This essay will look at efficiency between both a monopoly and a perfect competition, and whether a monopoly is necessarily less efficient than perfect competition. Using diagrams and equations reflecting the optimal choice of output, marginal revenue and marginal cost for monopolies, I will explain how efficiency is affected by low levels of production. At the same time monopolies can increase efficiency due to their ability in price discrimination, they price people differently and therefore people pay what they truly believe the good is worth. There needs to be a clear description of the differences between monopoly and perfect competition as well as efficiency; an analysis of deadweight loss and natural monopoly is also important
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Areas B and C represent the deadweight loss of a monopoly. As we move from the monopoly level of output to the competitive level of output we “sum up” the distances between the demand curve and the marginal cost curve to generate the value of the lost output due to the monopoly behaviour (Varian, 1996, p. 414-415). The loss arises because consumer gain from increasing output is larger then marginal cost but monopolies are not able to produce more.
The output produced by a monopoly may not be the only thing brought up into question; quality is also an important factor regarding the efficiency of a monopoly. Whether a monopoly produces a higher or lower quality good than would be produced under competition depends on demand and the firm’s costs. The difference between the quality choice of a competitive industry and the monopolist is that the monopolist looks at the marginal valuation of one more unit of quality assuming that output is at its profit maximising level. The competitive industry looks at the marginal value of quality averaged across all output levels. Even if they were to both opt for the same output level, their quality preferences may be different.
John Jewkes gives an explanation of the grounds upon which a single producer monopoly would defend its cause. The case was raised by the British Oxygen