Monopoly

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Monopoly
Public interest is virtual another way to describe consumers’ wants, namely, maximizing utility at the lowest price and the best quality. This concept has been contributed by Jeremy Bentham and J.S. Mill
referred to “the greatest happiness for the greatest number”. (Handout, 2004, the ‘public interest’) In the market structure, one extreme form, imperfect competition is known asmonopoly. The following is going to discuss that monopoly is always against the public interest. To compare with perfect competition (another extreme form), the potential strengths and weaknesses of monopoly will be presented and
examine which one can be best to serve the public interest.
First of all, a monopoly literally means a sole seller, it occurs when there is only one firm in the wholeindustry. But in practice, it is difficult to exist. Thus more than 25% market share in the industry is identified as monopoly by its legal definition. Meanwhile monopoly also exists in a certain region, e.g. a local water company dominates the local market as “natural monopoly” which means that market may be too small to support more than one firm to achieve significant economies of scale. A majorcharacteristic of monopoly is high barriers to entry. For example, a specific legal barrier protects monopoly in term of patent on essential processes, copyright and licenses and so on. At the same time, monopoly protects itself from competing through a variety of ways such as achieving great economies of scale, merger and takeover other companies and aggressive tactics etc. In case like this, themonopoly strongly erects the barriers to stop other rivals from entering or drive existing rivals out of the business. Furthermore some industries are considered to be unsuitable for competition, e.g. gas, electricity. Competition would lead to
duplication of resources.
Unlike monopoly, perfect competition, another extreme form, is normally defined through a number of assumptions or conditions: alarger number of sellers and buyers are price taker, they have to
accept market determined price. Sellers can sell as much as they wish at the prevailing price and buyers only buy a small proportion of the total goods available thus cannot influence market price; Freedom
entry, namely, no barriers to restrict; Homogeneous products means all goods are identical and cannot be distinguished;Perfect knowledge makes sure the consumers and producers are fully aware of prices,
costs, and quantity of products. (Handout, 2004, the model of perfect competition) Thus profit will be maximized just at MC=MR. It involves the firm, under perfect competition, can obtain supernormal profit during the short-run. The profit has been illustrated by the shade area. However the monopoly, in theshort-run, is only one firm in the industry, therefore the firm’s demand curve is also industry demand curve. Demand under monopoly tends to be less elastic at each price whereby monopolist can raise price and consumers have no substitute firm to choose within the industry
As above toughed, there are many factors involved in against public interest for monopoly. The main disadvantages can be summarizedas following. Monopolist can earn supernormal profits not only in the short-run but even in the long-run due to barriers to entry. Meanwhile, the high barriers result in operating with higher costs because the less competition means it may have less incentive to be efficient and keep costs down. “Managers and workers may take advantage of their monopoly position to use less technique and marketknowledge, thus produce less efficiently than perfect competition. This is known as X-inefficiency.” (Brownless, C. 1989, P218) Compare to a perfectly competitive industry, assume the same cost and demand curve conditions, the monopolist will charge a higher price for less output. Furthermore the monopoly is allocatively inefficient, like the price charging is greater than the marginal cost, this...
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