The world of pure competition that was described as the
ideal in terms of allocative and production efficiency. Such a market structure
leads to the most efficient use of scarce resources. However, pure competition
is not common in our country; only the agricultural industry offers a close
approximation. In reality, most markets in the United States are characterized
by imperfect competition: monopoly, oligopoly or monopolistic competition. Each
of these will be explored in this chapter.
MARKET POWER-A DEFINITION
Before we discuss monopoly and other forms of
imperfect competition in great detail, it would be useful to consider the
concept of market power for a moment. The seller in a purely competitive
market has no market power. The price that is set by the market will be the
seller's price. Any attempt to charge a higher price will, as we have seen,
lead to disaster. The seller's sales will fall to zero. Under imperfect
competition, sellers will possess some market power. That means they will be
able to raise price and not lose all of their sales. The degree of market power
will depend on the number of sellers and the ease of entry into the market (to
be discussed below). Where there are few sellers and difficult entry, market
power will be great. As the number of sellers increases and entry becomes
easier, the market power of the sellers will decline.
MONOPOLY-CHARACTERISTICS
Monopoly is market structure in which there is a
single seller of a product with no close substitutes. In addition, there are
significant barriers to entry such that new firms will find it very
difficult or even impossible to enter the market. True monopoly requires one
seller, but the additional characteristics are equally important. The lack of
close substitutes is necessary if the single seller is to have much market
power.
The existence of barriers to entry is also very
important to the existence of monopoly. A single seller in a market where entry
is easy would have very little market power. If a monopoly seller charged a
high price and, as a result, earned economic profits, new sellers would enter
the market if no barriers existed. This would obviously erode the monopolist's
position very quickly. Clearly, if barriers to entry were present in a monopoly
market, the seller will have a much greater degree of market power.
BARRIERS TO ENTRY
There are several different types of barriers to entry
that can exist in markets. One type is product differentiation. In this
case, the buyer has come to identify the brand name of the firm with the
product. Examples of this would be Kleenex and Jello. Nobody asks you for a
paper tissue, they request a Kleenex. Similarly, you would not ask for a bowl
of flavored gelatin for dessert, but instead would request a bowl of Jello. In
markets where significant product differentiation exists, it is very difficult
for new firms to enter. Potential entrants somehow have to overcome the
consumers' natural inclination to identify a seller's brand name with the
product, and that will not be very easy.
A second type of barriers to entry consists of institutional
barriers, which are erected by government. These barriers take on many
forms. Firms and individuals are issued patents by government for new
products and inventions. Patents last for seventeen years (and are not
renewable), during which time the owner of the patent has the sole right to
produce and sell that product. This definitely confers a monopoly on the holder
of the patent. The reason for granting patents, of course, is to stimulate
inventive activity since the resulting new products will benefit all of
society. By rewarding inventors with a limited monopoly, there will be an
incentive for research and development, which is, of course, the goal of
patents.
A third type of institutional barrier includes licensing
restrictions by government. Many different occupations (beauticians, barbers,
lawyers, doctors, school teachers, nurses, taxicab drivers, etc.) require some
type of government license or certificate. Without the license, a person is not
allowed to practice a given occupation. What is the purpose of such a
requirement? Ostensibly, it is to protect the consumer and guarantee quality.
After all, no one wants to go to a physician who has not been to medical school
or to be represented by a lawyer with no legal training. For these individuals
and others in the health professions, the licensing restrictions seem
appropriate.
But what about for barbers and beauticians? Are
licenses really necessary for these occupations? The worse that can happen to a
buyer is to get a lousy haircut. Why not let the market decide who can be a
barber and a beautician? If someone is not very good at cutting hair, the
market will soon eliminate that person through lack of customers. In addition,
I suspect that you have gone to a barber or beautician and received a lousy
haircut, even though the individual was properly licensed. So the license
doesn't guarantee that the person with the scissors is competent, only that he
or she has been to a beauty school or a barber school. If the license doesn't
really guarantee quality for the buyer, there is little reason for it except to
restrict the supply.
A fourth type of institutional barrier exists when the
government gives exclusive franchise rights to a firm to sell a
product. An obvious example of this would be the U.S. Postal Service, which has
the sole right to deliver first-class mail. Other examples would include cable
TV companies and utility companies as local phone service, electricity, etc.
These latter examples are usually perceived as special cases and require
further explanation below.
Another type of institutional barrier erected by
government is the use of tariffs and quotas. Tariffs are taxes on
imported goods while quotas consist of a maximum amount of a good that can be
imported into a country. By placing tariffs and quotas on imported goods,
foreign firms will find it difficult or even impossible to enter U.S. markets.
The sixth category of barriers to entry consists of economic
barriers. In some markets, production barriers will limit the feasible
number of competitors. In the long run, when all resources are variable, firms
increase output by expanding their plant size. The firm is said to be
experiencing economies of scale when average cost declines in the long
run as output expands. Economies of scale are due to such factors as division
of labor tasks and specialization, which become possible as the size of the
firm's operations increases. For most markets, average costs cease declining at
output levels (and then, perhaps, level out over a long range of output) that
are relatively small compared to the market size. This means that many firms
can operate in such markets and still be efficient by producing where long run
average cost is minimized. But in a few markets, average cost in the long run
continues to decline over the entire range of market demand.
Therefore, in case of natural monopoly, one
firm is preferred. Usually, the government will grant a public-utility
franchise to an individual firm, giving it the sole right to provide some
product to a market. This is the case with local phone service, electricity,
etc. In some markets, the economies of scale are large relative to the size of
the market such that only a few sellers are possible. This appears to be the
case for automobile production, cement, and aluminum production. These will be
discussed later under oligopoly.
6 comments:
Sir
In my view, yes, there is a lot of difference in the two i.e the perfect competition and the monopoly markets but monopoly has its own advantages against the perfect competition market ,they are : where there are similar products in the perfectly competitive market ,there might be lot of wastage of the resources. While, monopoly avoids duplication of the products and also the wastage of resources ; on one hand where in perfect competition ,the competition between the buyers to maximize profit is missing, on the other hand ,in a monopoly market the sellers not only think of profit maximization but also of the consumer satisfaction to stay in the market in the long run and thus, they take care of the good quality of the product. Hence, the social surplus is taken care of more significantly.Because there is perfect knowledge of the technology as well, the sellers do not waste a lot of time in research and development in perfectly competitive market which suggests that even in the areas where there is a little development needed is not taken care of. While ,in a monopoly market immense time is invested in research and development because seller community of this market understands the fact that they will be able to maximize profit through innovation and stand unique in the market side by side making sure the consumer attraction towards the product. As we see ,in the market today consumers are likely to buy the products with unique quality or design or packaging etc.Also because in a monopoly they have the advantage to use a better technology ,the producers tend to increase the productive efficiency.
Companies having monopoly over a product are bound to take advantage of the fact that the consumers have no other choice but to buy that company’s product. So, the company dictates its prices and terms of business. This not only harms the consumers but also the quality of the product produced by the company.Due to its extensive financial resources, a monopoly firm can survive the shocks of falling prices and the consequential losses, which, to small sized competitive firms, prove fatal during the period of depression.In India, the ‘MRTP ACT of 1969’ is such a legislation. The purpose of such legislation is to permit only those mergers, acquisitions and trade practices that increase efficiency and to prevent those that enhance the monopoly power of the companies.Having said this there are some places where monopoly in india is widely acceptable, like in that of railways largely for common good and other example is national power sector like nuclear and atomic.
sir,to me monopoly should not be there .monopoly it actually takes away the rights of other sellers who are not having the desired outputs and those who are new to this field .to them already there is a great competition of reaching at par with other sellers in the market,and putting barriers like brand name,govt monopoly would be like demotivating people to invest i india.on one hand modi is pursuading foreign companies to open firms in india to do bussiness here to invest here but on the other hand we are not appreciating our own indian firms to rise .in india there are very few brand names companies why it is so ?we need to think.. srishti sharma
Monopoly is created when the consumers are left with no alternatives or choices as there are barriers to entry so in order to satisfy their needs they at a point have to make a compromise. A compromise with price, quality, and quantity of goods.
I am now jottling down some areas where there is complete 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.
Monopoly never reaches to the point of equilibrium because there is always one weighted side which never makes social surplus happen.
I believe with choices and alternatives there comes satisfaction, and with an option of ‘no choice’ there is always an state of compromise.
Sir, according to me monopoly has its both advantage and disadvantage. Monopoly is bad because due to it, a commodity gets overpriced which does not happen in the case of perfect market. It is to be noted that monopoly is different from monopsony , in which there is only 1 buyer. Competitive laws restrict monopoly but in few cases as of patents or copyrights it is not illegal. Some of the disadvantage of monopoly are that due to monopoly other sellers are not able to come in the market. Also the seller may discriminate between the buyers, resulting in problems for buyers. Some difference between perfect competition and mopoly are: Perfect Market gives equal opportunity to all the sellers which does not happen in case of Monopoly; In perfect competition, all the goods are homogeneous with a perfect substitute but in monopoly either the buyer buy that good or leave it, i.e. no substitute is there. In monopoly market the profit maximization is much high than that of perfect competition.
It is important to note that there are some areas where monopoly is preferred due to reasons of security , limited resources. transportation expenses ,etc like, Defence, Coal, petroleum,Diamond etc.
SINGH ASMITA
15bal052
Sir,
According to me perfect competition market Is better than monopolistic market .In monopoly there is more chances of undue influence in market because there is only one seller ,so the prices are also determined by the seller itself .At least at the time of necessities buyers have to buy goods from that particular seller at higher prices. Because buyer doesn’t have any other option. But in competitive market , there are lots of benefits for buyer & seller both .Like, sellers have free exit & entry. Nobody can restrict them& he will have position in market as other sellers have because every seller sells same thing at same price. Competitive market benefits the consumers as well as in terms of pricing ,quality and after sales service. In this buyers have others options too. So, in this competitive market ,the problem of undue influence will not be occurred. No firm in the market can make abnormal profits in long run.The high degree of competition in this market helps resources to be allocated to the most efficient user.
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