Power Monopoly Research Paper Examples
A monopoly is a market structure dominated by only one supplier who supplies a particular product or service which does not have substitutes (Mankiw, pg 330). Monopolies exist because there is restriction of entry into a particular market. The existence of monopoly leads to market failure in an economy. Monopoly power means the ability to set prices by a monopoly firm. Entry into the market is restricted because of the high initial costs involved, complexity of operation, the nature of the product or service, economies of scale and existence of patents, trademarks, copy rights and franchise. The existence of monopoly rules out perfect market because its market power dominates in terms of price and this leads to an imperfect market (Hylton, pg 64). The reason why monopolies are powerful is because they can alter their prices without affecting demand. Because of the monopoly power, consumers may get low quality goods because monopolies are inefficient in their operations. Most monopolies are government owned organizations which produce public good. Since monopolies owns the scarce resource as factor input, they decide the quantity produced, the nature of production and the price to charge once inputs are converted to outputs. There are various assumptions considered when analysing the nature and operation of monopoly (Grant & Vidler, pg 213). These are:
There is no free entry and exit of other firms
The monopolies seek to maximize their profits
Monopolies decide how much price to charge different groups of customers
Monopolies know their demand curve
A monopoly firm is the industry unlike in competitive market where the firm and the industry are different. A monopoly does not have a supply curve because it sets its own price which is not influenced by other factors. This is in contrast to a perfect market whose price is determined by other factors outside the industry. A monopoly may charge prices higher than the marginal cost meaning it could produce output which does not satisfy the demand of the society. This leads to output inefficiency. A monopoly can continue to operate even when it is making losses because most of them are financed by government or the bodies which own the scarce resource (McEachern, pg 215). Monopolies have the behaviour of rent seeking and they draw that behaviour from government since most of them are owned by the government. Rent-seeking means retaining positive profits by firms or individuals. Rent seeking leads to government failure and resources are even more inefficiently allocated since it is the government which seeks to retain positive profits.
Theories of a monopoly
There are two main theories which explain how and why monopolies exist (Mankiw, pg 338). These are:
Economic Theory - Economic concept of monopoly is the one which is widely accepted by economists and it argues that a monopoly exists when there is one supplier and no close substitutes. It states that monopoly power may arise depending on the size and number of firms in an industry. The theory continues to argue that if there are small numbers of firms which are large in size, the possibility that a monopoly will natural arise is high. This is also to say that the larger the markets share in a firm, the greater the monopoly power. Some examples of economic concept monopolies are Microsoft and Wal-Mart because they are large in size and they control a large percentage of the market. A major drawback of economic concept monopoly is that it classifies firms according to the dominance arising from free trade. This is the case in Microsoft and Wal-Mart and United States Postal services. The theory does not show how firms acquired their dominance in the market because it only considers the size and market share of the firms. Critics say that size of the firm and market share cannot be grouped together because they are diametrically against each other (Hylton, pg 69). Voluntary trade leads to rise of competition and this may dilute the monopoly power of a firm. Therefore, it can be concluded that the size of a firm does not lead to monopoly because competition still exists between the firms. However, if a firm is protected from competition, the firm can be said to be a monopoly.
Political Theory - The political theory of monopoly argues that monopolies arise because of government intervention with an aim of controlling a certain percentage of market share (Grant & Vidler, pg 215). In this theory, the government prohibits competition and the number or the size of firm does not matter. Hence, provided there is government restriction of competition, the firm has monopoly power. An example of political concept monopoly is the United States Postal Service (USPS) because it is protected by the government against any form of competition.
Monopoly and price elasticity
The demand for monopolies is elastic. Monopolies cannot maximize their profit when the demand is inelastic because the marginal revenue is negative (McEachern, pg 220). When demand is elastic, the marginal revenue is positive and price is higher than the marginal cost. Price elasticity means the responsiveness of demand to price changes. When demand is elastic, it means that a small percentage change in price lead to a large percentage change in quantity demanded. Since monopolies control their own output, a small change in price does not significantly affect the output produced; hence high profits. However, if it was a competitive market, the small change in price would significantly affect the quantity demanded.
Inefficiencies in a monopoly
Monopolies require regulation because they cause inefficiencies in the market. The fact that monopolies arise because of restriction by the government leads to government failure because most monopolies arise as a result of government protection (Mankiw, pg 405). The following are some of the inefficiencies brought about by the presence of monopolies.
There is lack of competition by firms in the market. Competition leads to surplus. Monopolies have little surplus because there is no competition.
Monopolies do not make everyone better off because of the inefficiency in the pricing strategy. The consumers pay high prices while the monopoly is making huge profits. Competitive market ensures that everyone is better off, there is Pareto efficiency. Therefore, the dead weight loss is large in case of monopoly and these calls for regulation through the antirust.
Remedies for a monopoly
Monopolies can be remedied by giving independent shareholders a trust in order to allow them exchange trust certificates with the stocks they own. This allows a group of trustees to run the trust hence controlling and determining the price (Hylton, pg 75). Various antitrust have been created in order to oversee the operation of the monopolies. Some of the antitrust include:
Interstate Commerce Commission (ICC) which was created by the Congress in 1887 with an objective of formulating antitrust legislation aimed at supervising the railroad industry to minimize abuse.
Sherman Act was passed by Congress in 1980 with an aim of nullifying any contract which prohibited trade among the different states. The Supreme Court introduced the 'rule of reason' in 1911 with an aim determining the legality or the illegality of actions under the Sherman act.
In 1914 the Congress created Federal Trade Commission (FTC) which was aimed at carrying an in-depth analysis of the behaviour of firms in interstate commerce in order to evaluate unethical behaviour and give appropriate directions.
Wheeler-Lea Act (1938) was created in 1938 with an aim of defining and adding new terminologies such as "deceptive" and "unfair" to the act formed by Federal Trade Commission Act.
The Department of Justice has an antitrust division which is mandated to evaluate the actions of firms and take disciplinary action against them.
Grant, S., & Vidler, C. (2000). Economics in context. Oxford: Heinemann.
Hall, R. E., & Lieberman, M. (2013). Economics: Principles & applications. Australia: South-Western Cengage Learning.
Hylton, K. N. (2010). Antitrust Law and Economics. Cheltenham: Edward Elgar Pub
Mankiw, N. G. (2011). Principles of economics. Mason, Ohio: Thomson South-Western.
McEachern, W. A. (2012). Economics: A contemporary introduction. Mason, OH: South-Western Cengage Learning.