Evaluate the view that a monopoly, in the market place, is always undesirable.
A monopoly is the power of a firm to act as a price maker rather than a price taker. A monopoly is one of the extreme versions of the market structure scale therefore it sits at the end of the scale. A monopoly is not always undesirable for example where natural monopolies occur, other forms of market structure may be inappropriate or lowered costs mean re-investment in technology and innovation – dynamic efficiency; however, they are not so good as they have higher prices than competitive markets, they decline consumer surplus, less incentives to be efficient and possible diseconomies of scale.
Natural monopolies occur in cases such as the railway network. It would not make sense for there to be more than one network, as keeping it within one company means they can regulate all the timings, the construction work, the expansions and the safety of the consumers. A monopoly is the most appropriate explanation. Nevertheless, a natural monopoly ultimately means firms have no real competition and are incontestable. This means they decline consumer surplus as they could abuse their market power and set higher prices, which are in the company’s interest more than the consumers. Therefore, natural monopolies often need government regulation. With the government involvement it ensure the customer that there will be a good quality of service, prevent excess prices and ensure the monopoly stays a monopoly to avoid unnecessary competition, which would not be in the consumers interest. Also, threats of new competition may exert pressure on the monopoly to reduce costs. By having the government intervention they can ensure that if the monopoly does not have the consumer’s interests in decisions they can change their plans.
With a monopoly their profit tends to be supernormal profit as there is no competition and all the consumers are buying from their product, meaning they can cover their costs easily. This means they can re-invest their profit into technology and innovation. Innovation converts the results of invention into marketable products or services. This can lead to lower costs than in competitive markets as well as the monopoly being able to stay a monoploy. However, they could reduce output to increase prices as shown in diagram one. So even though they are more efficient, they can still hold back from selling the quantity as it will give them a reason to increase the price. This is disuse of allocative efficiency. In addition, in the case of the UK’s...