Question

You will find that we consume monopolies in our daily lives from our electricity to internet service. Why do you think monopolies are classified as a price maker and what are the challenges that monopolies will be facing given the lack of competition?

Answer 1

Monopolies are classified as price makers because of absence of other competitive firms. Unlike the other forms of market structures where there exists competitors or firms co-existing , in this case a single firm exists in the market.

Due to just its existence and no other firm , it gets the power to set the prices according to its requirements. The monopoly need not face the competition and the threat of reduction of prices from other firms. But this does not mean that it would increase the price as much as required.

challenges that monopolies face

Given that it is a single firm existing in the market , one of the biggest challenges is the lack of incentives . Due to non presence of other competitive firms , the monopolies might not have the incentive to improve the quality of services , or innovate or upgrade technology.

Also the next problem is that when setting prices higher than the marginal cost, it leads to exploitation of consumers which does not lead to efficient or pareto efficient outcomes.

Monopolies can along with charging higher prices to consumers would also want to but from suppliers at a low price. This would also lead to market distortion results.

So despite the fact that Monopoly is the sole firm in the market , it faces its challenges too.

(You can comment for doubts)