Concept of Monopolies in Market
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Added on 2020-02-18
Concept of Monopolies in Market
Added on 2020-02-18
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Natural Monopoly In general, monopolies are distinguished by high investment cost and high fixed cost. A natural monopoly is different in context to the existing concept of monopolies. It is characterised by a condition where a single firm is in a better position to serve in the market in comparison to two or more firms. In other words, where a single large business can serve the entire market at a lower price than other two or more smaller firms. The term, “natural monopoly’’ doesn’t refer to the actual number of sellers in the market but relation between demand & technology of supply. In this scenario, the actual cost & prices might increase as there is only one efficient provide of a good. If it contains more one industry than either the firms will constrict to one through mergers or failures or the production will continue to consume more resources than required (Posner, 1968)There are various reasons which can lead to this situation. One of them is where there is decrease in the overall cost as the production output increases thereby giving the advantage to the existing firm owing to the large output which a new firm cannot match and eventually this stands as a barrier ( Mankiw, 2014). The other reason would be the control over the less available resources e.g. railway lines, power supply, telephones line etc. Hence, the key player which have the hold over the scarcely available resources becomes the only supplier which makes the entry of other firms difficult without the same resources. Government intervention and policies also contributes to the natural monopolies. This type of scenario arises in several industries where the starting or the upfront cost is too high. For instance, electricity transmission, transmission lines of telephones, oil or natural gas etc. One cannot think of replicating the same due to the exceptionally high cost which leads to only sole player having all the control over the market.Determination of price & QuantityThe firm falling under monopolistic takes decisions with an aim to maximize the profits which ultimately leads to situation where marginal cost is lesser than the price, as the firm keep producing resulting in under allocation of available resources. This is only occurs as the corresponding output is lower than the comparable output which is expected in perfect competition while the price charged is significantly higher. The same can be explained below in the diagram:
Monopoly DiagramThe quantity produced by a monopolist firm is represented by QM & the price charged by PM. It is apparent that the firm tends to produce until the average cost (AC) is at its lowest point. Thus, to maximize the profit, a firm need to produce until average cost is at its lowest possible point. In other way by increasing the production & corresponding lowering the price will never maximize the profits (Krugman & wells ,2008). So, the firm under natural monopoly produces less as the efficient output level would be higher. If a new entrant tries to enter the market in this scenario then the monopolist will increase the production quantity to lower the price compelling the new firm to exit the market ( Mankiw & Taylor, 2011).Efficiency of Natural monopolyKnowing the available resources are scarce, it is evident that the resources should be assigned orutilised in way to maximise the production & efficiency of these resources. The same never happensin natural monopoly unless there is government intervention. The same can be explained below withthe help of a diagram:
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