Monopolies that make super normal profits aren’t in the public
interest because they could charge a lower price than they do.
Introduction: Monopoly is an emotive word, and the immediate reaction
is that it should be replaced with competition. In this investigation
we are going to look at what is a monopoly, what are barriers to entry
and what types of barriers there are, what are normal and supernormal
profits and to they bear any benefits to the public.
What is a monopoly?
Monopoly is a market situation in which there is a single seller of a
product and there are no close substitutes of this product in the
market. The firm has all the market to its self and the customer
depends on the firm for the supply of the product. The monopolists are
the industry and the firms demand curve is also the market demand
curve. In this case the firm has some discretion over the price it
charges. The firm may increase or decrease the price with out fear of
retaliation form other firms. We may consider that there is no
interdependence in this market, there in one firm only. Finally it is
worth mentioning that the firm may change its demand curve by for
(Introductory Economics, a first approach to the study of economics by
Mike Cunningham 1994)
Why do monopolies exist? There are several reasons. The source of
Polaroid’s monopoly power is its penitent on instant camera
technology. No firm can copy Polaroid’s process of making instant
pictures. Penitent laws are one kind of barriers to entry that prevent
other firms form entering the industry.
Barriers to entry
A barrier to entry is a condition that precludes firms from entering
and industry to compete for profits. Barriers exist when new firms
find it difficult to enter the market. If such barriers exist the
elasticity of supply will be less that if no such barriers existed.
Barriers that prevent such firms form entering a monopoly industry
include economies of scale, government licensing, penitents, and
exclusive control over an important resource.
Economies of scale
Suppose that five firms currently that share a market and that each
sells 100 units of output at a break even price of £10 per unit. If
new technology was developed enabling a single firm to produce 500
units of output at a price of £5 per unit. One of the firms would take
advantage of this technology and use it to up the other four firms out
of business. Monopolies that arise for the economy of scale are often
called natural monopolies.
a natural monopoly is having vast scale of economies, firms that arise
from the economy of scale do not have any fear of smaller competitors
entering the industry.
Government licensing constitute legal barriers to entry, most legal
barriers limit the number of competitors, but do not result in a
single pure monopoly firm. For example many states require hospitals