competition as it doesn’t give room to any firm for competition and thus this leads a company to be more concerned about its shareholders than about its image or dealing with the customers. For example Self-interest and income exist, and this has a negative effect on the management quality of how they handle their products/service. This is because the customers have no other or limited options. There are three main points which define a pure monopoly. There is a single producer and hence a single seller of products or products, there is no close alternative for the firm's product and there is a barrier for entry in monopoly (Timothy 2002 pg 21). A monopoly situation has many advantages. In many industries a company will only benefit only if it achieves a monopoly as it would have a greater chance to gain from economies of scale (benefits of conducting operations on a large scale) that can minimize prices. In order to maximize a firm's profits, it could set up a monopoly as it’s the best way to increase profit. However monopolies often have several adverse effects. In it the Companies can force high prices on the consumers because they are the sole producer of a specific good and so the consumer don’t have any other alternative but to buy the products in spite of its high prices. And as the company wouldn’t have any competition in the market so it would not be tempted or have any incentive to improve their products or offer a wider range of products. There would be no such pressure on the company to improve its efficiency of its use of resources thus giving a very bad overall effect. Good examples of monopoly are public or government utilities such as gas, electricity, water, local telephone service companies, professional sport teams, DeBeers and Alcoa. Monopolies may also be at the local level because of geographic location. Barriers to entry are a major line of defense for the present monopolies Economies of scale is a major obstruction for monopolists, which usually takes place where reduction in per unit costs depends on the output size. (Sloman, J, 2001 Pg133) Since a huge firm with a big market share is most competent, new firms cannot penetrate the market and get market shares. Public sector utilities are known to be natural monopolies as they have such economies of scale. Barriers to entry are also known to be in legal forms such as patents or licenses. Patents allow the inventor or the producer the elite right to produce a product for 20 years (new worldwide patent period established with the help of 1995 GATT agreement). And the government approves licenses for the firms, which thereby allows one or few firms to function in a given market. Lastly, barriers to entry may also occur from the elite ownership or control of vital and fundamental resources. (Scherer, F. M. pg 50) The monopolist is a price maker, it controls all its output or price making but still it has to look after its market background, keeping in mind what product to sell at what price so that they don’t fall back on their profits. And in the end a monopolist's profits depend on its ability to sell, i.e. on market demand for its product. The area of concern for a monopolist is that what price it should sell its product on. As there is only one firm, in the case of the monopolist, the market and the company's demand curves are the same. A monopoly demand is the industry or market demand and so is demonstrated by a downward sloping curve. While on the other side in perfect competition, the profit maximizing solution for the monopolist is attained when MC=MR. But this creates inefficiency For example, If the marginal cost is $20 and monopoly charges a $100 price, It may create a severe inefficiency crisis. In distinction, the inefficiency formed by a monopolistically competitive firm that charges a $50 price while incurring a marginal cost of $49.95 is considerably less. While in perfect competition the marginal revenue does not exceed the price, but in monopoly the opposite happens (i.e. the price exceeds the marginal revenue) because the monopolists tend to lower their prices to increase the amount of sales and to increase their profit. For each price cut, revenue increases by an amount same as the price of the last unit sold deducting the sum of the price cuts which must be taken on all prior units of output. While if there is a raise in price the opposite happens. The trade-off between price and sales is the reason why the marginal revenue is always below the demand curve. Finally as the monopolist produces where MR = MC and P > MR, then P > MC is also true. Monopolists being on a big advantage sell products on higher prices than would the competitive producers in the same market. The following Figure illustrates profit maximization under monopoly: Price elasticity of demand plays a major role in the setting up of price in monopoly. If the demand is elastic, total revenue will rise when the monopoly reduces its price, but this won't happen when the demand becomes inelastic. Hence the monopolist will expand output only in the elastic portion of its demand curve. The biggest disadvantage about a monopolist is that it does not care about reviewing the highest prices which may be of a great concern to the social people. A monopolist wants to maximize its sale and get returns on them accordingly. But at times monopolies as discussed above can have losses too i.e. if government interferes. The government influences markets in various ways, one of which is through direct regulation (e.g. Competition Commission). Regulation can be defined as any form of state interference with the operation of the free market. This includes many factors such as regulating demand, supply, price, profit, quantity, quality, entry, exit, information, technology, or any other aspect of production and consumption in the market. So in order to avoid the interference by the government, private market firms maintain a system of voluntary self regulation. The overall responsibility for conduct of policy lies with the Secretary of State for Trade and Industry. However, day to day supervision is carried out by the Director General of the Office of Fair Trading (OFT). The OFT may then refer the companies to the Competition Commission (formerly known as Monopolies and Mergers Commission). The Competition Commission also plays a major role to investigate the situations which are called 'Oligopoly Situations' which involve explicit or implicit collusion between firms. Then the Competition Commission decides if the monopoly is acting against the public interest or not. (Great Britain pg 100-110) And if they find a firm with a monopoly situation they recommend measures such as asking the firms to lower their prices, profit and price controlling, removal of entry barriers thus letting other firms enter for competition or at times even considering the option of dividing the firm which is very rare though. If a monopoly situation exists, the workers and managers would take a great advantage by using less technique, knowledge and expertise in producing a good and would enhance their means of profits. Thus the good would not be much to the standards, as it would be in the perfect competition. This is known as X-inefficiency (Brownless, C, 1989, P218), if compared to a perfectly competitive industry, considering the same cost and demand curve conditions; even then the monopolist will charge a higher price for less output. Conclusion Monopoly has both advantages and disadvantages in serving public or consumer interests. They have been examined by the equilibrium of monopoly and perfect competition. Through the analysis mentioned, many weak points of monopoly have been identified which include X-inefficiency, management problems and so forth. These factors often result for even bad consumer interests but on the other hand monopoly also has its potential strengths. All the factors discussed above need further researches on areas such as perfect competition, demand and supply and consumer perspectives regarding the monopolistic competition. These researches would further help to solidify the points discussed above regarding a monopoly. Bibliography BPP Business Core Unit 4 Organization, Competition and Environment Brownless, C, (1989) Economics Charles Letts & Co Ltd Brownless, C., Hurd, S., & Randall, K. (1985). BASIC economics. Butterworths BASIC series. London: Butterworths. Sloman, J., & Sutcliffe, M. (2002). Economics. Harlow, England: Prentice Hall/Financial Times. 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