The Microeconomics of Power: Monopoly Theory - Term Paper Example

Outline I. Introduction A. The first introduction of monopoly theory to mainstream economy B. Detractors of the Monopoly Theory C. The Representation of Monopoly Theory in Education D. Introduction of Monopoly Theory: Both A Success and A Failure II. Monopoly Theory A. Powerful Companies Become More Powerful because of Advertisements B. Corporate Power in the Media C. Definition of Monopoly Power III. Economic Power A. Definition of Economic Power B. Economic Power and Monopoly Power: Synonymous? IV. Conventional Firm A. The Conventional Firm as a Point of Reference B. The Conventional Firm in the Lens of Monopoly Power C. Competition + Low Prices + High Market Share = Economic Dominance V. Conclusion The Microeconomics of Power Name: Date of Submission Martine H. Saboo Microeconomics 202-002 Abstract Monopoly theory has been a battle cry for most of its advocate because of its unrealistic underpinnings in the contemporary business world, which is highly competitive. However, it is still important to examine the origins of this usually taken for granted economic concept and its struggle against adverse reactions from the intellectual community and from the public. Monopoly theory is not a singular term which denotes a basic premise. The emergence of the concept of economic power makes the monopoly model all the while worthy of scholastic attention. Moreover, the presence of the conventional firm places monopoly theory in the prime scene because of the comparable attributes of a colossal firm to a monopolistic corporate power. I. Introduction The concept of monopoly power was initially applied during the 1930s to the traditional theory of the firm by some well-known economists. This breakthrough in the discipline of the economy provided useful tools for economists examining the performance and behavior of firms and industries. However, as expected in every emerging idea, the concept has met strong oppositions and spiteful criticisms, in this case from scholars trained in the conventional assumption of perfect competition. Monopoly theory does not merely go against several of the principles of perfect competition but roused significant doubts on the good organization of laissez-faire capitalism itself (Cleaver 2004). While the new-fangled theory had attracted numerous disbelievers, it was also strongly protected from criticisms. Since the first monopoly framework was derived from perfect competition, the two theories are much in common in terms of their opinion about “profit maximization, marginal analysis, and mathematical rigor” (Karier 1994: 27). It was easier said than done for advocates of perfect competition to hit on the assumptions in the monopoly model without disparaging their own. Provided with little prospect of locating lapses in the new theory, critics were disposed to plainly disregard it or relegate monopoly as nothing more than a unusual occurrence in the actual economy (ibid). The introduction of monopoly theory into conventional economics was both a success and a disappointment. It was a success because it made available an alternative to the romanticized model of perfect competition. Yet, it was also a disappointment since the circumstances for the typical monopoly framework were ordinarily just as idealized and confusing as perfect competition. Where perfect competition necessitates an unlimited population of firms manufacturing identical products, the monopoly model takes on an exclusive producer in a market (Semmler 1984). A well-known microeconomics excerpt claims that “the conditions of the model, pure monopoly, are exacting; and it is difficult, if not impossible, to pinpoint a pure monopolist in real-world markets” (Karier 1994: 28). The justification for this is that majority of the markets do not have only a single seller. Nevertheless, in spite of the criticisms and the opposition received by the monopoly model from the intellectual community, it still managed to win a small alcove within the more significant society of the schools of economy. Textbooks on microeconomics will be absolutely insufficient if it does not contain a chapter dedicated to the topic of pure monopoly followed by a subject matter in oligopoly, making it highly improbable for even the extreme zealous advocates of perfect competition to deny their students a fundamental knowledge with monopoly theory (ibid). II. Monopoly Theory Brand names of powerful firms are universally known because of the quality of the products they sell in the market. Some of these leading companies in the world in terms of brand names are Coca Cola, McDonald’s, Goodyear tiers, Microsoft, Xerox photocopiers. As these companies inundate every medium of contemporary communication with their promotional techniques, their names are permanently instilled in the minds of myriad of potential customers (Zoninsein 1990). The increasing impact of decades of assertive advertising is that firms with immense economic power are rarely unheard of. Powerful firms also make an impact on the public because they are out of the ordinary or newsworthy. Their mergers, takeovers, or joint venture are frequent features in the business folios of the written media. Documented profits or executive compensations are allocated airtime on the daily televisions programs or radio news broadcast. Substantial airtime is committed to colossal corporations when they are currently facing financial constraint, looking for special considerations from creditors or assistance from the government (Boff 1989). Although corporate power may be unproblematic to recognize, it is still inadequately understood. The notion of ‘power’ is applied in economic discourse to imply various attributes, yet in the concept of monopoly its meaning is concrete and precise. Monopoly power “refers to the degree of practical control that firms have over their prices” (Karier 1994: 4). For a number of firms, insignificant fluctuations in prices will result in significant changes in the quantity of goods or services that consumers will purchase. For all realistic objectives, the option of prices for this firm is fairly restricted; it has modest monopoly power. For other companies, small fluctuations in prices yield extremely irrelevant disparity in the quantity demanded by consumers (ibid). These companies possess much greater sensible alternatives of prices to choose from, granting them greater monopoly power. Every single firm can be differentiated through the quantity of monopoly power they hold. III. Economic Power While monopoly power can enhance the prospective productivity of a company, it does not warranty it. In order to clarify about the relationship between monopoly power and profits, it is important to initially introduce another model, economic power. This concept if defined as the “maximum potential profit of a firm” (Karier 1994: 5). Real profit and economic power are comparable only if the firm charges the specified price that capitalizes on short-run profits. Otherwise, economic power simply illustrates the potential profitability of a firm. Economic power is calculated in thousands of dollars for a number of firms and in billions of dollars for others and is so far another means to tell apart one business from the next (ibid). Even though monopoly and economic power oftentimes overlap, they are not one and the same. For instance, it is likely for a small town newspaper and a distant gas station to have immense monopoly power because of their significant privileges over prices. Yet, neither venture has the capability to produce short-run profits on a range required to be labeled as a truly grand economic power. Nevertheless, elevated monopoly and economic power agree for sufficient a firm that is it practical to refer to these firms as upholding corporate or business power (Semmler 1984). IV. Conventional Firm Any economic theory of business is founded on the concept of the conventional firm, one that contributes as a landmark. For instance, in Adam Smith’s model of competition, the conventional firm is believed to be fairly small and to challenge several competitors producing precisely the same product. Every decision of the firm originates from the strategy of making the most out of short-run profits. The firm, greatly desiring to charge a higher price, is halted by the presence of various similar opponents, each charging lesser prices. The firm is obliged to sustain the product quality and trim down production costs for the basic rationale that it is anxious that others are carrying out the same activity (Cleaver 2004). It is then, survival of the fittest, in which the weak will be eliminated and the strong will dominate. In spite of these severe anxieties, extremely little is anticipated to change throughout time as the firm continues to be moderately small and persists competing under dramatically consistent conditions. Both its dread of failure and its hope for supremacy hardly ever realized (ibid). The conventional firm in the assumption of monopoly power is significantly varied. The firm that gradually achieves power may possess a meek starting point, launching with merely a new innovation. The firm acquires exclusive rights for the product but on the other hand confronts adversaries with identical products and parallel aspirations. Even though there are no faultless alternatives, there are primarily numerous producers of defective replacements to be ignored. Taken altogether, the combination of alternative products represents a market (Karier 1994). Every one of these competitors aims to become the leading seller in the market. Then, a period of competition characterized by low prices and increased spending for marketing and promotional activities will ensue. Each opponent eagerly gives up current profits in order to attain market power. Eventually, firm surfaces from the horde, elevating its market share while spreading out into other geographically unique markets. To speed up the process it acquires a small number of its competitors (Semmler 1984). As the firm gets bigger, production and sales are centralized in larger, well-organized workplaces, such as factories, offices, and stores. Marketing or product promotion becomes more systematic and integrated, sales people are prepared, trained and delegated to emerging markets, and publicity campaigns are verified and let loose on a national scale (ibid). Sooner or later, the firm reaches a point where its yearning for further greater market share in the national market starts to ebb. Persistent price contest or the acquirement of yet another opponent runs the hazard of provoking antitrust policies or inflaming a hostile response of public opinion. Accordingly, prices are tolerated to steadily increase, settling toward the position that maximizes short-run profits. As the firm starts to dispose of price competition, it also begins to depend more on marketing and research and development expenses to vie for market share. Profits go sky-high and executives rewarded with enormous compensations and incentives (Zoninsein 1990). The firm is also compelled to allocate some of the excesses or surplus to the employees/workers, either reluctantly based on a union contract or willingly as a means to dispel the possibility of unions (ibid). At some stage at this time, overseas markets become progressively more lucrative to the firm. Expansion can carry on in this ground without dread of generating antitrust investigations or, at least at the outset, exacerbating public antagonism against monopoly. Lesser prices and efficient promotion attempts are combined to gain greater shares of overseas markets. While a large portion of this premature growth is carried out through means of exports, the firm gradually realizes it necessary to meet additional expansion with foreign manufacture (Cleaver 2004). This necessitates the firm to build up foreign operations or purchase foreign ventures. Even during prolonged periods of success, there is constantly the danger of improved competition. Patents may end, advance technologies may come out, consumer preferences may change, protective mechanisms of the government may be repealed, or delayed entrants may achieve a magnitude and stage of efficiency necessary to defy time-honored leaders. Competition can transpire among local or global rivals whenever ambitions for greater market shares cannot be restrained anymore (Karier 1994). When competition resurfaces, it is rarely in the exact identical form as competition that initially gave impetus to power. Competition in the period of monopoly is a war of titans rather than a scuffle of ants. Competitors with considerable size and dominance have much superior recognition to maintain during competition and they have more privileges to acquire advocacy from national governments during encounters with overseas rivals. Yet, akin to the earlier competition, each contender aspires to safeguard and promote its national and international position (Cleaver 2004). V. Conclusion To sum it up, the long influence of monopoly theory from the insightful discourse of Adam Smith to the exceptional accurateness of contemporary systematic economists is conclusive. In some instances, ideas were revealed in seclusion, detached from the larger context of monopoly theory. For example, the curvilinear demand curve was on no account successfully integrated into the wider model of monopoly power. In some cases, arguments stressed in a particular projection but stopped short of achieving a feasible resolution. A large portion of the development established in defining monopoly power and oligopoly markets contributed to eradicate alternatives rather than construct equally agreed-upon finales (Karier 1994).Yet, in every case, these ideas and arguments they created provided the needed elements for developing a modern theory of monopoly power. Nevertheless, there is one conclusive but essential point about economic and monopoly power. Both concepts explain fundamental characteristics of all firms. Provided accurate data/information about demand and costs, it must be probable to establish the economic and monopoly power of any firm (ibid). And as what one scholar has stated, “Competition and monopoly are not polar opposites but integral parts of one competitive process that leads to concentration of power resources in a few hands… competition weeds out many firms and leaves others in positions of greater leverage.” (Du Boff 1989: 38) Therefore, monopoly theory and the idealized perfect competition are intertwined models which make these two economic models inseparable with respect to advocacy and opposition. Works Cited Boff, Richard Du. Accumulation & Power: An Economic History of the United States. Armonk, NY: M.E. Sharpe, 1989. Cleaver, Tony. Economics: The Basics. New York: Routledge, 2004. Karier, Thomas. Beyond Competition: The Economics of Mergers and Monopoly Power. Armonk, NY: M.E. Sharpe, 1994. Semmler, Willi. Competition, Monopoly and Differential Profit Rates. New York: Columbia University Press, 1984. Zoninsein, Jonas. Monopoly Capital Theory. New York: Greenwood Press, 1990. Read More