What would happen in a market that is transformed from a perfectly competitve market to a pure monopoly - Essay Example

Competition not only helps the customer but also the company itself. The constant challenge to outdo the rival helps companies to stretch an extra mile and work optimally. Barriers to entry keep the businesses constrained and discourage them to enter the market. In a perfectly competitive market a lot of suppliers of goods and service exist, a lot of buyers exist, the barriers to entry are non-existent and the market is characterised by non externalities. In a pure monopoly the demand curves of market and the firm are identical.

However, in a pure competition the demand curves are different for both market and firm. The demand curve of the firm is perfectly elastic because it sells product or service at the equilibrium price. Natural monopolies exist without any regulation in place but due to the technological and cost advantages of the company. The prospective entrant can not afford to invest in the technology or share cost advantages of the initial firm in the same industry. For example, DeBeers has control over the natural resource of diamonds.

Practically all diamonds in the world have come into the control of DeBeers in South Africa. IBM enjoyed monopoly for a long time because of copyrighting and patents rules. Gas, electric and bus companies are usually monopolies in their respective country because of the huge cost of capital and maintenance cost. Monopolies are often call price setters and many exploit their status to discriminate price for its consumers. In real world, pure monopolies have mostly been characterised as less efficient.

Pure monopolies supply is hardly equal to the market’s demand. The consumer are constrained by making alternate choices as there is no other firm in the same industry. This has grave implications on the society we live in. The self interest battle between the pure monopoly and the society can cause loss of goodwill for the monopolies. However, natural pure monopolies do not exploit the