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THE ADVANTAGES AND DISADVANTAGES OF MONOPOLY POWER
The major effects of monopoly power are distribution of revenue in favor of the monopolists, misallocation of resources and reduction of the aggregate welfare. Monopoly power is greatly condemned by neoclassical economists for this reason. The super-normal proceeds realized in both the short and long term are due to supra competitive level of prices being charged. Is monopoly power desirable or undesirable? Even though large amount of wealth is generated by the monopolist firms in the economy, these market failures are left unsolved. In this essay I will review the sources, disadvantages and advantages of monopoly power and the alternative views on the behavior of monopolists. I will then discuss the approaches and reviews using Singapore as the case study.
Monopoly Market structure
A pure monopoly is a single firm. There are few situations of pure monopoly; the monopoly power can also exist in an industry where there is more than one firm. The market where only two suppliers exist is called a duopoly and where few suppliers exist is known as oligopoly (Fisher, 1995). In the monopoly market structure there is a single which also forms the industry, firms generate supernormal profits both in the short and long run, the firm practices price discrimination, there are barriers for entry of new firms, the set its own price unlike in the perfect competition market where price is set by the forces of demand and supply.
A monopoly market situation is undesirable the following reasons
A monopolist firm maximizes its profits at MR=MC.This set higher price (PM) than in the case of competitive market structure (P1), causing a decline in consumer surplus. If the firm sells its goods at the price PM, implies that the supplier is allocatively inefficient simply because at QM, marginal cost is less than the price. The monopoly diagram is productively inefficient since it is not the minimum point on the curve of the average cost. If it was a perfect competitive market structure the firm would produce at price P1 whereby D=AC+MC, indicating allocatively efficient and normal profit(Geer,2003).
A monopolistic firm may also have minimum incentives to reduce the cost of its products due to lack of adequate competition. Therefore, the firm will be x-inefficient. This is because the cost curves of the monopolist tend to be higher as compared if the firm was operating in a more competitive pressure. A monopoly may as well lack the incentives to help in developing new goods and services and offer high quality products (Wahlgemuth,1999). For example, standard of food products in service enterprises drops because of lack of adequate competition.
Some firms may increase in size and become too big and suffer from the problem of diseconomies of scale since in a very big business enterprise is difficult to motivate and coordinate workers.
Monopolist can also use their power to exploit the suppliers by paying them lower prices. For instance, a big supermarket in Singapore like Sheng-Siong Supermarket may be able to reduce the profit margin for the farmers .Sheng-Siong use their market power to squeeze incomes of their suppliers since the suppliers do not have alternative supermarkets (Fisher, 1997).
Lastly, monopoly firms generate supernormal profits both in the short and long run hence leading to inequitable distribution of the resources in the economy.
However, existence of monopoly firms in an economy does not always affect the public interest negatively. If the is high fixed cost in particular industry, then in this scenario economies of scale imply the most efficient and effective number of firms in the market is one.
If the market demands the level of quantity at 10,000, then the number of firms that would be effective and efficient is one. This type of natural monopoly exists in particular industries such as national networks and systems of electricity, tap water and gas distribution. In most of the industries such as car industry has very high fixed cost and a wider scope of specialization, indicating that the economies of is not too large, hence there if more than enough room for many firms.
In some situations, monopolies can utilize their supernormal proceeds to invest in innovation, research and development. For instance, a company that deal produces drugs may heavily rely on patent rights to make supernormal profit both in short and long run which justifies the huge cost of research, innovation and development. However, most of industries such as the supermarkets, it is hard to justify monopoly as many of the supermarkets have very limited need for innovation, research and development (Harberger, 1995).
Thirdly, there is an assumption that monopoly firms face minimal competitive pressure and hence they are x-inefficient (Easterbrook, 1990). However, a firm may acquire monopoly power because of being dynamic and efficient. For instance, Google Company is a monopoly, but the majority of the people including economists they do not consider it as inefficient firm.
The desirability of monopoly power solely depends on the nature of the market and industry. Generally, perfect competition market structures have more merits over monopolies (Fisher, 1997). However, in some situations monopoly may be justified, for example particularly if the industries have huge amount of fixed cost and they need profit for innovation, research and development. In other situation the government may allow some firms to operate as a monopoly, but control the prices for example, privatized firms such as electricity and water.
Causes of monopoly power
Economies of scale
If particular industry has very high fixed costs, other new firms are likely to incur higher average costs than the incumbent business enterprises. If a firm enters the industry and sells at Q1 can’t compete with companies already operating at MES and incurring an average cost at AC1.The economies of can occur for several reasons such as managerial, specialization and technical . They are commonly experienced in industries that need huge investments as airplane production and car production companies in Singapore.
This is type of barrier of entry where the incumbent companies have a very strong brand loyalty, making hard for new firms to enter. The new firms need to incur large amount of money in product promotions such as advertising .Product is a sunk cost, the new firms can’t regain it back, if the firms have the quit the market. The examples include drinks such as coca cola and Pepsi
Being first business unit in a particular industry more often become a barrier for the entry of new firms. For instance, Microsoft was first company to dominate the industry of office software. This made hard for ne companies to enter the market because every individual wanted to be compatible with Microsoft. Google has dominated search engine market even though it wasn’t the first in the industry.
Also barrier to entry may occur due to difficultness to access raw materials and suppliers. For instance, new airlines may experience a lot of challenges in accessing Heathrow airport for landing.
Cartels, collusion and mergers
Firms collude because they want maximize profits and minimize cost in whole industry, as well as set product quotas accordingly. This will cause prices of goods and services to go up and high proceeds to the firms. Since the firms will enjoy supernormal profits they invest in innovation, research and development. However, also consumers are likely reap some benefits from this investment .For instance in industries such as drug and automobile ,innovation ,expensive investment and research is needed to develop new drugs and engines .
Collusion and formation of cartels is necessary for the firms to earn supernormal profits in order to finance their investment project .Although it would lead to higher prices of goods and services, consumers benefit in the long term since they are able to get high quality goods and services to maximize their utility.However, there is no assurance that the companies will utilize the profits for innovation, development and research in order to produce high quality products. They may give the proceeds to both ordinary and preference shareholders in form of large amount of dividends .The firms may also utilize the supernormal profits to finance predatory pricing in the new markets. This will influence the welfare of consumers negatively.
Under collusion consumers incur higher prices in purchasing goods and services in order to satisfy their unlimited wants and reduces consumers surplus, but the y do not enjoy the benefits of economies of scale
However collusion assists firms to survive in market ecosystem. For example, there may be an industry like the bus industry which highly struggling for survival. Therefore , for the firms to survive in the market they must collude and for cartel otherwise most of firms may exit the industry. This will have a negative impact on the consumers because there could be no a variety of choice and competition. Collusion of firms is crucial to keep production of goods and services going. However, there is better ways of ensuring that business enterprises survive in a given industry. If necessary, the government should provide subsidies to the industry .Collusion are not the best method of keeping outperforming firms in business.
Competition anti-monopoly policies
Competition is ensures value and variety of choice to the consumers. It also provides the incentives to the business to differentiate themselves through capabilities, research and innovation.CCS champions for competitions which enable Singapore markets to function effectively and efficiently, sustainable innovation and research and sustainable economic competitiveness. The competitiveness of the economy of Singapore has been globally acknowledged. For in 2014-2015 the Global Economic Competitive Forum Report, whereby Singapore was ranked the second behind Switzerland for four consecutive years.
The World Competitiveness Report found that the efficiency and effectiveness of anti-monopoly policies in Singapore has been greatly rising and Singapore was ranked fourth most effective and efficient in prevention of unfair competition in the economy.
The competition policy Act does not only curb unfair competition but also a market ecosystem where no individual firm or groups of firms, small or big face non-market barriers to entry. This is important because it allow the entry of disruptive innovation in the economy to challenge the incumbent firms and companies by adopting new economic models and levering new technology.
An example, in Singapore is the Redmrt Company which provides online market services. The firm enters into the supermarket industry four years ago which is known to contain huge number of incumbent firms with very strong economic models. Redmart uses to technology provide goods and services to their clients a convenient and effective way sell and buy groceries online. Redmart has established large premises, temperature controlled center and more automated machines and equipment .Redmart’s entry into the industry has provide a competition incentive to the incumbent supermarket firms to adopt online shopping services(Evans , 2005).
Competition policy is an efficient and effective since it enable Singapore economy to open market and remove all the obstacles for entry. This enables business to thrive through research, innovation and productivity. This befits the consumers who enjoy high quality value and a variety of choice in order to be to maximize their utility. However, the competition policy on emphasizes on the entrepreneurial and private business leaving the government owned businesses such as public corporations unregulated. The government may allow only one firm to provide goods and services in a given industry hence fueling in monopoly power. Such industries include electricity and water
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Geer, 2003. Cyber insecurity: The cost of monopoly. Computer and Communications Industry Association (CCIA).
Harberger, A.C., 1995. Monopoly and resource allocation. In Essential Readings in Economics (pp. 77-90). Macmillan Education UK.
Wohlgemuth, M., 1999. Entry barriers in politics, or: why politics, like natural monopoly, is not organised as an ongoing market-process. The Review of Austrian Economics, 12(2), pp.175-200.