Question

1- Compare the situation of Walmart’s predatory pricing of paint with the 7 features of perfect competition (you do not need to deal with all 7). In what ways is Walmart either not guilty or guilty of violating some of these principles?

2- Everyone knows that a monopoly is wrong, but why exactly? List and define several reasons why monopolies hurt competition.

Answer 1

Answer to Question 1:

A perfect competition market is that type of market in which number of buyer & sellers are very large, all are engaged in buying & selling a homogeneous product without any artificial restriction & possessing perfect knowledge of the market at a time. There are 7 features of perfect competition which are as under:

i) Large numbers of buyers & sellers

ii) Homogeneous Product

iii) Free entry and exit conditions

iv) Perfect knowledge on the part of buyers & sellers

v) Perfect mobility of factors of productions

vi) Absense of transport cost

vii) Absense of Government or artificial restrictions

Now in the given case, Walmart was hit with the charges of predatory pricing. Government officials in Wisconsin and Germany accused the retailer of pricing goods below cost with an intent to drive competitors out of the market. In Oklahoma, retailer faces a private lawsuit alleging similar illegal pricing practices. Cost pricing in various countries are prohibited because of its impact on small businesses. Walmart strategy was to price the orner products very low. Corner products are items for which consumer know the price. By setting prices on these items very low, Walmart creates an overall impression of having very low prices. The material benefit of below cost pricing to consumer is marginal & temporary, but the restriction of competion by placing unfair obstacles before medium-sized retailers is clear & lasting.

So Walmart is guilty by violating some of the above principles of perfect competion.

Answer to Question 2:

A market structure characterized by a single seller, selling a unique product in the market is termed as monopoly. In a monopoly market, the seller faces on competition, as he is the sole seller of goods with no close substitute.

The several reasons why monopolies hurt competition are as follows:

i) Higher prices than in competitive market: In monopoly market, seller can easily increase the price of the product as & when it thinks that demand of the product is high. For eg. in the year 1980, Microsoft had the monopoly on PC software and they charged a high price for Microsoft Office

ii) A decline in consumer surplus: Consumer pay higher prices and fewer can afford to buy. This also leads to allocative inefficiency because the price is greater than marginal cost.

iii) Monopolies have fewer incentives to be efficient: With no competition, a monopoly can make high profit without much effort.

iv) Possible diseconomies of scale: A big firm may become inefficient because it is harder to co-ordinate and communicate in a big firm.

v) Monopolies can gain political power and the ability to shape society in an undemocratic and unaccountable way especially with big IT giants who have such an influence on society & people's choices.