Tutors on net
Tutors on NetTutors on Net

Government Strategies Towards Monopoly And Rivalry

  Government Strategies towards Monopoly and Rivalry

The Drawbacks of Monopolies And Restricted Rivalry

The effect of monopolies and restricted rivalry as in oligopolies is that they lead to economic ineffectiveness which decreases social welfare. There are 4 chief sources of emergence of economic ineffectiveness under monopolies and oligopolies.

Prime is monopolies limit productivity and manufacture levels of productivity which are less than what are economically effective. Next is there subsists managerial slack under monopoly due to which cost per unit of productivity is higher.

Subsequently is monopolies expend less on research and development and thus, hampers technological progress. Last is monopolies and oligopolies frequently involve in rent seeking activities to enhance or sustain their monopoly profits.

  1. Limitation of Productivity to Charge Higher Price
    • Monopolists like industries working under perfect rivalry aim at optimising profits.
    • However to optimise profits a monopolist is capable to charge higher price by limiting productivity of the product or service he offers.
    • Provided the same demand and cost conditions as prevailing in a rivalled firm, the monopolist who optimises his profits at the productivity level at which his marginal cost parities marginal revenue, manufactures less than the rivalled firm.
    • Therefore, by manufacturing less and charging higher price, the monopolist works in an economically ineffective way and causes a loss of consumer welfare.
    • Consider the below diagram 1 where DD is the demand curve of the rivalled firm comprising of a huge number of industries.
    • SS is the short run supply curve of the industries. The rivalled firm is at symmetry at point E at which demand curve and supply curve intersect and manufactures Vc volume of the commodity and price ascertained parities to marginal cost of manufacturing at productivity level Vc.
    • Now, with monopolist equating marginal revenue MR with marginal cost MC to optimise profits restricts productivity to Vm and fixes price paritying to Rm.
    • It is to be noted that when all rivalled industries are combined to form a monopoly, supply curve SS of the rivalled firm will become marginal cost MC curve of the monopolist.
    • Therefore, productivity under monopoly is lower and price higher than in a rivalled firm and this tends to loss of consumer welfare.
    • How monopoly causes loss of consumer welfare can be described by reinterpreting the demand curve. On this explanation demand curve for a commodity shows how much money a consumer is willing to pay for an additional commodity as he consumes more volume of the commodity.
    • In other terms, demand curve which depicts several prices at various volumes of commodities manufactured measures marginal benefit to a consumer of additional units of a commodity as he purchases more units of it.
    • As under perfect rivalry the productivity the level is ascertained at which demand curve interconnects the supply curve under it consumer welfare is optimised.
    • Price paid by the consumers depicting marginal benefit parities to marginal cost under perfect rivalry and this guarantees optimum welfare.
    • Or otherwise, as described before, allocated economic effectiveness is accomplished when aggregate excess is optimised.
    • Under perfect rivalry the total of consumer excess and producer excess is optimised at productivity level Vc in the below diagram 1, at which demand curve DD interconnects the supply curve SS.

    • Or otherwise, the monopolist decreases social welfare and causes allocated ineffectiveness.
    • This is being explained in the below diagram 2. To hold the study we presume that marginal cost curve which is the supply curve under perfect rivalry is a horizontal straight line which presents that marginal cost stays invariable as productivity is enhanced.
    • Under perfect rivalry as price is equated with marginal cost, productivity Vc will be manufactured.
    • With productivity Vc and rate Rc, consumer surplus enjoyed by consumers will be ERcD.
    • Alternatively the monopolist will equate marginal cost with marginal revenue and will manufacture and will manufacture lower amount of productivity Vm and charge higher price Rm.
    • Resultant, consumer surplus is decreased to ARmD which features the loss of consumer welfare paritying to the region AERcRm.
    • However this loss of consumer wellbeing can be split up into two losses.
    • Primarily, the rectangle ABRcRm which depicts the profits made by the monopolist by limiting productivity to Vm and increasing rate Rm.
    • However this loss of consumer excess is not a loss to the society entirely. It is a shift of earnings from the consumers to the monopolist as price of the commodity is enhanced and productivity decreased by the latter.

    • However there is supplementary loss of consumer excess paritying to the region ABE for the reason that limitation of productivity from Vc to Vm by the monopolist.
    • As observed from the section of demand curve AE in the below diagram 2, for the units of productivity from Vm to Vc the consumers are ready to bear huger price than marginal cost MC of these units of productivity.
    • Therefore, this second type of loss of consumer excess is a total loss to society as no one in the society has earned a result of loss undergone by the customers.

      Thus, the loss of consumer surplus paritying to the region of triangle ABE is termed as dead-weight loss and denotes ineffectiveness caused by the monopolist.

  1. Managerial Slack

    • It is commonly pointed out that an industry which aims at optimising profits will try to reduce as much as feasible for manufacturing a provided level of productivity.

    • Nevertheless, in actual practice it has been verified that those industries which take pleasure in monopoly or countenance restricted rivalry are able to make a lot of profits and also lack incentives to keep their cost as low as feasible.

    • The lack of incentives to decrease costs as far as feasible due to the absence of pressure of rivalry it is problematic to know whether or not management of the industries is effective for the reason that it is always claimed by them that they are doing their best to keep their costs as low as feasible.

    • Under the pressure of rivalry with the private companies have been offered to give remote services prices of them have dropped sharply.

    • Hence private companies have decreased prices and rates of remote calls. This portrays there was a lot of managerial slack in the private services and indeed it was not keeping its costs as low as feasible.

    • If it were not so, then how when it has to finish with the private industries it has been able to considerably cut the prices of remote calls.

    • As monopolists are capable to make a huge volume of profits without any hard work, to make development in technology there is lack of incentives on their part to make adequate labour and expend enough outlay on research and development to grow new technologies which improve output and lessens costs or manufacturing.

Online Live Tutor Limitation of Productivity to Charge Higher Price:

         We have the best tutors in Economics in the industry. Our tutors can break down a complex Limitation of Productivity to Charge Higher Price problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Limitation of Productivity to Charge Higher Price concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Limitation of Productivity to Charge Higher Price tutoring and experience the quality yourself.

Online Government Strategies towards Monopoly and Rivalry Help:

         If you are stuck with an Government Strategies towards Monopoly and Rivalry Homework problem and need help, we have excellent tutors who can provide you with Homework Help. Our tutors who provide Government Strategies towards Monopoly and Rivalry help are highly qualified. Our tutors have many years of industry experience and have had years of experience providing Government Strategies towards Monopoly and Rivalry Homework Help. Please do send us the Government Strategies towards Monopoly and Rivalry problems on which you need help and we will forward then to our tutors for review.