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Evaluate the statement that monopoly should be considered as an undesirable form of market structure (25 m)

Monopoly is when there is only one seller in the market and has monopoly power is when a firm can significantly affect the price or the output in a market. According to the CMA a firm has monopoly power when it has 25% market share. Market structure are a collection of factors that determine how buyers and sellers interact in a market.

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Firms in the monopoly produce output at the point of profit maximising which is when marginal cost equals marginal revenue. At this point average revenue is greater than marginal cost, allocative efficiency is when a firm or industry produces the right type and quantity of output in the market and this point occurs at QComp in a competitive market on the diagram above. Monopoly occurs at point QM which is not the point of allocative efficiency. The price at QM is higher for consumers compared to at QComp which means they wont be able to afford as many items as they would like this affects the right quantity of output which is characteristic of allocative efficiency. in 1982, government litigation split up AT&T into a number of local phone companies, a long-distance phone company, and a phone equipment manufacturer to increase type and quantity of products for consumers. Allocative inefficiency reduces the consumer surplus which is the difference between the price consumers are willing to buy and what they actually pay which is bad for firms as well unlike competitive market where firms are producing at allocative efficiency and provide lower prices for consumers However, the average costs and marginal costs might be higher for competitive firms than concentrated because of economies of scale which means monopoly can sell at a lower price and higher quantity than allocatively efficient competitive firm.

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Another reason monopoly is undesirable is because they have high barriers of entry such as high start up cost, patents or high economies of scale. High barriers discourage competitors from entering the market and lead to natural monopoly where there is only room for one firm because of the nature of the market and controls most of the resources compared to competitive markets where there are lower barriers of entry allowing competition. In order to kill competition in natural monopoly uses price strategy of predatory pricing since the firm is a price maker where the firm will lower the price to PComp lower than the cost price and once accomplished the purpose revert the price back to profit maximising stealing all the customers. In 2015, the Justice Department ruled against American Express and Mastercard for imposing restrictions on retailers that encouraged

customers to use lower swipe fees on credit transactions. However, regulators who are government agencies such as Ofwat and Ofgem that seek to ensure that firms in the concentrated market behave in a way that is beneficial to customers, they act as surrogate competition to reduce high barriers to entry by allowing the firms to use the same infrastructure to lower start up costs. In the UK in the 90s British Gas was forced to be competitive despite pure monopoly due to the substitute products such as electricity and oil and when there was also merging between Asda and Sainsbury which was stopped because there was potential of monopoly in the food supermarket and had to prevent it.

Furthermore, monopoly also doesn’t have productive efficiency which is when a firm or industry uses their resources as efficiently as possible to produce output and it occurs at the lowest point on the LRAC. In monopoly there is no competition which incentivises firm to be productively inefficient. This suggests that their average cost is higher because they have no incentive to invention this cost is then passed to consumers to higher prices but lower quantities. This also creates X-inefficiency due to unnecessary costs. On the other hand, oligopolist actually have a lot of competition unlike pure or natural monopoly. Also, since monopoly always produce at profit maximising which means there is existence of supernormal profit both in long run and short run which reducing their AC and are able to reinvest in innovation and invention such as better management of human capital and new technologies to increase capital productivity. For example, when IBM monopolised the computer market but due to efficiency it initiated companies such as Apple, Microsoft and Google limiting IBM monopoly power. This is known as dynamic efficiency is when there is improvement in new technology and invention over time.

Monopoly is undesirable form of market structure because for consumers such market structure doesn’t provide both productive and allocative efficiency where they are unable to choose from a range of products which discriminates the poor since due to productive inefficiency the prices for the products is high which leads to reduction in consumer surplus and satisfaction which is a key component of market where buyers and sellers interact and exchange goods at a set price. Even though monopoly can increase dynamic efficiency over time due to producing profit maximising and make supernormal profit in both long and short run and reinvest in new technologies however there is no incentive to dynamic efficiency since they also receiving funding from government

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