Overview
Purpose:
To help viewers understand that the degree to which a firm controls the market affecgts prices and economic efficiency, and that the government tries to prevent or regulate monopolies.
Objectives:
1. Market power is directly related to the producer’s ability to control the total production of a product and therefore keep prices and profits high.
a) At one extreme monopolists can control total output and therefore keep prices high – they are the price makers.
b) At the other extreme, in perfectly competitive markets, sellers have no control over prices – they are price takers.
2. The concentration of market power depends on entry barriers, e.g.:
a) ownership of a resource (e.g., oil) or process (e.g., patents on polaroid film) or transportation or marketing outlets.
b) economies of scale (e.g., the large fixed costs necessary to start a telephone company). Some markets, such as those for local utilities, have such large economies of scale, they are "natural monopolies."
c) even if entry barriers are high, some firms may try to compete with monopolies because the level of the monopolist’s profits are so high.
3. The more concentrated market power is in a given market the higher the likelihood that it is operating in a way which is economically inefficient for society as a whole. Producers with a high degree of market power are likely to set prices at a level which is higher than the level which would prevail in perfectly comptitive markets, and produce less than would be produced in a perfectly competitive market. From society’s point of view, this is not economically efficient.
4. The government tries to minimize or control monopolies:
a) if the market is not a natural monopoly, a monopoly may be dismantled by antritrust action.
b) in the case of natural monopolies, the government will regulate the firm.
| Key Economic Concepts pools, trusts, perfectly competitive market, holding companies, mergers, monopoly profits, regulation,
economies of scale, natural monopoly, predatory pricing, entry barriers, monopoly power. |
| Contemporary Issues Some analysts have suggested that because of national defense considerations, anti-trust rules might at times have to be waived – or at a minimum relaxed – for defense contractors. Under what circumstances would such a change in U.S. laws be justified? How would such a monopoly be different from a "natural monopoly" such as an electric utility? Would regulating a defense monopoly and providing it with the incentives to remain efficient and innovative be more of a challenge than for an electric utility? Does the fact that there is only one buyer (the government) of defense goods make this an inherently more difficult situation? |
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