Scribd
Upload
102 views3 pages

Essay (Monopoly)

Is Monopoly Always Bad for Society? Monopolies can have both advantages and disadvantages for society. On the one hand, monopolies may restrict output and charge higher prices, creating deadweight loss and reducing consumer welfare. However, monopolies can also use profits from high prices to invest in research and development, potentially improving products over time. Additionally, some industries like utilities require large fixed costs and are more efficiently served by a natural monopoly with only one producer. But natural monopolies still pose issues like lack of competition incentives and may require government subsidies. Overall, while monopolies can restrict competition and harm consumers in many cases, they may also spur innovation and bring efficiencies in some industries.

Uploaded by

Sarah Tseung
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
102 views3 pages

Essay (Monopoly)

Is Monopoly Always Bad for Society? Monopolies can have both advantages and disadvantages for society. On the one hand, monopolies may restrict output and charge higher prices, creating deadweight loss and reducing consumer welfare. However, monopolies can also use profits from high prices to invest in research and development, potentially improving products over time. Additionally, some industries like utilities require large fixed costs and are more efficiently served by a natural monopoly with only one producer. But natural monopolies still pose issues like lack of competition incentives and may require government subsidies. Overall, while monopolies can restrict competition and harm consumers in many cases, they may also spur innovation and bring efficiencies in some industries.

Uploaded by

Sarah Tseung
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Is Monopoly Always Bad for Society?

Definitions
● Monopoly: Theoretically, a significant firm with total market share, high barriers to
entry and significant market power, which is the ability to set a markup of price over
marginal cost to earn economic profit
● Diagram of monopoly

○ Brief explanation
■ Profit maximisation: produce at MR=MC, because if producing one
more unit of output than this level, the marginal revenue cannot cover
marginal cost
■ Earn economic profit of (P-AC)*Q
● Sources of monopoly power come from barriers to entry
○ Economies of scale e.g. large capital costs, large advertising costs
○ Control of scarce resources e.g. DeBeers controls 95% of diamond source
○ Granted by the government e.g. license
○ Brand loyalty

Disadvantages of monopoly
● Not producing at pareto efficiency: deadweight loss
○ Because they have significant market power, monopolies choose to restrict
quantity supplied to increase market price

○ Lead to less transactions than actually possible, instead of socially optimum


level of MB=MC to fulfill demand, produce at MR=MC
○ There are people willing to pay between profit maximising price of P and P*
that have been neglected
■ Q-Q* quantity of trades lost, welfare loss
○ COUNTERPOINT: This is not always the case, it can be reduced: 3rd degree
price discrimination

■ When firms can identify different groups of consumers and sell to each
at different prices, then can reduce pareto inefficiency, as there groups
with more price sensitivity can get demand fulfilled too
■ Even more the case with 1st degree price discrimination, when a
monopoly firm can set the price custom to each individual consumer:
eliminate pareto inefficiency
● THIS IS NOT LIKELY IN REALITY, so pareto inefficiency still is
very likely
● High price markup, compared to perfect competition
○ Lerner index: as monopolies that have a downward sloping (less elastic)
demand curve, they can charge a higher proportional markup of price over
marginal cost

○ When right hand side of equation (1/E(y)) is larger due to (E(y)) being large,
then left hand side (which represents proportional markup) is also larger.
○ Vs. perfect competition: with perfectly elastic demand curve (E(y)=1) then
markup is 0
○ High markup over marginal cost means higher price for consumers,
inequality/regressive pricing problems (some essential goods become out of
reach of consumers)
○ E.g. Mylan monopoly over epipen, lifesaving medicine costs $100+per jab in
the US????
● Lack of competition → low product quality
○ No competition= incentive to improve products or gain an competitive edge
○ Firms become compliant, give consumer faulty products because there are no
available close substitutes in the market
○ Impact consumer welfare
○ E.g. Faulty epipens from monopoly manufacturer Mylan

Advantages of monopoly
● High economic profit → research and development → better products/product quality
for consumers
○ Refer back to 1st diagram to point out the economic profit
○ Unlike perfect competition who cannot earn an economic profit in the long
run, thus cannot effectively engage in R and D
○ E.g. Apple can use large research and development funds to keep pushing
out new models of iphone, update iOS to keep in demand and keep up
barriers of entry
● Reduce wasteful competition/ natural monopoly
○ Some services e.g. providing water for the city would be wasteful if there are
multiple producers, due to need to coordinate between them in order to be
efficient
○ In these cases if only one firm is used, there will be less waste, as one firm is
responsible for the planning of the entire city’s water pipes
■ Increase efficiency instead of reduce it
○ Illustrated by natural monopoly: In a case where fixed costs are very high
(such as when providing water for an entire city), when producing at minimum
average cost (like in competitive markets), the monopoly firm is loss-making:
production is more efficient with only one firm in the industry

■
○ No incentive for entry
○ COUNTERPOINT
■ Will probably need some form of subsidy to make up for losses made
in natural monopoly
■ Diversion of government funds, burden on taxpayers etc.

You might also like