Monopoly Markets Pros & Cons

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Created on: 18-01-13 16:41


	Monopoly Markets Pros & Cons
	Advantages A competitive market (perfect competition) is a theoretical ideal. It does not occur in a real economy. What is more meaningful is to compare monopoly with other market structures that are observed to occur. These are also not allocatively or productively efficient. The supernormal profit graph is drawn on the assumption that the costs in monopoly are the same as in a competitive market. This is not necessarily the case, since a monopolist may benefit from economies of scale. LRAC are reduced, and while making supernormal profits, the firm's consumers will be better off due to lower prices Natural monopolies can often occur which have an overwhelming cost advantage Dynamic efficiency is being achieved over time. Here the monopolist makes investment in process innovation, product innovation and other ways to protect market position. This is likely to involve some of the supernormal profits being allocated for this purpose. A positive outcome is that consumer choice is widened and unit costs reduced. Where there is a continued threat of new entrants into a market. This is the principle feature of a so-called contestable market	Disadvantages Restricting output onto the market Charging a higher price than in a more competitive market - because there are no other firms to compete away the supernormal profits Reducing consumer surplus and economic welfare - loss of welfare on the graph is the triangle between the point where MR and MC cross and AR and MC. Competitive markets would charge where average revenue and marginal cost cross Restricting choice for consumers Reducing consumer sovereignty Lack of efficiency - both productive and allocatively creating market failure Likely to suffer from X inefficiency - the loss of management efficiency associated with markets where competition is limited or absent Could have a wider impact on the global market place making it less competitive as well as potentially reducing employment as the higher prices lead to lower output
	Evaluation Monopolies are generally destructive to the economy. However, there are instances in transport in particular where a monopoly would be more efficient. The case is particularly strong for railways.

Monopoly Markets Pros & Cons

Advantages

A competitive market (perfect competition) is a theoretical ideal. It does not occur in a real economy. What is more meaningful is to compare monopoly with other market structures that are observed to occur. These are also not allocatively or productively efficient.
The supernormal profit graph is drawn on the assumption that the costs in monopoly are the same as in a competitive market. This is not necessarily the case, since a monopolist may benefit from economies of scale. LRAC are reduced, and while making supernormal profits, the firm's consumers will be better off due to lower prices
Natural monopolies can often occur which have an overwhelming cost advantage
Dynamic efficiency is being achieved over time. Here the monopolist makes investment in process innovation, product innovation and other ways to protect market position. This is likely to involve some of the supernormal profits being allocated for this purpose. A positive outcome is that consumer choice is widened and unit costs reduced.
Where there is a continued threat of new entrants into a market. This is the principle feature of a so-called contestable market

Disadvantages

Restricting output onto the market
Charging a higher price than in a more competitive market - because there are no other firms to compete away the supernormal profits
Reducing consumer surplus and economic welfare - loss of welfare on the graph is the triangle between the point where MR and MC cross and AR and MC. Competitive markets would charge where average revenue and marginal cost cross
Restricting choice for consumers
Reducing consumer sovereignty
Lack of efficiency - both productive and allocatively creating market failure
Likely to suffer from X inefficiency - the loss of management efficiency associated with markets where competition is limited or absent
Could have a wider impact on the global market place making it less competitive as well as potentially reducing employment as the higher prices lead to lower output

Evaluation

Monopolies are generally destructive to the economy. However, there are instances in transport in particular where a monopoly would be more efficient. The case is particularly strong for railways.

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Monopoly Markets Pros & Cons

Monopoly Markets Pros & Cons

Advantages

Disadvantages

Evaluation

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