Market Structures: Monopoly - Term Paper Example

Market Structures: Monopoly Abstract 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’. The structure of the market that is not in line with the assumptions of perfect competition is regarded as the market for imperfect competition. This type of markets disregards the rules of perfect competition. The imperfect competitive market structure resembles the structures of the realistic market. There is presence of monopolistic competitors and oligopolists in the realistic market. The conditions of the market are dominated by the competitors. The elements of the market structure are size and number of participating firms, entry and exit conditions. In the imperfect market structures the firm has the capability to affect the market prices. The products are differentiated although they are close substitutes. The role of advertising as well as branding is huge in the market structure. The market is concentrated by many sellers. Freedom of entry and exit are the characteristics of the market (Economics, 2012.). The imperfect market structure comprises of monopolistic and oligopolistic competition. The products are offered administered prices. The assumption in the monopolistic competition is that firms will tend to produce at the level where marginal cost equal marginal revenue in the short run. The scenario in the long run is different. In the long run the firms in monopolistic competition will operate at zero profit levels while the demand curve and the total average cost curve will be tangential. Body A monopoly is said to exist where there is sole supplier in the market. Lack of competition is a characteristic of the monopoly market. Therefore the size of the business is immaterial while analyzing the monopoly market. When there is only one firm in the market it can be anticipated that the firm will try to manipulate the market price. The firm is well informed about the capabilities and will influence the market structure by setting the price accordingly. The firm will engage itself in choosing the price that will provide maximum 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 more natural and the second approach is analytical. 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 situation where the initial cost of setting up the business is high is referred as natural monopoly. The production process is concentrated on the sole existing firm of the market. The natural monopolist may exploit the conditions of the market and so government or the concerned authorities keep a look at them with the aim to enhance the welfare of consumers. It can also be a case where a single seller is operative in the market and the market is devoid of any other 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 operating monopolist faces the entire demand of the market and profits are accrued to the monopolist both in the long as well as 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). The power of the monopoly is maintained by the barriers to entry into the market. 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. The monopoly market lacks competition and so the choice of the consumers is very limited. The consumers are left with no other option but to buy the available goods, sometimes at higher prices. The monopolist exploits their position by charging high prices for the goods. The monopolist takes the strategy to limit the entry of substitutes into the market. It creates artificial excess demand in the market and according to the law of demand the price of the products rises. Therefore the price of the product rises automatically. The power of the monopolists over the consumers leads to loss of consumer sovereignty. The monopolists are well informed about the market and therefore they can use it to their own advantage. Asymmetric information is also present in the market (Acquaye and Traxler, n.d.). The lack of competition acts as the disincentive for the monopolist to reduce the prices and the obvious result is productive inefficiency. The monopolist may not set price and marginal cost at equal levels. 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. 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 level of employment is less in the monopoly market than in the market of perfect competition. Economies of scale allow the monopolists to produce at low costs. The consumers may get the benefit of low prices as a resultant but the real life scenarios tell a different story. The monopolists use the savings in order to generate more profits and therefore there is less chance of consumers getting the benefit. Less competition provides the opportunity for the monopolists to get involved in new innovations. 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 (Wauthy and Gabszewicz, 2000). 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, 2012. Causes of monopoly. Web. 20th November, 2012. Retrieved From: Central Washington University, 2003. Market Structures: Monopoly. Web. 20th November, 2012. Retrieved From: Economics online, 2012. Monopoly Power. Web. 20th November, 2012.Retrieved From: Klotz, T., 2008. MONOPOLY POWER: USE, PROOF AND RELATIONSHIP TO ANTICOMPETITIVE EFFECTS IN SECTION 2 CASES. Web. 20th November, 2012.Retrieved From: . Wauthy, X. and Gabszewicz, J., 2000. ANOTHER PERVERSE EFFECT OF MONOPOLY POWER. Web. 20th November, 2012. Retrieved From: . Acquaye, A., and Traxler, G., Monopoly Power, Price Discrimination, and Access to Biotechnology Innovations. Web. 20th November, 2012. Retrieved From: . Read More