To what extent do monopolies pose a problem and how should governments deal with such markets (monopolies)?
In strict economy definition, monopoly means the only seller in the market. Such a market structure is quite hard to be found in the real world. Hence, a big company or a firm which can control more than 25% of shares is considered a monopoly. A company can become a monopoly when there are barriers which prohibit others to enter the market. Those barriers are patents, licenses given by government and also the dominance position of monopoly. Due to the barriers, a monopoly seldom faces competition and hence it has a great market power. Because of the great market power, many economists have argued that monopoly is actually an inefficient and undesirable market.
Why the monopoly is said to be inefficient? This is because monopoly will never produce at the point price equal to marginal cost which the social welfare is maximized. Most of the firms will try to maximize their profit and hence they will produce at the point of marginal cost equal to marginal revenue. The marginal revenue curve is below the demand curve. Because of that, there is a deadweight loss in the society. The resources are not allocated in the most efficient way. Allocative inefficiency occurs. The demand curve of monopoly is downward sloping and it is very steep. Because of a steep downward sloping demand curve, the demand curve is very inelastic. Hence, a monopoly could charge its product at a very high price. It can do this easily by restrict its output and the price will shoot up. Because the demand curve is inelastic, a monopoly will not lose many customers when it raises its price. For instance, Genting in Malaysia is a monopoly. The fee that it charges for the casino and the theme park is actually very high. However, many people still go to Genting for trips because there are no substitutes for that.
Besides that, a monopoly does not face...
Please join StudyMode to read the full document