Question

Students are required expressing their views on how Monopoly contrasts with Perfect completion, bringing out the factors that can possibly create Monopoly, the social cost (deadweight loss) involved in monopoly, market power and other enabling factors for price discrimination.

Answer 1

Differences between perfect competition and monopoly

Monopoly and perfect competition mark the two extremes of market structures, but there are some similarities between firms in a perfectly competitive market and monopoly firms. Both face the same cost and production functions and both seek to maximize profit. The shutdown decisions are the same, and both are assumed to have perfectly competitive factors markets. However, there are several key distinctions. Therefore, a general comparison between monopoly and perfect competition has been depicted as below in Table:

Monopoly		Perfect competition
1	Extreme market situation, where there is only one seller. He has no competition and so controls supply and price.	A fair, direct competition between buyers and buyers; sellers and sellers; finally between buyers and sellers.
2	Only one seller and practically all buyers depend on him, hence he has absolute control over the market.	Large number of buyers and sellers, hence no sellers and buyers can alter the price in the market.
3	Supply from only one seller, hence absolute control over the supply.	Supply comes from large number of sellers.
4	Demand is inelastic. Demand curve slopes downward.	Demand is perfectly elastic. Demand curve is a horizontal straight line.
5	Homogeneous product	Homogeneous product
6	No competition at all. No price or product competition.	Pure and perfect competition in price
7	Higher price. Higher than all competitive price P> MR=MC	Normal price P=MR=MC
8	Small output fixed by the sole seller.	Large output fixed by MR=MC
9	Excess profit monopoly gain.	Normal profit realized by price competition.
10	Pure monopoly is rare but elements of monopoly are there in markets.	Quite unreal.

There are certain caused for the growth of monopoly. These causes are:

1. Industrial Policy and the Expansion of the Scope of the Private Sector:

The industrial policy resolutions introduced by the countries have also expanded the scope of the participation of the private sector enterprises in various fields of industrial activity. The industrial policy resolutions of many countries in their list of industries (exclusively reserved for the public sector), allowed the existing private sector enterprises to continue and expand.

The growing participation of large industries in the new industries has resulted in growing concentration of economic power to the large industrial houses. The new industrial policy of many countries have liberalised many areas for the private sector which further led to the concentration of economic power in the hands of a few.

Again the Liberalisation, Privatization and Globalisation policy followed by the world economies have resulted in the concentration of economic power in the hands of particular MNC which further contributed to the expansion of monopoly power.

2. Inter-Company Investment:

Inter-company investment is considered another important factor for the growth of large industrial houses and growing concentration of economic power. Through inter-company investment, big industrial houses occupy the directorship of a good number of companies and monopolized the decision-making of these companies.

3. Government’s licensing policy

The licensing policy of the Governments has also facilitated the growth of large industrial houses and concentration of economic power. While giving industrial license, the governments never tied to control the growth of monopoly or concentration of economic power. Rather the licensing authorities had the tendency to sanction the licenses of new enterprises to experienced person having proven business ability instead of new entrepreneurs.

Moreover, the government’s policy and foreign collaboration, extension of tax incentives etc have also helped mostly the large industrial houses to avail these facilities. Again the governments never made any successful endeavor to grant to the small producers

In contrast the multinational corporations along with large industrial houses were allowed by the governments to produce even the items like televisions, radio receivers, soaps, cosmetics etc.

4. Import Duties and Market Protection

The industries in many of developing countries are protected by the governments from foreign competition through the imposition of heavy import duties and also by banning imports of some commodities. This sort of protection has raised the strength of large business houses in the domestic market.

The situation has reached to such an extend that these large houses even pressurize the small enterprises, create artificial crisis of their products for increasing profits, leading to growing assets and concentration of economic power in their hands by speculating the situation.

5. Planning Process

The planned development strategy in many countries has provided the opportunity to the large industrial houses to increase their fortunes further.

6. Control over Banking Companies.

In the past , the banking system of many countries was mostly under the control of large industrial houses. The major portion of the bank deposits collected from general depositor were mostly used for financing the industries of large industrial houses. The commercial banks in the past played an important role in developing monopolies and industrial empires of large industrial houses.

7. Credit Policy of the Public Sector Financial Institutions

Another important cause behind the growth of monopolies and concentration of economic power is the credit policy persuaded by the public sector financial institutions, where they always favoured large industrial houses in advancing loans as compared to that of small entrepreneurs.

8. Tax Policy

Many of the governments have also introduced fiscal incentives in the form of tax concessions or tax exceptions so as to provide incentives to some industrial enterprise for its development. The incentives benefited the large business houses to the maximum extent.

9.   Diversification and Technological Integration:

Diversification through proliferation of industrial units in different industrial categories and attaining technological integration by combining various stages of production under common ownership. Most of the large industrial houses have utilized both techniques so as to increase their monopoly power.

Social Cost of Monopoly

An important difference between monopoly and perfect competition is that whereas under per­fect competition allocation of resources is optimum and therefore social welfare is maximum, under monopoly resources are misallocated causing loss of social welfare.

When a product is produced and sold under conditions of monopoly, the monopolist gains at the expense of consum­ers, for they have to pay a price higher than marginal cost of production. This results in loss of consumers’ welfare. Which is greater? Monopolist’s gain or consumers’ loss.

With lower production of the product the monopolist relatively less resource are allocated to production. But under perfect competition there is optimal allocation of resources. Thus the monopoly caused inefficient production. Under monopoly resources remain idle as the monopolist wants to increase the profit by rising price.

In a perfectly competitive equilibrium the quantity demanded equals quantity supplied or price equals marginal cost, the sum of consumer’s surplus and producer surplus is maximum and therefore perfect competition ensures maximum social welfare or economic efficiency. But to maximise profits monopoly does not equate price with marginal cost. Instead he equates marginal revenue with marginal cost and therefore reduces output and raises price and thereby causes loss of welfare.

So loss of consumer surplus and inefficient allocation of resource are the common features of monopoly.

Deadweight loss occurs when supply and demand are not in equilibrium. When consumers do not feel the price of a good or service is justified when compared to the perceived utility, they are less likely to purchase the item. With the reduced level of trade, the allocation of resources may become inefficient, which can lead to a reduction in overall welfare within a society.
Under monopoly Market inefficiency occurs. When goods within the market are either overvalued or undervalued certain members of society may benefit from the imbalance, others suffer consequences in regards to their welfare.

Monopoly leads to the severe environmental problems. Under the monopoly situation the big industrial establishment cause sever hazards to environment in form of water and air pollution unless these industries are properly controlled by the governments. The overwhelming pollution cause incurable diseases to the citizens which may further caused for the increase in government’s expenditure on health facilities.

Under monopoly there is the concentration of economic power in the hands of a few. This lead to the unequal distribution of income.

Enabling factors of Price Discrimination

1) Market Imperfections:

Price discrimination is possible when there is some degree of market imperfection. The individual seller is able to divide and keep his market into separate parts only if it is imperfect. Customers do not move readily from one market to the other because of ignorance or inertia.

(2) Agreement among Rival Sellers:

Price discrimination also takes place when the seller of a commodity is a monopolist or when rivals enter into an agreement for the sale of the product at different prices to different customers. This is usually possible in the sale of direct services. A single surgeon may charge a high fee for an operation from a rich patient and relatively low fee from a poor patient.

In place where a number of surgeons and physicians practice, they charge their fees according to the income of the patients. The rate of fee is fixed for each category of patient. Lawyers charge from their clients in proportion to the degree of risk or amount of money involved in a law suit. Price discrimination is possible in the case of services because there is no possibility of resale.

(3) Geographical or Tariff Barriers:

Discrimination may occur on geographical grounds. The monopolist may discriminate between home and foreign buyers by selling at a lower price in the foreign market than in the domestic market. This type of discrimination is known as “dumping”. It can only be successful if the commodities sold abroad can be prevented from being returned to the home country by tariff restrictions.

Sometimes transport costs are so high that they act as a safeguard against the return of dumped goods. Geographical discrimination satisfies Pigou’s first condition for discrimination ‘when no unit of the commodity sold in one market can be transferred to another.’

(4) Differentiated Products:

Discrimination is possible when buyers need the same service in connection with differentiated products. Railways charge different rates for the transport of coal and copper. For they know that it is physically impossible for a copper merchant to convert copper into coal for the purpose of transporting it cheaper.

This satisfies Pigou’s second condition that ‘no unit of demand proper to one market can be transferred to another.’ It also applies to discrimination based on age, sex, status and income of buyers of services. For instance, a rich man cannot become poor for the sake of getting cheap medical facilities.

(5) Ignorance of Buyers:

Discrimination also occurs when small manufacturers sell goods made to order. They charge different rates to different buyers depending upon the intensity of their demand for the product. Shoe makers charge a high price for the same variety from those customers who want them earlier than others. For the same variety of shoes, different buyers are also charged different prices because individual buyers are not in a position to know the price being charged to others.

(6) Artificial Differences between Goods:

A monopolist may create artificial differences by presenting the same commodity in different quantities. He may present it under different names and labels, one for the rich and snobbish buyers and the other for the ordinary. Thus he may charge different prices for substantially the same product. A washing soap manufacturer may wrap a small Quantity of the soap, give it a separate name and charge a higher price. He may sell it at Rs 17 per kg. As against Rs 16 for the unwrapped soap.

(7) Differences in Demand:

For price discrimination, the demand in the separate markets must be considerably different. Different prices can be charged in separate markets based on differences of elasticity of demand. Low price is charged where demand is more elastic and high price in the market with the less elastic demand.

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