Why is monopoly 'harmful? How can regulation ameliorate these harmful effects? What
problems confront the regulators?
In order to deduce that a monopoly is 'harmful', there must be another market system
which is preferable to monopoly so as to offer greater benefits to the public. A monopoly
can therefore be compared to perfect competition. If the benefits of perfect competition
outweigh the benefits of monopoly then a monopoly can be regarded as 'harmful' since the
consumers are not receiving the maximum possible utility for their purchases.
Monopolies are criticised for their high prices, high profits and insensitivity to the
public. Some governments therefore, in the light of these protests, advocate policies
relating to monopolies, in order to regulate their power in favour of the public's
interest.
There are several reasons why monopolies may be against the public interest. It is
claimed that monopolies produce at a lower level output and charge a higher price than
under perfect competition in both the short run and the long run.
Consider the diagram above. Assume that this monopolist attempts to maximise profits.
Equating MC=MR yields an output of Qm and a price of Pm. If the same industry existed
under perfect competition however, the price would be Ppc and output would be Qpc since
under perfect competition P=MC=AR. The price in such a situation would thus be lower than
under monopoly and output would be greater. Consumers obviously benefit if this is the
case since P=MC implies P=Marginal utility so that consumers are maximising their total
utility(Under monopoly P>MC and therefore arguably, not the optimum).
In the long run under monopoly, supernormal profits persist. Under perfect competition
complete freedom of entry leads to the elimination of these profits and forces firms to
produce at the bottom of the long run average cost curve. Under monopoly however, there
are barriers to entry so as to prevent new firms from entering the industry and reducing
the monopolist's profits to the normal level. Higher prices and lower output thus
continue to persist in the long run.
Due to lack of competition, it is argued, a monopolist has no incentive to develop new
techniques in order to survive. A monopolist can therefore make supernormal profits
without using the most efficient techniques. Under perfect competition, in order for
firms to survive, the most efficient techniques must be adopted or developed whenever
possible or else the firm which fails to do so will be forced to shutdown. This argument
leads to the conclusion that monopolies have higher cost curves than firms under perfect
competition(Assuming that the monopolist does not use supernormal profits to finance
research and development and hence reduce costs. ).
Even if a monopolist does invest in research and development, although prices will fall
and output will rise, extra supernormal profits received will merely accumulate with old
profits. These high profits lead to the question of distribution of income. The answer to
this question is a normative one and is thus subject to much controversy. It is therefore
up to the government to decide if intervention is necessary to curb a monopolist's power
and hence to uphold the public interest.
If the government weighs up the cost and benefits of ' monopoly' and concludes that
they are in fact 'harmful', the government can adopt policies of intervention or
regulation.
The diagram below shows how a government can keep the price at a maximum Pm below market
equilibrium.
The government may feel that a price of op1 is excessive so a price of opm is
implemented. At this price however, the monopolist is only willing to supply oq1 units
while quantity demanded is oq3 units. There is thus an excess in demand(Or shortage in
supply) of oq3-oq2 units. In such a case the price should rise but it can't because of
the price maximum. The monopolist would thus have to sell its output on a 'first come,
first served' basis, or some sort of rationing system will have to be organised for
those who desire the good and can afford to pay for it.
Alternatively a government can adopt an RPI-X formula(As in the UK with privatised
industries), which provides an incentive for monopolies to be as efficient as possible.
If the monopolist reduces its costs below X the monopolist can still make large profits.
If the monopolist does not succeed in doing so a loss is inevitable. Monopolies are thus
forced to cut costs if profits are to be attained.
There are however various problems with regulation. Since the government gives the
regulator power to implement decisions. Who is to say that the regulator's perception of
the public interest coincides with the government's?(Since the government acts in the
public interest, or is supposed to anyway.) Moreover, regulation is very complex and
difficult especially with large powerful firms which exert political influence. There is
thus a danger of regulatory capture. This is where the regulator is persuaded to operate
in the monopolists' interest rather than in the public interest. Regulatory capture may
be due to corruption or due to regulators actually believing the managers point of view.
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