Monopoly as an Enemy to Good Management - Essay Example

Monopoly...is a great enemy to good management.’ Adam Smith, (1776), The Wealth of Nations, Book I, Chapter XI.’ Discuss. It is indeed an undeniable belief that “monopoly…is a great enemy to good management.” It can constrain technological innovation while providing little incentive for change. While these facts are undeniable far more important for the purposes of this paper is what to do about it. Within this context the idea of ownership becomes the overriding factor. In his book the Wealth of Nations (1776) 1Adam Smith spoke of various models of social organization where he has analysed presentations of pre-capital accumulation and the resultant effects of wealth, monopoly power and political influences upon the management of the economy2. In the light of this statement therefore this question involves the discussion of the various market structures and their contribution to the achievement of the highest possible level of allocative and productive efficiency (in both static and dynamic senses).The question already suggests that the Monopolised market structure is not conducive to “good management” or efficient resource allocation. Resource allocation in a modern economy demands allocative efficiency which means that resources should be allocated to match the wants of society. Essentially this would mean a point of allocation where no redistribution would enable one individual to be made better off without making someone else worse off. Allocative efficiency would therefore consider both the consumer (demand) and the producer (supply) and that it should satisfy the needs of both. This essay will mainly discuss the two main extremes of competing market structures i.e. monopoly and perfect competition and to a slightly lesser extent similar models along the vast range of economic models falling halfway between these extremes for example Oligopolies. Perfect Competition represents the efficiency achieved by an industry which has extensive competition and almost no interference in the market forces either by the sellers or buyers or the government. Monopoly on the other hand represents a rather inefficient means of market structure characterised by lack of competition and extensive market control. 3.The reason the statement by Adam Smith seems to resent Monopoly power is because of the complete market control by the monopolist who as the only seller in the market will control the supply of goods in the market and is able to influence the price of its product sometimes in an unfair way. Perfect competition, in contrast is preferred in this regard as a market structure where each firm has neither got any significant market control nor is it able to influence the market price.4 Another structure very much close to monopoly power is the oligopoly (see diagram below) which represents5 a model closer to a monopoly, i.e where a 2 or more sellers will collaborate to fix prices and thus have significant price and market control.6 (The kinked Demand curve in an oligopoly) Coming to the main discussion of how monopoly and perfect competition fare as market structures in the management of the economy, this will involve the discussion in terms of the four major features of perfect competition which are the presence of the a relatively large number of small firms, selling identical products, who have perfect knowledge of the market and there is a freedom of entry and exit into the market. Therefore comparing these features to a Monopoly would mean that there will be just a single firm controlling the industry and the price of the product. New market entrants will have a small chance of surviving any competition against this market structure as the monopolist can afford to sell at a lower price for a while (due to economies of scale) to drive away any new competition. Essentially the difference between a Monopoly and Perfect competition then relates to the differences between a price taker and a price maker.  The diagram above7 shows that in a Monopoly the average cost curve will be tangential to the demand curve. The market entry of new firms may destabilize the Monopolistic firm for a while but the Monopolistic Competition equilibrium is rarely a representation of loss since there will be sufficient returns to cover total costs. Thus the diagram shows that Marginal Cost = Marginal revenue. Secondly in terms of available Substitutes it can be said that all firms in Perfect competition are involved in producing exactly the same /heterogeneous products and thus there is an infinite amount of perfect substitution available. Contrastingly monopoly firm will usually be involved in producing unique products which have no close substitutes. Thirdly in terms of market entry the Monopoly firm presents a major barrier to new entrants because of its pricing tactics. And last but not the least each firm in a perfectly competitive industry will have the same amount of knowledge, prices and production unlike a monopoly which relies on this information barrier to gain large profits. In consequence of this the demand curve for a perfectly competitive firm is perfectly elastic unlike the negatively sloped monopoly demand curve. The monopoly firm is able to charge a higher price and produce output at an inefficient level in contrast to the perfectly competitive market. Interestingly as seen above the Monopoly price does not equal marginal cost, which is why the monopoly is said to not efficiently allocate resources. 8Now coming to the statement in question where Adam Smith has perceived monopoly as a threat to good management of the economy (resource allocation and efficiency).The Shorter Oxford English Dictionary9 defines Competition as “the action of endeavouring to gain what another endeavours to gain at the same time”. The concept of Perfect Competition is therefore central to the theory of the free market which underpins the modern economic models and management thinking. Monopoly can indeed be potentially lethal to fair competition as it distorts the pricing structures as well as the quality and profit. Competition thus spurs good management as it creates awareness of what the other competitors are producing in the surrounding business environment.10 However it should also be noted that sometimes there is no concept of the ideal market having Perfect Competition and in this regard a classic criticism has been put forward by Bennet 1994: “The market of the classical economists is set in a world of perfect competition, perfect information, good price signals and frictionless transactions”.11 The classic formulation thus takes it for granted that there will be low market entry and costs and some sort of an arms-length relationship between purchasers and providers. That the consumer base will be well-informed like the sellers and ignores the effects of organizational repute and political influences.12 The modern rendition of the monopoly manifests itself in more positive forms so it can hardly be perceived as a threat to allocative efficiency at all.13 This happens in the public sector where it is much more expensive to let private organisations produce goods of strategic importance like steel ,water and electricity. These goods will be provided in a cheaper way for the public benefit if just one government encouraged entity produces them. Today many markets are heavily regulated for example the telecommunications market in the United Kingdom and this government interference has actually helped price stability and competition rather than distort it.14 Although recently there has been a trend of governments procuring pubic services by tendering competitive contracts and evidence does suggest that they have acquired value for their money (allocative efficiency) by choosing the most reasonably priced bidders, this has often been perceived as a step to privatisation which is often looked down upon when it comes to public benefits.15 Therefore in my view despite it being a perceived threat to privatisation, monopoly structure does yield some benefits for the problem managing the economy and therefore is not entirely useless or harmful to the problem of resource allocation in the modern economy. Conclusion The purpose of this paper was to view the problems presented by monopolies through the lens of a government regulator and suggest whether monopolistic competition can be allowed as a necessarily due to some merits it might have.This required the comparison of between a monopoly and a firm operating in perfect competition to show the inefficiencies presented by a Monopoly.The point is that the neo-classical view ignores the role which the state can play in maximising society’s benefits through natural monopolies involving power-plants, transport (particularly trains) and water companies. It can be argued that enough resources are already spent by the state trying to regulate these monopolies so why not just put them under complete ownership of the state instead of the tax payer having to pick up the tab for regulating the company and then pay extortionate fees for services which are often unreliable, overly expensive. The main conclusion is therefore, that it would be unfair to take a one sided view of considering monopolies an enemy of efficient resource allocation because at times carefully regulated monopolies can achieve public benefit and state welfare. References 1. Bennett, C., Ferlie, E. (1994), "Management by contract rhetoric or reality?", unpublished paper to the ERU conference Cardiff 2. Donahue, J.D. (1989), The Privatization Decision - Public Ends, Private Means, Basic Books Inc., New York, NY, 3. Smith, S.R., Lipsky, M. (1993), Nonprofits for Hire: The Welfare State in the Age of Contracting, Harvard University Press, Cambridge, MA, 4. Carswell L., Connolly, M. (1994), "The contract state and the voluntary sector", Department of Public Administration, University of Ulster, unpublished paper, 5. N. Gregory Mankiw (2006),Principles of Economics . 6. Economics Explained (1995) Peter Maunder, Danny Myers, Nancy Wall, and Roger Leroy Miller Read More