Disadvantages of monopoly Essay

Higher tolls and lower rig Monopolies often mean that prices will be heightser and output lower than is the case for an industry where competition prevails. Firms in one industry are producing low conditions of perfect competition, while the other firm is operating under conditions of monopoly. The costs of production are the same for each industry. Excess profits High profits made by the monopolist are not unavoidably an indication of efficient methods of production. The monopolist whitethorn, in fact, be using its market power to raise prices above marginal costs in order to maturation its revenues. Higher costs and x-inefficiencies Under competition, firms strive to minimize their inputs to spend a penny a given level of output. Firms do not necessarily have to produce at the minimum efficient scale to be proficiently efficient, as long as they produce at the lowest costs for their given scale of output. Firms which produce on the average cost curve are technically effi cient or x-efficient. In other words, they produce at the lowest cost executable given their respective sizes. Competition normally implies that firms will be x-efficient.However, if firms are insulated from competition, as is the case for monopoly, then there is less incentive to minimize costs. Firms may instead adopt expense preference behavior by investing in activities to maximize the satisfaction of senior managers, at the subsequent sacrifice of profitability. scathe discrimination Monopolists as sole suppliers can discriminate between different groups of customers (based on their respective elasticitys of demand) separated into different geographic or product segments. A monopolist can practice price discrimination in several ways First-degree price discrimination.Often referred to as perfect price discrimination, this involves the monopolist charging each customer what he or she is willing to pay for a given product. By doing this the monopolist can increase revenue and gag any consumer surplus which consumers might enjoy. Second-degree price discrimination. The monopolist charges customers different prices based on their usage. In other words, consumers might be charged a high price for initial usage, but lower prices for subsequent units consumed. This type of pricing has been used in industries such as electricity, gas, water and telephony. Third-degree price discrimination. In this case, the monopolist separates customers into markets based on different demand elasticitys. Customers with inelastic demand are charged higher prices than those with elastic demand. Restrictive practices Monopolists often use partial practices to keep potential rivals out of the market. Even if rivals are successful in entering the market, the monopolist may choose to eliminate these firms by various suppressive price and non-price strategies such as predatory pricing and vertical restraints. Limited technical progress Some evidence suggests that technical pro gress is often leaden when a single firm or group of firms dominates an industry. As they face no real competitive pulls, monopolists are under no real pressure to spend any abnormal profits earned on research and development of new product and processes, which is often seen as a risky investment. Consequently, technical progress in these industries is likely to be slow.Reference http//classof1. com/homework-help/economics-homework-help/.