Monopoly Market Structure: Advantages and Disadvantages

MICROECONOMICS
STUDENT ID:
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Question 1
a) The equilibrium position for a single seller market or monopoly along with underlying
efficiency is captured based on the diagram shown as follows (Arnold, 2015).
The efficiency for the
monopoly is lower as the price
charged to the consumers is
higher than perfect
competition. In order to
maintain this price, the supply
is maintained at lower cost. In
the long run, this is possible in
monopoly owing to absence of entry from any new player. As a result, the industry production
can be controlled by a single seller leading the inefficiency to continue for earning higher profits
(Mankiw,2014).
(b) The monopoly market structure tends to have certain advantages. One of the key ones is
visible in case of utilities such as electricity and water distribution. If such sectors are
allowed multiple players, then every company would invest in distribution infrastructure
leading to overlapping and wasteful expenditure. This is provided in monopoly. Also, since
there are no price wars, hence the stability of price may be obtained (Nicholson &
Synder,2015).
However, there are significant disadvantages of monopoly structure. One of these can be
reflected in the form of efficiency loss as is apparent from the equilibrium position highlighted
above. Also, the quality of the services or good produced may become lower as there is no other
substitute available to the consumer. Besides, the single seller has no incentive for cost reduction
leading to higher costs and prices for the customers (Pindyck & Rubinfeld, 2016).

Question 2
a) Allocative efficiency can be said to be attained when equality of price and marginal cost is
achieved. This is attainable in perfect competition owing to which it is often considered as
the benchmark market structure in this regards. Relevant illustration highlighting the same is
indicated as follows (Krugman & Wells,2014).
The above figure clearly reflects that marginal cost and price are equal in the long run as the
producers do not realize any profit. Clearly, this is the maximum allocative efficiency and this
cannot be exceeded (Mankiw, 2014).
b) With regards to monopolistic competition firm, the long term equilibrium position is
illustrated through the following diagram.