Compare the efficiency of monopolistic and perfectly competitive markets. Discus

Question

Compare the efficiency of monopolistic and perfectly competitive markets.

Discuss the economic factors that lead to the development of monopolies. Examples of monopolies include electric utilities, railroads, airlines, cable television, and sports leagues. Try to focus your answer on a specific industry.

Governments grant temporary monopolies through patents and copyrights to pharmaceutical companies, authors, and artists. Consider the trade-offs that society must make when granting those temporary monopoly rights.

Given what you know about perfectly competitive markets, compare the efficiency of monopoly and perfect competition. Which is more efficient? Explain your reasoning and try to illustrate with a hypothetical example.

Explanation / Answer

Following are various factors that lead to the development of monopolies,

Merger and Acquisition

                A monopoly could be created following the merger of two or more firms. This will reduce competition.

Exclusive ownership of a scarce resource

                If a firm has exclusive ownership of a scarce resource, such as Microsoft owning the Windows operating system brand, it has monopoly power over this resource and is the only firm that can exploit it.

Governments Policies

                Governments may grant a firm monopoly status, such as with the Post Office, which was given monopoly status.

Patents or Copy write

                Producers may have patents over designs, or copyright over ideas, characters, images, sounds or names, giving them exclusive rights to sell a good or service, such as a song writer having a monopoly over their own material.

Perfect market is more efficient than Monopoly,

1. Allocative Efficient. This is because Price = Marginal Cost

2. Productive Efficient. This is because firms produce at the lowest point on the Average Cost

3. X Efficient. Competition between firms will act as a spur to increase efficiency

4. Resources will not be wasted through advertising because products are homogenous

5. Normal profit means consumers are getting the lowest price. This also leads to greater equality in society

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