With Reference to an Existing Case, or Cases, Critically Appraises the View That Monopolies Are Always Detrimental to Consumer and Social Welfare

COURSE WORK ASSIGNMENT

ЎҐWith reference to an existing case, or cases, critically appraises the view that monopolies are always detrimental to consumer and social welfare.Ў¦

MNGT 504: Economics for Managers

Introduction

Ў§MonopolyЎЁ is defined by its market power. Monopolies are always known to possess an exclusive control over its particular market and that gives them the sovereign authority to control the prices for its goods or services (Dictionary.com Unabridged (v1.1), 2006). Hence, they represent the market. They indeed have detrimental effects on consumer and social welfare.

In this paper, section 1 will focus on the theory and economics of a monopoly. Section 2 will discuss with a recent case of monopoly, as in the web search engine company- Google, whose real repercussion is still not clear to most consumers. Finally this essay will conclude with the outlook on how world markets are opening up to each other and how competition and new government policies are restraining the growth of monopolies and their incessant power.

1 Theory and Economics of a Monopoly

In theory, monopoly can be defined as the presence of a single firm in an industry or a number of firms sharing the majority of the market -An Oligopoly (Sloman, 2005).In practice, monopoly is considered to be 25% or more of the market. Market power is shaped by these monopolies in their respective fields and they gain supernormal profits out of it. An individual firmЎ¦s output manipulates the price of that goods or services, and that in turn is referred to as market power (McAleese, 2004).

1.1 Profit maximization under monopoly

Monopoly follows the same rules for profit maximization as given in a perfect competition. Namely, the cost curves looks similar to those of establishments under perfect competition although the revenue curves look dissimilar (Sloman, 2005).

Figure 1: Profit maximization under monopoly (Adapted from Sloman, 2005).

The price demand under monopoly will be more or less inelastic. This leaves the consumer no choice, but to pay the high price for that particular good which would have been more elastic in a competitive market. In figure 1, MR is the marginal revenue which is the price of the last unit sold; minus the loss of revenue incurred of those units it could have otherwise sold at a higher price (Sloman, 2005).AR is the average revenue curve. Both the average and the marginal revenue are downwards sloping as in a competitive firm. It should be noted that AR=P, thus price to quantity is same as the average revenue to quantity. MC=AR where the profit is at the maximum, at an output of Qm (Sloman, 2005).The demand curve is the price given.AR=P, the price at Qm.AR-AC is the supernormal profit gained .Point b pertains to average cost (AC) (Sloman, 2005).

1.2 Monopoly against perfect competition

To understand better how the monopoly affects the market, we need to compare monopoly to perfect competition. Where there is perfect competition, the company is unable to decide the price of their product. In other words, the company has to label their prices according to the prices of their competitors. However, in a monopoly, they decide the prices and that too, at a much higher price with a different output compared to a competitive industry (Sloman, 2005).Some key points are given under:

„X Ў§Lock-in effectЎЁ arises when consumers are unable to switch to other competing aftermarket products, other than the manufacturerЎ¦s aftermarket products, because of the loss incurred in switching costs (Coppi, 2007, p. 55)

„X Monopolies are also likely to hold patents and royalty for their products, which in turn is an obstacle for other potential competitors.

„X Monopolies may operate on a high cost or even on a lower cost than other competitors and still earn very high revenues thereby creating barriers of entry (McAleese, 2004)

„X The possession of land, water resources, location, etc also gives monopolies an upper hand to other competition.

„X