Monopoly is against the interest of the consumer
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Monopolies can be national (royal mail), regional (water companies) or local (petrol station). Unlike a perfect competition situation were firms are ‘price takers’ and only respond to consumer demand, a monopoly finds itself in an imperfect competition market. In this type of market the firm is more of a ‘price maker’ and can therefore influence the market price. When comparing monopoly and perfect competition under the same conditions, we can find that the monopolist when in equilibrium produces a lower output and sells it at a higher price than the perfectly competitive firm. Due to the fact that the monopolist holds down output and maintains a high price enables him to make supernormal profits that he can sustain as no other firms can enter the industry.
A monopoly is a situation where the monopolist is the sole supplier or seller in the market. The monopolist can increase the price or restrict output of his product in order to increase sales revenue, as the demand curve is less elastic. This means that the monopolist faces the entire market demand curve for its output.
There are several different types of monopoly:
– A pure or absolute monopoly is basically a standard monopoly, meaning that there are no close substitutes in the market.
– Technological monopolies involve monopolies were there are high capital costs such as in telecommunications.
– Natural monopolies are when there is only room for one firm within the industry. There are two different types of natural monopoly; the first is the ownership of mineral resources, for example gold in South Africa, or oil in the North Sea. The second is the statutory monopolies established by governments such as the public utilities.
– Lastly there are artificial monopolies, which are deliberately created by firms in order to make abnormal profits (surplus earnings to normal profit) such as takeovers, amalgamations, or cartels.
The downward sloping demand curve for the industry must also be the demand curve for the firm. This gives the monopolist the power to be a price maker, he can set the price and then sell whatever quantity consumers are willing to buy at that price. Rather than setting the price, he can set the quantity he wishes to sell and then accept the price the market is willing to pay. It is because of this we say that the monopolist is constrained by the demand curve. Unlike perfect competition the monopolist is able to prevent new firms entering the industry by technical or statutory barriers. If the monopolist is making abnormal profits in the short term they are likely to persist in the long term. However the monopolist will not always make abnormal profits, as it will depend on the relationship between consumer demand (AR) and production costs.
In the short run equilibrium there are only three possible outcomes for the monopolist, abnormal profits, normal profits or losses.
Abnormal Profits (Average Revenue > Average Costs) (AR>AC)
Normal Profits (AR=AC)
Losses occur when the average revenue is below the average cost, i.e. the AC curve is above the AR curve. If losses were to persist in the long term the monopolist would have to leave the market unless he were to receive subsidies for the goods or services. If abnormal or normal profits are being earned, the monopolist will remain in the market in the long run. Unlike perfect competition, it is possible to earn abnormal profits in the long run due to the presence of barriers to entry, which prevent firms entering the industry and eroding the profits.
To say that monopolies are against the interests of the consumer is not, in my view strictly true as there are some advantages that monopolies can offer consumers. Monopolies encourage economies of scale, which are the reductions in unit costs which a firm can enjoy due to them being large operators, due to this a firm may be able to keep its prices down for consumers as there overhead costs per unit will not be as high as it would have been within a smaller business. An example an economy of scale is supermarkets such as Sainsbury’s or Tesco’s, as due to them buying products in bulk, they can sell their products cheaper than the local grocery store as there costs per unit will be cheaper.
Another way in which monopolies may be of an advantage to the consumer is that there will be rationalisation of resources within the industry, this is another way that the company can cut their costs and hence perhaps cut the final cost of the product to the customer. A monopolist also has the ability to continue production during times of recession, as the monopolist will have the resources to maintain output. Examples of some monopolies that are of benefit to the consumer include essential services such as the public utilities. i.e., telecommunications, public transport, electricity & water. Due to there being such high costs within these industries, it is of benefit to both the firm and the consumer for these industries to be a monopoly as it reduces wasteful duplication. To be sure that these companies do not abuse their privileges, the government may impose a number of guidelines for the organisations to follow such as price controls, fiscal measures and consumer laws; the threat of nationalisation or investigation by the Monopolies and Mergers Commission. The other way in which monopolistic power can be restricted is by market influences, as too high prices may force buyers to look for alternatives or substitutes.
In general the argument against monopolies are based on the idea that they do not act in the interests of the public due to them restricting output or charging high prices so as to maintain higher profits for themselves. Due to the company having control of the market it can also mean that the quality of the product may decrease as often the company may lack innovation to improve products and production methods in order to reduce costs and prices. Since monopolies know that customers have to buy from them, monopolies have little incentive to provide better products. Firms in a competitive industry try to obtain more customers. To obtain more customers, firms in a competitive industry try very hard to produce better products than their competitors.
Another disadvantage of a monopoly is that the consumer has less variety of goods to choose from due to the lack of competition. A basic economic theory is that market structure, causes business conduct, which causes performance. Market Structure is the number of buyers and sellers. The theory is that monopolistic market structure causes bad business conduct, which causes bad performance such as bad products. In a different market structure, with competition, it will cause lower prices and better products. This theory says that if we take a person, and put him in a monopoly, he will realize that he is a monopolist and become lazy. If the same person is put in a competitive industry, he will have to work better to produce the same income.
Price discrimination is another feature of a monopoly structure. This can be both a good feature and a bad feature of a monopoly for the consumer. The monopolist is able to charge consumers different prices in separate markets for the same product. The costs of production remain the same in both markets; hence the monopolist is able to increase profit. Profit maximisation is achieved when MR=MC (see diagram).
In conclusion I feel that I cannot fully agree with the statement that a monopoly is not in the interest of the consumer. In some cases as mentioned such as electricity, a monopoly is not a bad thing, as due to the high costs is works out cheaper for one company to monopolise the industry. However, in most cases I feel that a monopoly is not in the best interests of the consumer. An example of this is British Telecom, before when it was the only telecommunications company; its prices were much too high, once new companies came into the market their prices had to come down due to the price competition that they were now facing. In general I feel that for a consumer’s interest, we need competition within most industries to keep prices down, which unfortunately a monopoly does not provide.
Economics: A mini text, Buckingham, D. 1997
Principles of Economics; Henderson and Poole.1991