Question

13. Some markets are much more monopolistic than others.a. Why are some markets characterised by monopolistic market structures? (7.5 marks)b. Compare and contrast the equilibrium outcomes under monopoly and perfect competition (7.5 marks) c. What are the welfare implications associated with monopolies? (7.5 marks) d. What policies can governments use to limit the degree of monopoly power? (7.5 marks)

Answer 1

a.

Some of the characteristics which suggest that the market is monopolistic in nature are:

• Many producers and many consumers are present in the market thereby no business has total control over the market price.
• Consumers believe that there are differences among the competitors' products other than prices too.
• Relatively less barriers to entry and exit
• Producers have a certain degree of control over price

b.

Either it is monopoly or a perfectly competitive market, the agenda of equilibrium is to maximize profits. In case of a monopoly.

A firm under perfect competition has a demand curve to be a horizontal straight-line and marginal revenue equals average revenue. Whereas, a mo­nopolist faces a downward-sloping demand (or AR) curve and the marginal revenue (MR) curve lies below the average revenue curve(AR).

The difference in the demand conditions of monopolist and a perfectly competitive firm makes all the difference in the equilibrium outcomes, despite the agenda of profit maximisation. Take a look at the graph below.

c.

For a monopolist, the profit-maximising point (MC=MR) is at price Pmon and output Q2. The monopolist is able to charge a higher price, thereby restricts total output and welfare as the rise of the price to Pmon reduces consumer surplus effectively.

The reduction is welfare is transferred to the firm in terms of higher profits. This is known as the deadweight welfare loss or the social cost of monopoly and is equal to the area ABC shown in the graph below.

d.

Some of the deregulation policies by the government ensures that the consumer rights are preserved in a monopoly. Those are :

• Hold a cap in prices
• Regulating the mergers taking place in the market.
• In worst case scenarios break the monopoly
• The government ownership, like in the case of natural gas and electricity, could help reducing the power of monopoly

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