Premium Essay

Economic Case Against Monopoly

In: Business and Management

Submitted By del321
Words 659
Pages 3
The economic case against monopoly * A profit-maximising firm will produce at the productively and allocatively efficient level of output in a perfectly competitive industry * The conventional argument against market power is that monopolists can earn abnormal (supernormal) profits at the expense of efficiency and the welfare of consumers and society. * The monopoly price is assumed to be higher than both marginal and average costs leading to a loss of allocative efficiency and a failure of the market. The monopolist is extracting a price from consumers that is above the cost of resources used in making the product and, consumers’ needs and wants are not being satisfied, as the product is being under-consumed. * The higher average cost if there are inefficiencies in production means that the firm is not making optimum use of scarce resources. Under these conditions, there may be a case for government intervention for example through competition policy or market deregulation.

Potential Benefits from Monopoly
A high market concentration does not always signal the absence of competition; sometimes it can reflect the success of firms in providing better-quality products, more efficiently, than their rivals
One difficulty in assessing the welfare consequences of monopoly, duopoly or oligopoly lies in defining precisely what a market constitutes! In nearly every industry a market is segmented into different products, and globalization makes it difficult to gauge the degree of monopoly power.
What are the main advantages of a market dominated by a few sellers?

Patents
Giving the firm the legal protection to produce a patented product for a number of years (see below)
Limit Pricing
Firms may adopt predatory pricing policies by lowering prices to a level that would force any new entrants to operate at a loss
Cost advantages
Lower costs,...

Similar Documents

Premium Essay

Monopoly

...In economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Suppose that, instead of many sellers, there are only a few, or even one. Each seller provides a substantial part of the market supply. As a result, the market price will be affected whenever he varies the amount he supplies of the commodity. In other words, he is faced with a downward sloping demand curve. Similarly, on the buying side, when any buyer takes a significant proportion of the total market supply, he will be faced by a rising supply curve. In both cases we have some elements of ‘imperfect competition’. Monopoly is always characterised by number of peculiarities: 1) One firm and many buyers, that is, a market comprised of a single supplier selling to a multitude of small, independently acting buyers; 2) A lack of substitute products, that is, there are no close substitutes for the monopolist’s product; 3) Blockaded entry, that is, barriers to entry are so severe that is impossible for new firms to enter the market. In static monopoly the monopolist is in a position to set the market price. However, unlike a perfectly competitive producer the monopolist’s marginal and average revenue curves are not identical. The monopolist faces a downward-sloping demand curve and the sale of additional units of its product forces down the......

Words: 1445 - Pages: 6

Premium Essay

Perfect Competition

...(Spring 2007) 11-21 Applicability of the Theories of Monopoly and Perfect Competition -Some Implications Ravinder Rena * College of Arts and Social Sciences Eritrea Institute of Technology Gobind M. Herani * Indus Institute of Higher Education (IIHE) ABSTRACT This paper addresses the concern that monopolies arise naturally out of the free market. An attempt is made to compare and contrast two theories of monopoly economic and political monopoly that this is not true. This paper further demonstrates that the two theories of monopoly have their separate roots in two opposite theories of competition: perfect competition and competition as rivalry. Hence the paper discusses only one of these theories of competition accurately describes the nature of competition in an economy. Besides, the paper also delves the two theories of competition and monopolies are derived from collectivist and individualist political philosophy. It illustrates how perfect competition and economic monopoly have undermined economists' understanding of the actual nature of both competition and monopoly. After investigating these theories, an attempt to made to apply them to show how one can come to very different conclusions about when monopoly power does and does not exist. Keywords : Monopoly, Perfect Competition, firm, industry, government, egalitarianism, etc. 1. INTRODUCTION It is often claimed that a free market leads to large firms gaining monopoly power and being able to restrict the output of......

Words: 6569 - Pages: 27

Premium Essay

Microsoft Case

...The Microsoft Case Investigation into Microsoft began in 1991 by the Federal Trade Commission under suspicion that the company broke anti-trust laws and engaged in coercive activities prohibiting competitors from entering or participating equally in the market. “The plaintiffs alleged that Microsoft abused monopoly power and monopoly market structure on Intel-based personal computers in its handling of operating system sales and web browser sales “(The Microsoft Monopoly, 1998). The primary concern of the Federal Trade Commission and eventually, the Department of Justice, was whether Microsoft should be able to bundle its own web browser, Internet Explorer with the Microsoft Windows operating system. In 1998, The Department of Justice brought an antitrust suit against Microsoft. The suit included “twenty U.S. states suing Microsoft for illegally thwarting competition in order to protect and extend its software monopoly” (United States v Microsoft). In the end, “Judge Thomas Penfield Jackson ruled that Microsoft, with its Windows program, possessed monopoly power over a particular kind of operating system” (Rothstein, 2001). Later, the ruling was over-turned in the D.C. Circuit Court of Appeals and in September 2001, the DOJ announced that it was no longer seeking to break up Microsoft as previously ordered by Judge Jackson. It would instead impose less of a penalty. I agree that this bundling allowed Microsoft monopolized success over other browsers attempting to compete...

Words: 1431 - Pages: 6

Free Essay

Antitrust Laws

...Antitrust Laws After much research and investigations on Antitrust Laws, and reading up on individual cases, I think that overall Antitrust Laws are effective and good for the people. Without the Sherman, Clayton, and Federal Trade Commission Act, there would be a monopoly of every industry, trade, marketing, and services. This would in-turn lead to higher prices for the consumer, lower quality products, less innovation, and poor service. As I mentioned in my opening sentence, I will bring up two individual cases that the DOJ (Department of Justice) is pursuing when it comes to Antitrust Laws. I would like to begin by quoting the DOJ’s mission statement. Mission “The mission of the Antitrust Division is to promote economic competition through enforcing and providing guidance on antitrust laws and principles. Antitrust Laws The goal of the antitrust laws is to protect economic freedom and opportunity by promoting free and fair competition in the marketplace. Competition in a free market benefits American consumers through lower prices, better quality and greater choice. Competition provides businesses the opportunity to compete on price and quality, in an open market and on a level playing field, unhampered by anticompetitive restraints. Competition also tests and hardens American companies at home, the better to succeed abroad. Federal antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation,......

Words: 918 - Pages: 4

Free Essay

Microsoft as Monopoly

...Microsoft a Monopoly? Preliminary version April 4, 2000 Steven Cuellar Department of Economics San Jose State University San Jose, CA. 95129 Phone: (408) 924-5408 E-mail: SCuellar@email.sjsu.edu Presented at the Department of Economics Seminar San Jose State University San Jose CA. 95129 April 7 th 2000 Is Microsoft a Monopoly? 1 This would occur in the case natural monopoly in which economies of scale result in a single firm producing at a lower cost than a large number of smaller competitive firms. 1 Since the beginning of the antitrust trial against Microsoft there has been a great deal of commentary and analysis concerning the market position, pricing and strategic behavior of Microsoft. The courts Finding of Fact and the recent Conclusions of Law have intensified the interest in the case and resulted in even more analysis and questioning of the courts findings. This paper adds to the current list of Monday morning quarterbacks questioning among other issues: Whether or not Microsoft is a monopoly? Did they violate the antitrust laws? Have they harmed consumers? If the answer to previous questions is in the affirmative, then what remedies should be enacted? The purpose of this paper is to address the first and perhaps the most contentious question of whether or not Microsoft is a monopoly. Although most people have a general understanding of what a monopoly is, to eliminate any ambiguity it is helpful to establish a precise definition of......

Words: 6016 - Pages: 25

Free Essay

Regulation of Monopplies and the Microsoft Trial

...The regulation of Monopolies & the Microsoft Trial Research Paper Macroeconomics By: Ashleigh Magliano Introduction: Larger companies can become big threats to other smaller companies that are in a given market due to their power and innovation. Sometimes this can become more than a threat, and it turns to no competition at all between the markets due to the monopolization of a company. A company becomes a monopoly when it gains the control of the industry and has obtained the ability to change the output prices in that specific industry. With such power this opposes a threat to other businesses. The government has set up specific regulations for monopolies to control what they sell, how they sell it, and what services are allowed for consumers. The importance of regulating monopolies is to keep the market alive, to allow freedom for other smaller businesses. This keeps up competition in the market, and also keeps the monopolies from doing anything unreasonable. This has led to numerous trials on major companies, one of the biggest cases would be the trial against Microsoft INC. Acts for Regulating Monopolies: In 1890 the Sherman Antitrust act was put into effect, named after the Senator of Ohio, John Sherman and was the first component for congress to prohibit trust.(General Records of the United States Government, Record number 11) The Sherman Act intended by congress to help keep up competition in markets. Unfortunately the act was written to vague there were...

Words: 2220 - Pages: 9

Premium Essay

The Microsoft Case

...The Microsoft Case Microsoft was investigated for antitrust behavior after a U.S. court of appeals upheld a lower court’s finding that Microsoft used a series of illegal actions to maintain its monopoly in Intel-compatible PC operating systems (95 percent market share). (McConnell, 2012). US District Judge Thomas Penfield Jackson against Microsoft Corporation is a major blow to the largest US software company. Jackson upheld virtually all the contentions of the antitrust division of the Department of Justice, which brought suit against Microsoft for anti-competitive and predatory practices. Judge Jackson's finding of fact is unequivocal about Microsoft's crude and deliberate efforts to use its monopoly position in PC operating systems to gain control over other areas of the lucrative software industry, especially those related to the Internet and e-commerce. As the Wall Street Journal noted in its news report, "the judge came away convinced that the software company has behaved more like a thug in its dealings with competitors and customers." (McLaughlin, 2011). I do agree that Microsoft was trying to gain monopoly power in the computer software industry. Evidence that supports this are supported by the following facts: 1) During that time, Microsoft developed an entire range of products under the Microsoft Office that would cater to the various requirements of professionals in every field - Microsoft Excel, Microsoft Word, Internet Explorer, Windows Media Player,......

Words: 870 - Pages: 4

Premium Essay

Antitrust Paper

...Conclusion……………………………………………………………..page 4 References……………………………………………………………..page 5 O’Bannon versus NCAA Introduction In 2009, former UCLA basketball player Ed O’Bannon filed a lawsuit against the National Collegiate Athletic Association (NCAA), alleging that the NCAA had violated antitrust laws (specifically the Sherman Act) by colluding with colleges that participate in NCAA sports. The plaintiffs (Ed O’Bannon and 19 others) claimed that the NCAA had made money off their images in television programs and video games (www.espn.com). In August 2014, a federal judge, Claudia Wilken ruled that “the challenged NCAA rules unreasonably restrain trade in the market for certain educational and athletic opportunities offered by the NCAA Division I schools (www.espn.com).” Wilken proposed that schools set aside a $5000 cap per year for each student participating in NCAA sports. This money would be placed in a trust fund and would be paid out to the student/athlete upon graduation. If the school did not sell anything with the player’s name, image, and or likeness, the student-athlete would not be entitled to the money. Discussion The O’Bannon ruling cited that antitrust law, The Sherman Act, was violated. The Sherman Act was passed in 1890, and was “founded on the basic economic concept of supply and demand. Every contract in restraint of trade or commerce is declared to be illegal (Starr, 2014).” The plaintiff was seeking in the millions-of-dollars range, for both......

Words: 1082 - Pages: 5

Premium Essay

Market Structure

...Structure February 6, 2014 Economics are a very important part in the political policy. As a consultant to the mayor it is my job to inform him of the ever changing economy in our area. With that being said it is important that we think of all the aspects of microeconomics when deciding what to do with our economy as a whole. Today, economists classify markets according to conditions that prevail in them. Economists group industries into four different market structures- perfect competition, monopolistic competition, oligopoly, and monopolies. With that being said it is important to emphasize these key points and explain further what they mean. The first market structure, perfect competition, is characterized by a large number of well-informed independent buyers and sellers that exchange identical products. It represents an ideal situation that is used to evaluate other market structures. There are five conditions that perfectly characterize competitive markets. The first condition is that there are a large number of buyers and sellers. No single buyer or seller is large nor powerful enough to affect the price. Condition number two is that sellers and well as buyers deal in identical products. With no difference in quality, there is no need for brand names and no need to advertise. The merchandise of one seller is just as good as that of another. Third is that each buyer and seller must act independently. This ensures that sellers compete against one another for the......

Words: 2138 - Pages: 9

Premium Essay

Market Structure

...different market structures that made up the firms in his town. With this information is where the explaining of the different firms and their markets was explained. There was also discussion on the flow of the market firms and how the price elasticity worked within these firms markets. There was need to describe the high entry barriers that firms face when entering into the market when competing with other more established firms, that have known names against a small proprietors entering this market and the competitions it faces. There was the explaining how the smaller proprietors that do not have a famous or more renown name can hurt them when competing against monopolies and oligopolies, and how these market structures are formed and how they can edge out small proprietors with pricing and products sold that people are more familiar with. The mayor was interested and need to know how the local, state and federal governments could step in and help these smaller firms if there is seen a favoritism towards the higher monopolies and oligopolies. It was explained how this was important to help his local citizens build a business. Finally it was explained how international trade and their effect might help the local companies expand more into the international market and start a cash flow that would benefit the town and the firm owner. For a perfect competition there are six characteristics that will make it...

Words: 2331 - Pages: 10

Premium Essay

Microeconomics for Mba - Capítulo 10

...www.cambridge.org/micro4mbas McKENZIE: MICROECONOMICS FOR MBAS PPC CMYBLK ................................................................................................................ 10 Monopoly power and firm pricing decisions If monopoly persists, monopoly will always sit at the helm of government … its bigness is an unwholesome inflation created by privileges and exemptions which it ought not to enjoy. If there are men in this country big enough to own the government of the United States, they are going to own it. Woodrow Wilson That competition is a virtue, at least as far as enterprises are concerned, has been a basic article of faith in the American Tradition, and a vigorous antitrust policy has long been regarded as both beneficial and necessary, not only to extend competitive forces into new regions but also to preserve them where they may be flourishing at the moment. G. Warren Nutter and Henry Alder Einhorn t the bottom of almost all arguments against the free market is a deep-seated concern about the distorting (some would say corrupting) influence of monopolies. People who are suspicious of the free market fear that too many producers are unchecked by the forces of competition, but instead hold considerable monopoly power or control over market outcomes. Unless the government intervenes, these firms are likely to exploit their power for their own selfish benefit. This theme has been fundamental to the writings of economist John Kenneth Galbraith: The...

Words: 12857 - Pages: 52

Premium Essay

Espn' Monopoly

...ESPN’s Monopoly Embry-Riddle Aeronautical University xxxxxx Charge the highest price per unit at which this quantity of output can be sold or charge prices within demand? No matter the choice taken, ownership will always belong to the monopolist. According to Roger A. Arnold, a monopoly is a market structure in which there is a single supplier of a good or service. Also, a firm that is the single supplier of a good or service for which there are no close substitutes. Monopolies form when there is no competition between a leading firm and other companies, which allows the leading company to charge unreasonable high prices. Although monopolies are forbidden, since the U.S. government first outlawed monopolies in the 1890s, there are companies to this day that still have control over virtual monopolies in their firms. A journalist, who wrote the ‘3 Companies That Have Monopolies In The United States’ article, explains that monopoly owned companies dominate their respective markets and have no significant competitor. For instance, should ESPN be allowed to have their monopolized network for all things sports? In order to retain a monopoly, the ESPN company must prove the theory of monopoly, monopoly pricing, and output decisions by taking over the sports market. Sport marketing is a sector of marketing, which emphases both the promotion of sports’ events and teams along with the promotion of sports’ products and services. The sports market contains a distribution service,...

Words: 1238 - Pages: 5

Free Essay

The Microsoft Case

...The Microsoft Case November 17, 2011 Week 3 Paper Introduction…………………………………………………………………………...02 The Case...……......................………….………………….………………………… 02 Conclusion………………………………………………………………………....... 03 References………………………………………………………………………....... 04 Introduction The purpose of this paper is to discuss the Microsoft Monopoly case and how it relates to what we have been learning in our Economics class. The Case In 1999 Microsoft was accused of violating the Sherman Act, which was passed in 1890 with the purpose of maintaining competition in the marketplace by opposing the combination of entities. Microsoft was positioned as the largest publisher of operating systems in the world and this was their third anti-trust trial in the United States. The charges of the alleged monopoly were whether Microsoft were allowed to bundle Internet Explorer with their Operating Systems. The major theory was that they were going to turn into the sole internet browser supplier because it came bundled with every new personal computer and every Microsoft operating system, causing a monopoly. By definition this simply is not the case as Microsoft were not the only producers and sellers of internet browsers, nor was there any blocking of new entries to the market. There were also plenty of close substitutes back in 1999, with the internet browser Netscape actually far more popular than Microsoft's Internet Explorer. There was a perception by Microsoft's......

Words: 646 - Pages: 3

Premium Essay

Islam Economics

...In a free economic order, the decisions about economic activities are not taken by the State Authority. It is the market forces which decide which things to produce and in what quantity, which modes should be adopted to produce them and for whom should they be produced. In other words the market forces, that is, forces of supply and demand play ,a decisive role in the spending, production and distribution and exchange of wealth. It is the price index which brings these forces into operation. For instance, in the field of spending, the consumer will prefer to buy goods from the seller who charges comparatively low price provided that the goods conform to the normal standard. In the production sector, only those things would be produced which would sell at a higher profit margin and it is clear that greater profit can only be earned from the production of those commodities which fetch high price in the market. If the rate of sugar falls and the rate of cement rises, the capitalist would prefers to invest in the cement industry. The same is the case with exchange and distribution of goods and services. In the exchange of goods price plays decisive role. The seller wants to charge the maximum and the customer wants to pay the minimum price. Eventually the balance of the two forces i.e.,demands and supply determines the price and the process of exchange is completed. Like goods, the wages of the factors of production are also determined by the forces of demandand supply. The......

Words: 1763 - Pages: 8

Premium Essay

Antitrust Practices and Market Power

...Antitrust Practices and Market Power Antitrust Practices and Market Power Content Introduction…………………………………………………………………………..Page 2 Case for Antitrust Behavior……………………………….……….…..…………….Page 2 Antitrust and Market Power…………..……………………………………………...Page 3 Benefit of Monopoly………………………………………………………….……...Page 4 Conclusion……………………………………………………………………….......Page 4 References………………………………………………………………………........Page 5 Antitrust Practices and Market Power Introduction First of all, what is antitrust? It was first introduced and advanced by the neoclassical economists. We also call the antitrust law as the "competition laws". The main purpose of developing the antitrust law is to ensure fair competition in an open market economy, thus protect the consumers and maximize social welfare. Case for Antitrust Behavior I consider the case of Microsoft as the perfect antitrust law case of the antitrust police. On May 18 1998, United States of Department of Justice initiated the lawsuit towards Microsoft Corporation. Microsoft was accused of becoming a monopoly and engaging in abusive practices contrary to the Sherman Antitrust Act 1890 sections 1 and 2. The accuser alleged that Microsoft was being monopolistic because its product Windows requires bundling IE, Intel, and MSO which are all it’s own products. In other words, people that wants to use Microsoft Windows has to buy all the sub-products in order to make the whole system run normally. The settle...

Words: 572 - Pages: 3