Monopoly Vs Monopoly

Submitted By serge7serge
Words: 617
Pages: 3

Monopoly can be defined as a situation in which a single company owns most or all of the market for a specific type of service or a good. There are several assumptions about this model, such as: there is only one seller in the market, there are barriers to entry, monopoly is the industry thus it is the price creator and finally monopoly has an ability to make abnormal profits.
The case against monopolistic competition whether its powers should be eliminated or not is no longer straightforward as there are various advantages and disadvantages that could happen as a result of monopolistic actions.
The first argument that goes against monopolies is the fact that it can earn abnormal profits which goes at the expense of efficiency and the welfare of consumers. Due to the fact that price that is set in monopoly is relatively higher than marginal and average costs. This means that the price is above the cost of resources that were used in order to make a product, thus consumers are not satisfied and there is under-consumption of a good or a service. This will have a negative impact upon allocative efficiency and thus will cause failure of the market. Moreover the higher average cost with existence of inefficiencies in production means that the firm is not making optimum use of scarce resources. So in this case the government has to intervene by imposing competition policy or market deregulation. The diagrams below demonstrate the difference between monopoly industry and perfect competition industry.

The next argument is that even know monopolies would benefit from economies of scale that will not necessarily mean that they will have an incentive to invest in new ideas of how to distribute resources. That will lead to less incentive in terms of controlling the costs and X-inefficiencies, so there will be no real cost savings in comparison to perfectly competitive markets.
So in the case when the industry is taken over by a monopolist the profit-maximising point is at price Pmon and output Q2. So the monopolist will tend to charge higher prices Pmon rather than Pcomp which is the price of perfectly competitive market, thus restricting total output and reducing consumer surplus. However some of this reduction in welfare will be a complete transfer of higher profits to producers and some of the loss will not reassigned to any other agent. This is known as the deadweight welfare