Monopoly Power Is Not Automatically Bad As Long As It Is Regulated
"Monopoly power is not automatically bad as long as it is regulated".
Discuss this view [20marks]
Monopoly power occurs when a business is a dominant seller of a good or service with a market share that exceeds 25%. There are many disadvantages for societies where monopolies exist. A higher price than those in competitive markets is one of the main disadvantages for society. As monopolies are the main seller of goods and services in the market they can use their market power in order to raise the prices well above the marginal cost and thus make supernormal profits. As their prices are set so high and people have little other choice than to pay for them this reduces the amount of consumer surplus income.
Green area = supernormal profit (AR-AC)
Pink area = Deadweight welfare loss (the combined loss of producer and consumer surplus) compared to a competitive market. …show more content…
Another disadvantage of monopoly is that there are fewer incentives to be efficient. If it is protected by high barriers to entry (meaning there are a few or no competitors in their market), the business may become complacent and thus operate less efficiently that it could. In this instance it is also possible for diseconomies of scale to occur. For example if the business did become complacent and chose not to bother to invest in technology to improve its efficiency it could suffer from technical diseconomies of scale as with new equipment/machinery, goods can be produced at cheaper and more effective
Discuss this view [20marks]
Monopoly power occurs when a business is a dominant seller of a good or service with a market share that exceeds 25%. There are many disadvantages for societies where monopolies exist. A higher price than those in competitive markets is one of the main disadvantages for society. As monopolies are the main seller of goods and services in the market they can use their market power in order to raise the prices well above the marginal cost and thus make supernormal profits. As their prices are set so high and people have little other choice than to pay for them this reduces the amount of consumer surplus income.
Green area = supernormal profit (AR-AC)
Pink area = Deadweight welfare loss (the combined loss of producer and consumer surplus) compared to a competitive market. …show more content…
Another disadvantage of monopoly is that there are fewer incentives to be efficient. If it is protected by high barriers to entry (meaning there are a few or no competitors in their market), the business may become complacent and thus operate less efficiently that it could. In this instance it is also possible for diseconomies of scale to occur. For example if the business did become complacent and chose not to bother to invest in technology to improve its efficiency it could suffer from technical diseconomies of scale as with new equipment/machinery, goods can be produced at cheaper and more effective