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“THE GOVERNMENT SHOULD PROMOTE MONOPOLY”

Presented ByImran BanatNitisha ShahSandip PatilManpreet Kaur Matharu

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“The Government should promote Monopoly”

One of the roles of government, is that of regulating monopolies and ensuring competition.

The first step in understanding and forming conclusions in this debate is to determine a definition of monopoly.

Monopoly

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Monopoly is a term used by economists to refer to the situation in which there is a single seller of a product (i.e., a good or service) for which there are no close substitutes.

Governmental policy with regard to monopolies (e.g., permitting, prohibiting or regulating them) can have major effects not only on specific businesses and industries but also on the economy and society as a whole.

Why is Monopoly beneficial?

• Why is Monopoly Beneficial?

Monopolies have existed throughout much of human history. This is because powerful forces exist both for the creation and maintenance of monopolies. At the root of these forces is the natural human desire for wealth and power together with the fact that monopolies can be immensely profitable and provide their owners with tremendous financial, political and social power

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Types of MonopolyThere are four basic types of Monopolies

• Natural MonopolyA market that runs most efficiently when one large firm supplies all the output

• Geographic Monopoly A monopoly caused by geographic factors.

• Government Monopoly It is similar to natural Monopoly except that the monopoly is held by the

Government itself

• Technological Monopoly A firm who acquired monopoly rights because of a new invention or

scientific discovery.

Why Monopolies Arise?

– Ownership of a key resource.– The government gives a firm the exclusive right to

produce some good.– Costs of production make one producer more

efficient than a large number of producers.

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Causes of Monopoly

• There are two causes of monopoly

– Government

– Natural

Government-Created Monopolies

• Governments may restrict entry by giving one firm the exclusive right to sell a particular good in certain markets. – Example: Patent and copyright laws are two

important examples of how governments create monopoly to serve the public interest.

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Example of Government Monopoly

– Indian Railways has monopoly in Railroad transportation – State Electricity board have monopoly over generation and

distribution of electricity in many of the states. – Hindustan Aeronautics Limited has monopoly over

production of aircraft. – There is Government monopoly over production of nuclear

power. – Operation of bus transportation within many cities. – Land line telephone service in most of the country is

provided only by the government run BSNL.

Natural Monopolies

• An industry is a natural monopoly when one firm can supply a good or service to an entire market at a smaller cost than could two or more firms.– Example: delivery of electricity, phone service, tap

water, etc.

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Natural Monopolies

• A natural monopoly arises when there are economies of scale over the relevant range of output.

Quantity of Output

Averagetotalcost

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Cost

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How Monopolies Make Production & Pricing Decisions

• Monopoly versus Competition– Monopoly

• Is the sole producer• Faces a downward-sloping demand curve

– Is a price maker– Can reduce its sales to increase price

– Competitive Firm• Is one of many producers• Faces a horizontal demand curve

– Is a price taker– Sells as much or as little as it wants at market price

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Demand Curves for Competitive and Monopoly Firms

Quantity of Output

Demand

(a) A Competitive Firm’s Demand Curve (b) A Monopolist’s Demand Curve

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Price

Quantity of Output0

Price

Demand

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Sources of monopoly powerEconomies of scale: Low Production cost resulting from the large size of Output.

Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of companies in an industry. Large fixed costs also make it difficult for a small company to enter an industry and expand.

Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or finances to use the best available technology. One large company can sometimes produce goods cheaper than several small companies.

No substitute goods: A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits.

Control of natural resources: A prime source of monopoly power is the control of resources that are critical to the production of a final good

Network externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words the more people who are using a product the greater the probability of any individual starting to use the product It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft operating system in personal computers.

Legal barriers: Legal rights can provide opportunity to monopolise the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good.

Sources of monopoly power

Profit Maximiser: Maximizes profits.

Price Maker: Decides the price of the good or product to be sold.

High Barriers to Entry: Other sellers are unable to enter the market of the monopoly.

Single seller: In a monopoly there is one seller of the good that produces all the output. Therefore, the whole market is being served by a single company, and for practical purposes, the company is the same as the industry.

Characteristics of Monopoly

Advantages of Monopoly• Avoid Duplication

The avoidance of wasteful duplication of scarce resources - if the monopolist is a ‘natural monopoly’ it can be argued that competitive supply would be wasteful. Natural monopolies include gas, rail and electricity supply. A natural monopoly occurs when all or most of the available economies of scale have been derived by one firm – this prevents other firms from entering the market. But having more than one firm will mean a wasteful duplication of scarce resources.

• Enjoys Economies of scale

In spite of the undesirable economic effect of a monopoly in general, a monopoly may in certain circumstances generate substantial economies of scale, which can be passed on to society in a lower price. The small firms of perfect competition are not large enough to bring about the economies of scale. Such economies of scale are to be found primarily in natural monopolies. Some economists have questioned the existence of this beneficial economic effect.

• Research & Development

Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly

• Price Discrimination

Monopolists can also be dynamically efficient - once protected from competition monopolies may undertake product or process innovation to derive higher profits, and in so doing become dynamically efficient. It can be argued that only firms with monopoly power will be in the position to be able to innovate effectively. Because of barriers to entry, a monopolist can protect its inventions and innovations from theft or copying.

• Technological Progress

Another potential benefit to society from monopoly type firms is that profits are often the motivation for technological progress and investment in new technology is made possible by the presence of these profits. However, monopolies well protected byentry barriers will not need to seek new technology, and if they do, their goal may be to lower costs for additional profits and new entry barriers

Advantages of Monopoly

• Dynamic efficiency

Monopolists can also be dynamically efficient - once protected from competition monopolies may undertake product or process innovation to derive higher profits, and in so doing become dynamically efficient. It can be argued that only firms with monopoly power will be in the position to be able to innovate effectively. Because of barriers to entry, a monopolist can protect its inventions and innovations from theft or copying.

• Revenue

Monopolists can also generate export revenue for a national economy. A single firm may gain from economies of scale in its own domestic economy and develop a cost advantage which it can exploit and sell relatively cheaply abroad.

Advantages of Monopoly

Price Discrimination

• Price discrimination is the business practice of selling the same good at different prices to different customers, even though the cost of production is the same for all customers. – What do you think of this practice?

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Welfare with and without Price Discrimination

Profit

(a) Monopolist with Single Price

Price

0 Quantity

Deadweightloss

DemandMarginalrevenue

Consumersurplus

Quantity sold

Monopolyprice

Marginal cost

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Welfare with and without Price Discrimination

Profit

(b) Monopolist with Perfect Price Discrimination

Price

0 Quantity

Demand

Marginal cost

Quantity sold

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Examples of Price Discrimination

– Movie tickets– Airline tickets– Discount coupons– Financial aid– Quantity discounts

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Thank you