Is Monopoly necessarily less efficient than Perfect Competition According to SJ Grant’s Introductory Economics, Monopoly is the only sole supplier of the industry. They would not inherit any competitions as well as having no close substitutes. There are many reasons that cause the formation of Monopolists. Barriers to enter or exit discourages new firms to enter the market (patent rights creates a right to sell that product, abnormal profit, predatory pricing, raw material ownership, high fixed cost, government) being a price maker, firms either merge or get taken over by other firms and economies of scale. In Perfect competition, there are many sellers and buyers; there are only homogenous goods and perfect information. They are price takers so no firm charges either below or above the ruling market price. The demand curve is perfectly elastic. In this type of market, there is consumer sovereignty and advertisement could not be used to influence consumer’s demands. However both of them are opposite extreme forms of the market structure and in the realistic world, they hardly ever occur. An economist would define efficiency as ‘nothing can be made better off without causing the loss of another’. This is also known as Pareto efficiency. Meanwhile it is also when the resources are allocated in the best possible ways at the lowest possible average cost. Figure 1
Some people view Monopoly to be less efficient than perfect competition because they face no direct competition and so they would not work towards the interest of consumers. They would fail to apprehend productive efficiency using techniques and factors of production to produce at the lowest possible average cost per unit, because the cost of production is not a main concern to a Monopolist. They would simply increase price or restrict output. Monopolies are able to do that because they are price makers; even though the setting price is determined by the demand, they are still capable of restricting...
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