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ECONOMICS PROJECT

NAME JITENDAR SINGH ROLL NO-62 BATCH- PGP-SS(1113)


DISCUSS THE EFFECTIVEY EVILS OF MONOPOLY .HOW THEY CAN BE CHECKED

Monopoly
Absolute control of all sales and distribution in a market by one firm, due to some barrier to entry of other firms, allowing the firm to sell at a higher price than the socially optimal price.

What Does Monopoly Mean? A situation in which a single company or group owns all or nearly the entire market share for a specific type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products. According to a strict academic definition, a monopoly is a market containing a single firm. EVILS OF MONOPOLY ? Under conditions of monopoly , the position is very different. The monopolist is in a position to affect the market price. Since it is responsible for all the output, and since it is aggregate output that determines price through the relationship of supply to demand, the monopolist will be able to either increase price by reducing the volume of its own production, or to reduce sales by increasing price: the latter occurs in the case of highly branded products which are sold at a high price, such as luxury perfumes. Furthermore, again assuming a motive to maximize profits, the monopolist will see that it will be able to earn the largest profit if it refrains from expanding its production to the maximum possible. The result will be that output is lower than would be the case under perfect competition and that consumers will be deprived of goods and services that they would have been prepared to pay for at the competitive market price. There is a locative inefficiency in this situation: society's resources are not distributed in the most efficient way possible. The inefficiency is accentuated by the fact that consumers, deprived of the monopolized product they would have bought, will spend their money on products which they wanted less. The economy to this extent is performing below its potential. The extent of this a locative inefficiency is sometimes referred to as the "deadweight loss" .attributable to monopoly; the loss itself is known as the social welfare cost of monopoly .

The objection to monopoly does not stop there. Productive efficiency may be lower because the monopolist is not constrained by competitive forces to reduce costs to the lowest possible level. Instead, the firm becomes "X-inefficient." This term refers to a situation in which resources are used to make the right product, but less productively than they might be: management spends too much time on the golf course, outdated industrial processes are maintained, and a general slackness pervades the organization of the firm. Furthermore, the monopolist may not feel the need to innovate, because it does not experience the constant pressure to go on attracting customers by offering better, more advanced products. A final objection to the monopolist is that, since it can charge a higher price than in conditions of competition (it is a price-setter), wealth is transferred from the unfortunate consumer to the monopolist. This may be particularly true where it is able to discriminate between customers, charging some more than others. However, it is important to recognize that price discrimination in some circumstances may be welfare-enhancing, or at least neutral in terms of social welfare. While it is not the function of competition authorities themselves to determine how society's wealth should be distributed, it is manifestly a legitimate matter for governments to take an interest in economic equity, and it may be that one of the ways in which policy is expressed on this issue is through competition law.

HOW EVILS OF MONOPOLY CHECKED EFFECTIVELY? Evils of monopoly can be checked effectively in following ways Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority. Economies of scale: Monopolies are characterized by declining costs over a relatively large range of production.]Declining costs coupled with large start up costs give monopolies an advantage over would be competitors. Monopolies are often in a position to cut prices below a new entrant's operating costs and drive them out of the industry .Further the size of the industry relative to the minimum efficient scale may limit the number of firms that can effectively compete within the industry. If for example the industry is large enough to support one firm of minimum efficient scale then other firms entering the industry will operate at a size that is less than MES meaning that these firms cannot produce at an average cost that is competitive with the dominant firm. Finally, if long run average cost is constantly falling the least cost way to provide a good or service is through a single firm. Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of firms in an industry. Large fixed costs also make it difficult for a small firm to enter an industry and expand.

Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or fiscal muscle to use the best available technology. In plain English one large firm can sometimes produce goods cheaper than several small firms. No substitute goods: A monopoly sells a good for which there is no close substitutes. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits. Control of natural resources: A prime source of monopoly power is the control of resources that are critical to the production of a final good. Network externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words the more people who are using a product the higher the probability of any individual starting to use the product. This effect accounts for fads and fashion trends. It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft operating system in personal computers