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Economic Case Against Monopoly

In: Business and Management

Submitted By del321
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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?

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,...

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