Question

1) Why do people dislike monopolies and oligopolies?

2) Why do cartels break up?

3) Do the five market structures (Perfect competition, Monopolistic competition, Oligopoly, Duopoly, and Monopoly) control their own prices?

Answer 1

1. In a competitive market, any given firm sets the price of its good to equal the marginal cost of producing that good. Perfectly competitive firms do not wield market power to set prices. Prices are instead set by the interaction of supply and demand on an aggregate level. However, in monopolies and oligopolies, a firm is able to charge more for a good than the marginal cost of production because they are the only supplier and therefore hold significant pricing power. Even though there may be many people who would be willing to pay some amount more than the monopoly and oligopoly firm’s marginal cost to purchase that good, these buyers are boxed out of the market because their price exceeds their willingness to pay. This is referred to as deadweight loss and is the reason why people dislike monopolies and oligopolies.  Such firms tend to become complacent over time because pricing power, not gains from efficiency or innovation, drive profits. Further, they engage in price wars and anticompetitive behavior in order to retain their market position in lieu of consumer welfare.

2. Many cartels between firms collapse either because of exposure by the competition authorities, the impact of a recession or perhaps because of a breakdown in co-operation between firms and cheating on output agreements. The latter means that cartels break up because there is a reason to cheat. While the cartel maximizes joint profits, individual profit could be increased if the firm could sell more at the cartel price. If everyone does that, output increases and the price falls.

3. Under Perfect competition, firms do not control their own prices, while in other market structures, Monopolistic competition, Oligopoly, Duopoly, and Monopoly, there is certain degree of freedom to decide prices .