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A-level econ

Does a max price on a monopoly firm decrease competition/contestability because it means that effectively firms are forced to limit price, as they are pricing lower meaning new firms cannot compete/enter the market?
I guess if the answer is yes then this would be gov't failure.
Original post by Christiantaylor
Does a max price on a monopoly firm decrease competition/contestability because it means that effectively firms are forced to limit price, as they are pricing lower meaning new firms cannot compete/enter the market?
I guess if the answer is yes then this would be gov't failure.

A monopoly firm in existence mean that there is no competition(i.e any near substitutes),so imposition of maximum price will not give any incentive for the market to deter firms it would rather increase the social welfare.
Original post by Sreenithyaa
A monopoly firm in existence mean that there is no competition(i.e any near substitutes),so imposition of maximum price will not give any incentive for the market to deter firms it would rather increase the social welfare.

Wouldn't a max price decrease prices, and hence make it less profitable? So firms will be less encouraged to enter the market
Original post by Christiantaylor
Wouldn't a max price decrease prices, and hence make it less profitable? So firms will be less encouraged to enter the market.

You are right about how maximum prices discourage firms to enter but while discussing monopoly it is default to understand that there are no firms competing each other due to high barriers created by the monopoly firms.This means monopolies are price makers thus creating a social welfare loss at their profit maximizing point.If government introduce price ceiling (max price) the price would go lesser than the profit maximizing price and the quantity would become more than the profit maximizing quantity. Now this,as you said,makes the firm less profitable and the welfare loss created by the monopoly would be reduced to zero(i.e.the firms would bear the loss).Therefore,the monopoly firm may not necessarily incur subnormal profit and this government action will not lead to market failure.
Thanks! Would you evaluate this by saying monopolies have larger economies of scale and therefore have lower marginal costs and may not bare a loss at all
Original post by Christiantaylor
Thanks! Would you evaluate this by saying monopolies have larger economies of scale and therefore have lower marginal costs and may not bare a loss at all

Not exactly but this is partially right however i did research a little about your question and it was given that there are two types of price ceiling effect.One is the above discussed point which is maximum price set at competitive pricing level.Now this has the conclusion you said however the other effect happens when maximum price is set below competitive pricing that would decrease price at an even deeper level resulting in probable loss for monopolies and there would be shortage of supply leading to scarcity. So i would recommend if you get a question of this type it is better you write both effects and draw an even conclusion of to what extent government should intervene.
Original post by Sreenithyaa
Not exactly but this is partially right however i did research a little about your question and it was given that there are two types of price ceiling effect.One is the above discussed point which is maximum price set at competitive pricing level.Now this has the conclusion you said however the other effect happens when maximum price is set below competitive pricing that would decrease price at an even deeper level resulting in probable loss for monopolies and there would be shortage of supply leading to scarcity. So i would recommend if you get a question of this type it is better you write both effects and draw an even conclusion of to what extent government should intervene.

Okay, thanks very much. Competitive price level would be where ac=ar right? So ie the same as the sales maxing point
Original post by Christiantaylor
Okay, thanks very much. Competitive price level would be where ac=ar right? So ie the same as the sales maxing point

Exactly!!:smile:
Original post by Sreenithyaa
Exactly!!:smile:

I get it now, setting a max price below comp price level results in shortage in supply, exact same as a regular market diagram. Whereas if the govt sets the price max at the comp price level, no loss for monopoly firms but still a slight loss in welfare for consumers. So as an evaluation I could say the effectiveness of this price max would depend on where exactly the govt sets it
Original post by Christiantaylor
I get it now, setting a max price below comp price level results in shortage in supply, exact same as a regular market diagram. Whereas if the govt sets the price max at the comp price level, no loss for monopoly firms but still a slight loss in welfare for consumers. So as an evaluation I could say the effectiveness of this price max would depend on where exactly the govt sets it

A slight change,no loss for monopoly means social welfare loss would become zero and rest you got it!
Original post by Sreenithyaa
A slight change,no loss for monopoly means social welfare loss would become zero and rest you got it!

Okay cool! I have loads of questions about A-level econ btw ahah, trying to get an A. It's really something I'm interested in as well.
Original post by Christiantaylor
Okay cool! I have loads of questions about A-level econ btw ahah, trying to get an A. It's really something I'm interested in as well.

Ask away but fair warning i am not very good in economics and probably your questions can help me too.
Original post by Sreenithyaa
Ask away but fair warning i am not very good in economics and probably your questions can help me too.

Aha sure, for essay structure, right now for the intro im doing key definitions and a real life example of the topic at hand, then body is 6 paras (3 for and 3 against) with evaluation in each. Then in my judgement im dong evaluation of all my points, questioning which one is most important plus answering the actual question. Is this okay or?
Original post by Christiantaylor
Aha sure, for essay structure, right now for the intro im doing key definitions and a real life example of the topic at hand, then body is 6 paras (3 for and 3 against) with evaluation in each. Then in my judgement im dong evaluation of all my points, questioning which one is most important plus answering the actual question. Is this okay or?

I think this should be perfect.
Original post by Sreenithyaa
I think this should be perfect.

Okay thanks! Are you doing A-level econ too?
Original post by Christiantaylor
Okay thanks! Are you doing A-level econ too?

Yes i am taking them this march.
Original post by Sreenithyaa
Yes i am taking them this march.

Ah okay, how would you evaluate trade union impact on a monopsony? So obvs they raise wages and raise employment, but are they bad for monopsonies? i guess they are bad for the monopsony employer, but for the workers?
Original post by Christiantaylor
Ah okay, how would you evaluate trade union impact on a monopsony? So obvs they raise wages and raise employment, but are they bad for monopsonies? i guess they are bad for the monopsony employer, but for the workers?

Yes they are bad for monopsonies as trade unions would remove the incentive of restricting level of employment and it is good for workers as the demand for labour is increased.However this can happen only till some increase in wage rate i.e. the demanded wage rate is the marginal cost of employing one additional worker. This would result in more wages and employment but if demanded much higher the level of employment is likely to decrease.
Original post by Sreenithyaa
Yes they are bad for monopsonies as trade unions would remove the incentive of restricting level of employment and it is good for workers as the demand for labour is increased.However this can happen only till some increase in wage rate i.e. the demanded wage rate is the marginal cost of employing one additional worker. This would result in more wages and employment but if demanded much higher the level of employment is likely to decrease.

btw, i think competitive pricing in a monopoly is at mc=ar rather than ac=ar
Original post by Christiantaylor
btw, i think competitive pricing in a monopoly is at mc=ar rather than ac=ar

Oh thanks!

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