The Merits and Demerits of Monopoly

For 21A101 and 21S411

Introduction:
Explain the context given:
The merits and demerits of a monopoly are highly debatable in general. Monopolies are generally considered to
have disadvantages. However in certain circumstances, monopolies can have various advantages for consumers
and societal welfare.
State determinants of consumer welfare: Consumer welfare is affected by (1) prices, (2) availability of output,
(3) choice - product variety, (4) quality of products, etc.

Essay Development:
Thesis: Monopolies are bad for the consumer and Anti-Thesis: However, Monopolies are not
society because … necessarily bad for the consumer and society
because …
1. Higher Price and Lower Output compared to 1. Can charge a Lower Price and produce higher
perfectly competitive (PC) industry output due to Ability to Reap Substantial
Internal Economies of Scale
Monopolies can abuse their market power by restricting
output and charging a price above marginal cost (P>MC) A monopoly is able to reap substantial internal
and is allocative inefficient. This implies that consumer economies of scale (iEOS) as its scale of production is
welfare is not maximised since consumers value the last large.
unit of the good (represented by price) more than what (write in golden notebook) For example, basic mail
it cost the firm to produce that 1 more unit of the good service operator in Singapore, Singapore Post enjoys
(represented by marginal cost). This implies that the Technical Economies of Scale where they get to
good is underproduced and increasing the output can employ Indivisibility of inputs. As Singapore Post
increase the welfare of the consumers. increases in size, its use of an indivisible input, such as
Diagram: the machines to sort mails would be economical
because the cost of the indivisible input is spread over
Revenue/Cost/Price ($) a higher quantity of output (mails). In this case, the
MC = SSPC machines would be used more fully, thereby lowering
average costs. This explains why the postage rate of a
A first class local mail only cost 26cents to the
PM consumers.
PPC C
B
MCM Assuming that they pass the cost savings to
AR= DD= P consumers, they can sell their output at lower prices
0 Output
QM QPC compared to firms in competitive industries.

Explanation of diagram: Diagram:

With reference to the diagram above, a profit Cost/Revenue/Price ($)
maximising monopolist will produce where marginal MCPC=SSpc
revenue=marginal cost (MR=MC) at QM and charge a
price PM. On the other hand, a perfectly competitive
market will produce at the output where the market PPC MCMonopolist
demand intersects with the market supply (DD=SS), Qpc PM
and price charged at Ppc.

Assuming same cost condition as the PC market, a

monopolist underproduces since QM<Qpc and charges a MR AR = P =DD
higher price PM>Ppc. This leads to lower consumer QPC QM Output
welfare (always ANSWER the question). The
underproduction of the good and the inefficient
allocation of resources results in welfare loss to the
society (deadweight loss) of area ABC. The market fails
and there is allocative inefficiency as resources are
 The Merits and Demerits of Monopoly
For 21A101 and 21S411
underallocated / misallocated (always ANSWER the Explanation of diagram:
question). Society’s welfare can be maximised if more is With reference to the diagram above and ASSUME
being produced and consumed. DIFFERENT COSTS CONDITIONS, monopolist such as
Singapore Post is able to reap substantial iEOS where
Cite relevant examples: unit COP will fall. Hence, marginal cost (MC) curve of
- This is evident in the real world where Luxottica, the MPY – MPM is lower and lying below the MC curve of
monopoly in the eyeglasses industry is able to the PC industry (MCpc).
charge $400 for a plastic with 2 hinges that only cost Singapore Post’s profit maximising price and output is
$50 to produce. at 0PM and 0QM respectively where MCM=MR whereas
- In 2008, ticketing agent, SISTIC abused its dominant profit maximising price and output for a PC industry is
position to block other firms from competing by at 0Ppc and 0Qpc respectively where DD=SSpc.
signing exclusive contract with venue operators. As such, the price charged by the single monopolist in
That enabled SISTIC to raise its booking fee by 50% this case may be even lower and the output higher as
to $3 per ticket. Hence, monopoly is harmful to the compared to the perfectly competitive industry
consumers because they have no choice to choose assuming the monopolist passes on cost savings to
which ticketing agent to buy the concert tickets consumers in the form of lower prices. Hence,
from and have to pay a higher booking fee of $3 per consumers benefits.
ticket.

2. Inequity  unfair distribution of resources 2. Better Quality and Wider Variety of Products
(Dynamic Efficient)
The monopolist can earn supernormal profits even in
the long run due to high barriers to entry. If a A monopoly can be beneficial to consumers in terms
monopolist makes supernormal profits, these profits go of providing better quality, wider variety of goods and
to shareholders who may be mainly upper income services as well as lower price when it engages in
earners. This may worsen the income distribution in the innovation.
economy. Since the monopolist is also allowed to grow
wealthy at the expense of other firms and consumers With the high barriers to entry, monopolist is able to
too, this may worsen inequity in the distribution of earn and sustain the supernormal profits earned in the
resources. Consumers who are especially the low wage long run. Moreover, monopolies may have the
earners will be worse off as they will be charged higher incentive to innovate to maintain their monopoly
prices by the firm. This may worsen the income status. (especially in contestable markets).
distribution in the economy as the poor get poorer and
the rich get richer. Innovation can come in 2 forms, product innovation
For example: and process innovation.
Thus, a monopoly like Google which enjoys “a 90% share
of the global internet search market” earns Product innovation allows monopolist to increase
supernormal profits by extracting consumer surplus i.e.
product variety and improve quality of its products
offering lower quantity of product listings from other
which will therefore increase consumer satisfaction /
firms that are not under Google, resulting in inequity in
welfare. (write inside golden book) For example,
resource distribution. monopolist Luxottica partners Google to develop the
world’s smallest and slimmest smart glasses, Google
An example to illustrate the difference between Glass. This increases consumers’ product choices and
inequality and inequity: is hence beneficial.
Health inequality and inequity:
Health inequalities can be defined as differences in
In addition, Luxottica designs, manufactures and
health status or in the distribution of health determinants
between different population groups. For example, distributes over 80% of the major brands of
differences in mobility between elderly people and sunglasses, offering consumers with a variety of
younger populations or differences in mortality rates brands and designs. This widens consumers’ choice
between people from different social classes. It is and hence enhanced consumers’ satisfaction.
important to distinguish between inequality in health and
inequity. Some health inequalities are attributable to
biological variations or free choice and others are
 The Merits and Demerits of Monopoly
For 21A101 and 21S411
attributable to the external environment and conditions Also, when monopolist undertakes process
mainly outside the control of the individuals concerned. innovation, such as using more efficient technology, it
In the first case it may be impossible or ethically or
can lead to the production of more output using the
ideologically unacceptable to change the health
determinants and so the health inequalities are same amount of input. This translates to lower cost
unavoidable. In the second, the uneven distribution may per unit. Assuming the monopolist passes on these
be unnecessary and avoidable as well as unjust and cost-savings in the form of lower prices to consumers,
unfair, so that the resulting health inequalities also lead consumer welfare or consumer surplus can be raised.
to inequity in health.
3. Fall in Consumer’s Surplus due to X- 3. Some lower income group may benefit
inefficiency from price discrimination of monopolist

X-inefficiency is defined as organisational complacency Monopolies may benefit some groups of consumers
due to the lack of competition where the firm has little usually the students and elderly when the monopolist
or no incentive to keep costs low. With less competitive practices price discrimination. Price discrimination
pressure, a monopoly does not necessarily use the least- occurs when a producer charges different prices for
cost method of production. They may become different units of the same commodity for reasons not
complacent and not make efficient use of scarce associated with cost difference. When a monopoly
resources as cost controls become lax. Thus, costs are charges them lower price, consumer welfare of such
higher than necessary, resulting in inefficiencies as groups improves as they are now able to obtain a
average cost and marginal cost rise. good which they may otherwise not afford. Of course,
to the other group of consumers who will be charged
For example, there may be overstaffing and the use of a higher price, monopoly may be bad to them.
out-of-date production techniques, which may lead to a
loss of cost advantage. If the firm passes on the rising For example, state-owned monopoly Indian Railways
cost of production in the form of rising prices, then segments its customers by age, thereby segmenting
consumer’s surplus falls. them in different groups. Children older than 5 years
but less than 12 years are entitled for a discount of 50%
on the purchase price. This benefits consumers with
young children as they pay a discounted fare for them.
Nonetheless, price discrimination makes it possible
for certain essential services such as public
transportation to be provided to those with lower
ability to pay, thus ensuring a greater level of equity.

4. Consumers can get goods which

otherwise will not be produced

Certain products that have minimum efficient scale at

large range of output cannot be produced by the
perfectly competitive firms but will be produced by
the monopolist. This is so if one firm would have to
produce such a large quantity in order to realise lower
unit costs and that there would not be sufficient
demand to warrant a second producer of the same
product. This is especially true for a small country such
as Singapore.
(write inside golden book) For example, we only have
1 free-to-air television broadcaster, MediaCorp in
Singapore. The capital outlay to set up satellites, train
artistes, buy rights from foreign broadcasters to
telecast their shows here is extremely huge. By
diluting the profits through having more than 1
broadcaster, MediaCorp may find it unprofitable to
 The Merits and Demerits of Monopoly
For 21A101 and 21S411
provide the service and leave the industry. This would
leave consumers with no free-to-air television
programmes to watch, bringing adverse effect on
consumers’ satisfaction. In fact, Singapore Press
Holdings’ MediaWorks was an ephemeral free-to-air
terrestrial television broadcaster in Singapore in 2001
and ended up shutting down operation in 2005 due to
the insufficient market demand.

Evaluative Conclusion:
Stakeholders – consumers, producers, government and society
-Is MPY great for some groups, but bad for others?
Pros & Cons
-What are the advantages and disadvantages of MPY? What conditions do we consider for MPYs
to be either harmful or beneficial?

Make a Stand when the command word is “to what extent” / “discuss”:
Monopoly may have some disincentive effects on consumers and the society but not always the case as seen in
the case where innovation is achieved.

Whether monopolies are harmful to consumers and the society depends on the
- actual decisions made by the monopolist, e.g. whether it uses its supernormal profits to carry out research
and development (R&D) to benefit consumers or it remains complacent as well as whether it is willing to
pass its cost savings to consumers in the form of lower prices.
- the type of industry. In some industries where start-up cost is extremely costly, supplier needs to be assured
of a minimum size of the market in order to be profitable. An example is the market for utilities (which
provides essential goods and services) whereby a monopoly is essential to have a minimum efficient scale at
large output where firm’s average cost continues to fall across large quantity. This enables the monopoly to
offer lower price which otherwise is unachievable if the market share is small and average cost high.  MPY
is then desirable!

Priorities
- What are the priorities of the government / society regarding MPYs?
- How to solve the root cause of this problem?

Any government intervention to reduce market power may serve to harm consumers rather than to benefit as
the erosion of profits may discourage any attempts to improve quality & variety of products. Nevertheless,
having said that, the government can instead plant watchdog to check on monopoly. This would prevent the
firm from exploiting the consumers as seen in the case of Competition Commission of Singapore imposing a fine
on SISTIC for abusing its monopoly power in 2011. In England and Wales, OFWAT (The Water Services Regulation
Authority) regulates the price of water companies which provide essential goods and services to the consumers.
The watchdog can keep monopoly on their toes.

Instructions:

1. Please go through the points in this handout.

2. Write down the relevant examples in GNB.
3. Memorise:
- 1. Higher Price and Lower Output compared to perfectly competitive (PC) industry
- 1. Can charge a Lower Price and produce higher output due to Ability to Reap Substantial Internal Economies of Scale PLUS
- One other thesis / anti-thesis of your choice AND
- Evaluative conclusion
Intent: Training of writing speed in preparation of “A” Level examination. Writing practice will be given next week. Thank you.  Do study hard and be the best self!