• Argument for monopolist markets within boundaries
    3 replies, posted
Most of the time, we associate monopolies with being a bad thing. Indeed, in 99 cases out of 100 they are bad. First of all, I want to associate you all with four types of market structures which are theoretically possible in a market economy: - [b]Perfect competition[/b]. Standardised product, no barriers to entry or exit and firms are "price takers" (they must set their price to the market price). Unrealistic in practice outside of agriculture, even then agriculture does present barriers to entry. Can make economic profits in the short term, but not the long term. - [b]Monopolistic competition[/b]. Differentiated product (the main distinction between this and perfect competition), low barriers to entry (usually there are financial barriers associated with differentiation) and firms are also generally "price takers", however with creating their own monopoly of a product that is slightly different from other firms (hence the name), they are able to set their sales price slightly above the market price (not by too much, as consumers will flock to substitutes). Most markets in the world are of this nature. - [b]Oligopoly[/b]. High barriers to entry and a low level of firms in the market. Each firm has significant (although not absolute) market power and therefore leans them closer towards becoming price makers (set the market price). However this is not exactly the case, as firms in an oligopoly can indeed be very competitive. Products can be both standardised or differentiated. Oligopolies can earn economic profits. There is a degree of interdependence within the market, as firms are influenced by the actions they each take. - [b]Monopoly[/b]. Blocked barriers to entry, single firm, and an absolute price maker (especially when dealing with products inelastic in demand). Like an oligopoly, it has the ability to earn economic profits. It has no close substitutes. Of course there are other market structures such as a monopsony (only one buyer but many sellers), but we're only going to be dealing with the above in this debate, and of course with a focus on monopolies. Also just so I don't confuse some of you, [b]an economic profit is not the same as an accounting profit. Economic profits deal with situations such as "would I be earning more if I was doing y instead of x? (to put it simply)[/b]. Most current markets feature monopolistic competition. This makes sense as it is close to perfect competition which achieves both allocative (what products do consumers want?) and productive efficiency (how can we make this product most efficiently?). It also gives consumers more choice through differentiation. Just imagine how boring it would be if you had a great amount of firms producing the exact same mobile phone. Through the monopolistic function of differentiation, firms in the market can gain slight market power and bring in increased economic profits. This attracts other firms to the market encouraged by this kind of profit, but in the long run economic profits become zero as the market becomes crowded. While monopolistic competitive markets can aim for productive efficiency, they will never reach it. There are some factors at play that prevent this. One, because of the differentiated product there is less competition regarding the exact good you create, a lower requirement for reaching maximum productive efficiency. Would a luxury car maker care that their cars aren't produced in the most efficient manner if consumers are only interested in the car because it's built by hand using antique methods (ie the Morgan Motor Company)? They might, but they have no reason to pursue it, unlike in a perfectly competitive market where they must reach allocative efficiency to stay in the market. The second reason is that monopolistic competitive markets can't reach great economies of scale. While yes, monopolies also do not have the drive to reach allocative or productive efficiency, monopolies however can achieve economies of scale. For those unaware of the concept, economies of scale refers to how firms can reduce the costs that go into their products by producing on a larger scale. It's similar to buying in bulk. A small firm in a competitive market will not have much room to reach economies of scale, but this can and has been achieved in the real world, particularly in oligopolies. The Australian steel industry would be an example. When a monopoly is implemented in a market with laissez-faire policy (or similar low government intervention policy), this gives the monopoly great freedom in adjusting the price to what it wants, and given that there is only one seller in the market and a feature of monopolies is no close substitutes, this makes demand for a good a monopoly produces inelastic. Monopolies by their nature attempt to set the price to where marginal revenue = marginal costs. This is the peak a monopoly can set its price at, as it will always increase production as long as the change in revenue received is greater than the change in costs and therefore production will be at where a maximum economic profit is achieved. However given the advantage of a monopoly at producing at a high economy of scale, proper government intervention could set pricing fairly for consumers while still giving the monopoly an accounting profit, and if this is done very well then it could lead to the monopoly pursuing an increase to its allocative and productive efficiencies. There are two price points at which a monopoly could ethically sell its products at: [b]Price = Marginal Costs[/b] (the "socially optimal" price). This is the point of production where marginal costs intersect the demand curve. This is the price point where a perfectly competitive firm sets its price at. Given that monopolies are inherently inefficient at allocative efficiency, a monopoly will not achieve any profits at all until allocative efficiency is achieved. This can result in losses in the short run, and possible bankruptcy in the long run. [b]Price = Average Costs[/b] (the "fair return", or "compromise" price). This is where the price is equal to where the average costs intersect the demand curve. At this point the monopoly receives an accounting profit, but does not get any economic profits. However, this is not ideal for reaching full allocative efficiency. So given that monopolies have the benefit of economies of scale to reduce average costs, and that they can be regulated to the degree of offering a fair price to consumers while still making accounting profits, shouldn't monopolies be allowed to operate? I believe they should be allowed in certain industries such as water or energy, where the loss of economy of scale from a competitive market would not be worth it, especially if government intervention performed properly could lead to better value for consumers.
In a sense this is implemented in some places, albiet not in the ways you've mentioned. Crown corporations a bit like this, wherein the corporation will utterly dominate certain service fields; within strict boundaries. [URL]http://en.wikipedia.org/wiki/Crown_corporations_of_Canada[/URL] However they are quite restricted and have a high degree of responsibility to the public. Moreso than any private corporation could ever have imposed on it. If you're going to go through all the difficulty and trouble of violating and modifying the concept of laissez-faire to your own ends, you may as well just implement a much more effective government/crown corporation system anyways. There's no point in giving power to monopolies unless the are on a very tight leash. The concept of a sanctioned monopoly that isn't directly controlled by the government is pretty worrisome as they have no competition and no strict obligation to public service.
Generally speaking, monopolies are allowed in cases of public interest, where it's entirely possible for pure capitalism to be negative.
I think such companies can be allowed in certain cases. For instance, multiple railway lines between two cities is a rather mad case. Utility companies (water, gas, electricity, etc) should also generally be like this. Theoretically the same could be done with healthcare (for instance, the state providing it), but I quite like the "dual" system where a state operated monopoly is in operation, but private healthcare insurers and doctors are allowed to operate as well.
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