Monopoly Market Structures

Question: Discuss about the Monopoly for Market Structures. Answer: Introduction: There are various types of market structures that exist in an economy. Some market structures consist of many buyers and many producers like that of perfect competition ensuring that no single buyer or seller affects prices whereas there are markets where exist only one seller and many buyers such that the seller can affect the price fixed. A market consisting of only one seller and many buyers is known as a monopoly market (Pindyck et al, 2009). A monopolist is the only producer of a product and the demand curve that the producer faces is the market demand curve which relates the price that the monopolist receives with the quantity that it offers in the market, thereby having sufficient power in changing the price or the quantity of the product. If the monopolist charges a higher price it may not worry about other competitors who might charge a lower price and can capture a large share of the market. But it must charge a specific price if it is with the objective of maximizing profits (Varian, 2010). The monopolist takes into consideration the many factors that come into the picture to maximize profits. It must determine the costs and the features of the market demand to decide how much it should produce and sell. The price that the monopolist receives per unit of the output sold is its average revenue whereas the change in revenue that occurs due to one unit change in output is the marginal revenue. The solution to the mono polists maximizing problem is the intersection point of the marginal revenue and the marginal cost, the point where it maximizes profit (Mankiw, 2007). In the figure below we see the demand curve denoted as D which is also the monopolists average revenue curve. We also have the marginal revenue curve MR and the marginal and average cost curves denoted as MC and AC respectively. At the output level of Q* the MC intersects the MR curve, i.e., here MC=MR giving the profit maximizing output of the monopolist Q* at price P*. To assure that Q* is the profit maximizing output, we shall take a point Q which is less than Q*, and set at a higher price P. As we see in the figure, in such a case the MR exceeds the MC, hence indicating that if the monopolist produces any quantity a bit greater than Q it would be able to get extra profits thereby increasing its total profit. Thus, it can keep on adding to its output increasing profits until it reaches Q* where the MC is exactly equal to the MR an d hence incremental profit by adding one more unit to the output is zero. This shows that Q is not the profit maximizing output for the monopolist and if it produces Q then it loses the part of profit shown in the red shaded area from its total profit if it would have produced Q*. similarly if we take a point Q which is greater than Q*, we see here the MC is greater than the MR indicating that if it produces a bit less than Q then it would increase its profit by the amount MC-MR, thereby it can go on decreasing output and increasing profit till it reaches Q*. The greater profit earned by producing at Q* instead of Q is shown by the shaded region in blue. Mathematically we have: There are certain advantages and disadvantages of a monopolistic market structure. Firstly the advantages of such a market structure are as follows: Monopolists can gain from economies of scale and can be natural monopolies. Domestic monopolies can earn high amounts of export revenues for the country by being foremost in their region and then penetrating into international markets. An example of this is the Microsoft. Some economists argue that monopoly power is required to create dynamic efficiencies and technological progressiveness because the generation of high profits via monopoly would boost research and development investments (Samuelson et al, 2010). Also large monopolies are more expected to bring forward innovations which results in low costs than competitive markets and monopolists being in dominant strong positions are capable to bear high risks that are associated with innovation. Monopolies also protect intellectual property through the barriers to entry preventing the free riders problem (Lipsey et al, 2011) and also enabling them to generate super-normal profits which when invested in research and development reduces costs through innovations and increases efficiencies. The disadvantages of a monopolistic market structure are as follows: Output is restricted onto the market Higher prices are charged by monopolists than that would be charged in competitive markets Economic welfare and consumer surplus is reduced Choices and preference of consumers are restricted Consumer sovereignty gets reduced (Economics Online). Hence, if we sum up the advantages and disadvantages we see that monopolistic market structures do boost research and development with high profits being reinvested to uncover ways to innovation thereby increasing efficiencies but we also see that presence of such market structures also bring forward a high deal of social costs as these entities charge much higher prices compared to the perfectly competitive markets. Monopolistic market structures hamper economic welfare by reducing consumer surpluses, restricting the choices of consumers to earn supernormal profits. References: Pindyck, R, Rubinfeld, D Mehta, P 2009, Microeconomics, Pearson, South Asia Varian, H 2010, Intermediate microeconomics, Affiliated East-West Press, New Delhi Samuelson, P Nordhaus, W 2010, Economics, Tata McGraw Hill, New Delhi Mankiw, G 2007, Economics: principles and applications, Cengage learning, New Delhi Lipsey, R Chrystal, A 2011, Economics, Oxford, New Delhi Sowell, T 2010, Basic economics, Basic books, USA Economics Online, Monopolies, viewed 18 August 2016, https://www.economicsonline.co.uk/Business_economics/Monopoly.html