Question

4. a. State a recent (since 2009) case where government attempted to stop two firms to merge, and explain the reason behind government’s decision unwillingness to allow the merger.   

b. Briefly state why monopolies are not desirable?   

c. Briefly state two ways monopolies can be beneficial for buyers?      

Answer 1

Let me answer the questions one by one.

a) It is almost not possible to allow two monopolies to merge because they will have an upper hand of supremacy and will try to exploit the customers with their pricing strategy as there are no competition. The government on the other hand will try to avoid such mergers to save and protect the rights of consumers.

b) Monopoly firms can earn supernormal profit in the long run due to high barriers to entry and the lack of competitors in the market. Consumer’s have to pay higher prices for the goods and services offered but have no other substitutes to turn to since the firm is the industry. This leads to a deadweight loss to society because resources are wasted. Hence, the Monopolist firm will charge a higher price for the goods at a relatively lower level of output compared to a smaller firm in a more competitive market structure. A monopoly is a form of market failure because it is a price-maker. There also exists cross inefficiency, and this may be caused by the monopolist firm being the only producer in the industry.

c) Following are the ways in which monopolies can be beneficial for buyers.

• Lowering Prices with Policy: As consumers are conscious about the prices of the commodity and if the monopolies can do so, it will be beneficial for the buyers.
• Selling products at economic or equilibrium price