Why we consider PCMkt is better than Monopoly?

Monopolistic market Single seller Price maker High barrier to entry Unique products inelastic demand (no close substitute) Large size firm Small size firm, no firm has a significant mkt share Aim: Maximise profit Aim: Maximise profit Perfectly competitive market Many many seller Price taker, price set by the mkt No barrier to entry/exit Homogenous products

Monopolistic market

Perfectly competitive market (It is seen as better mkt structure we should aim towards) Short run Long run No (new firms enter in the industry: consumers are getting the cheapest possible goods) No Yes

Supernormal profit

Yes (due to high barrier new firms cannot enter, so no competition, a firm makes supernormal profit in the long run: consumers continue to pay high price)

Yes

Productively efficient (output= min ATC) Allocatively efficient? (P=MC)

No

No

Yes (produce what consumers most want)

Yes (produce what consumers most want)

(1)Economists are opposed to monopoly because it is harmful to consumer welfare and s well as optimum allocation of scarce resources in an economy. In monopolistic market structure, The firm is very large single seller of a product without close substitutes, so they have tremendous market power. They own/control key resources required for production and charge higher prices. The firm is a price maker, they can manipulate price by restricting output and thereby reduce economic welfare. Pricing power is greatest when demand is price inelastic. Barriers to entry protecting monopoly power in the long run, block potential entrants from entering a market profitably. They seek to protect the power of existing firms and maintain supernormal profits / increase producer surplus. These barriers have the effect of making a market less contestable (2) Price discrimination: charging different prices to different group of people for the same good or service. Price discrimination can be beneficial for both sellers and buyers as demand conditions are different. To practice price discrimination: - You have to have monopoly power or some degree of control in the market - Seller must be able to identify the customer - Prevent arbitration or resale e.g. Peak travel (train for London before 9am): Inelastic high price Off peak travel (train for London after 9am): elastic lower price Market for drug (during patent life: high after patent expires: low) Price discrimination can be a rational strategy for a profit-maximizing monopolist. Figure 1 shows that the firm is making supernormal profits by charging a higher price and restrict total output. The high price reduce consumer surplus and create deadweight loss. Figure 2 shows consumers pay exact value for the product, so consumer surplus is 0. Price discrimination can generate profits for the firm because total surplus equals to the firms profit. It also can raise economic welfare because deadweight loss is eliminated.

Favour of monopoly. Natural monopoly is exists when: Duplication of service/product would be wasteful eg two firms running the same railway route is unprofitable. one supplier can be more efficient use of recourses. If firms fixed costs are a high proportion of total costs infrastructure e.g. railway, airport If firm gets economies of scale from producing a large scale: that average long run cost are always falling Results: higher output, lower price but at a loss making output: i.e. to gain the benefit of natural monopoly may need a subsidy. Dynamic efficiency in monopoly: Monopoly power can be good for innovation. Supernormal profits used to innovate and invest in production. Despite the fact that the market leadership of firms like Microsoft is often criticized, their investments in R&D can be beneficial to society. Technological development will reduce costs and produce better quality cheaper products for consumers.

Oligopoly Few large firms dominate industry and they offer similar or identical products, e.g. airlines, OPEC. There is a high barrier to entry. Firms are price makers. Oligopoly firms collaborate to charge the monopoly price and get monopoly profits, e.g. OPECs oil price rigidity. Another important characteristic of an oligopoly is interdependence between firms. This can lead to implicit and explicit collusion between the major firms in the market. In the mature oligopolistic market firms cooperate under the tacit collusion based on price leadership and gentlemans agreement for mutual benefit, e.g.: BP as a price leader sets the general industry price, with other firms such as Mobile and Caltex following suit. They engage a lot in non-price competition to increase market share e.g. mass media advertising and marketing, gift schemes, loyalty cards/points Immature oligopolistic market situation can lead to price war and cut-throat competition between firms.

Advertising: Advertising is the paid communication of firms and organizations directed towards consumers and the broad society. Debate over advertising: Advertising provides information to customers, so that customers can make better choices. Advertising fosters competition and customers take advantage of price differences. Advertising allows new firms to enter the market more easily. Advertising is on the rise because of mass market and globalization dynamic. However, economists generally opposed to promotional advertising. It causes the misallocation of resources and to drive up the price. Market is too fragmented because of advertising. Advertising manipulates peoples tastes and foster brand loyalty that makes buyers less price concerned as consumers are willing to pay more for brand names. Advertising costs passed on to buyers while promotional advertising is often not informative providing knowledge/information buyers already have.

Economist are opposed to monopoly on the grounds that such a market structure is harmful to consumer welfare as well as optimum allocation of scarce resources in an economy. Explain this statement in the light of the Commerce Commission of NZ and Australian competition and consumer council (ACCC) of Australia rejecting the Proposal by Air NZ to sell 25 of its shares to Qantas. You are expected to explain in detail the economic reasons for this rejection by the competition authorities by comparing the market outcomes in a competitive market and a monopolistic market. Use an appropriate diagram to illustrate your arguments. Increase Market power, Merger enable them to make unnecessary high price.Monopoly can be harmful for consumers. Prevent airlines charge monopoly price and anti competitive practice