Monopolies and Economics Essay Example | Topics and Well Written Essays - 1750 words

Monopolies and Economics - Essay Example Economists have debated the value and the cost of monopolies for centuries and still have come to no clear consensus. Even our laws that protect the market from monopolistic practices have been viewed as incapable of defining the words 'market' and 'monopoly'. When does market share become a monopoly In the United States, the foul line is crossed when the Federal Trade Commission (FTC) interprets the anti-trust laws and rules that the actions are injurious to competition. The technical definition of a monopoly is a business that is the sole provider of a good or service that has no suitable substitute. Consumers are restricted to buying from the monopolist. Geographic limitations can also create a monopoly such as being the only doctor within a hundred miles. Monopolies can also exist where a firm manufactures a specialized product to a limited market. New innovations may become monopolistic due to patent restrictions or until the innovation becomes more widely available. Another characteristic of a monopoly is that there needs to be a barrier to entry into the market. This is usually due to high sunk-costs that prevent competitors from reaching an economy of scale. Though all these traits are seen in monopolies, many practices are labeled monopolistic because they restrict competition and are prohibited by law. Most of these practices serve to limit competition or drive competition out of business. Product dumping, price fixing, predatory pricing, and bid rigging are all considered monopolistic practices. In the United States corporations are occasionally allowed to engage in a monopoly or monopolistic practices. Professional sports, utilities, government institutions, and markets with a single producer are sometimes exempted or protected. These protected monopolies do not always benefit from their monopoly status, as they may still need to be competitive to keep new entrants from competing. Major League Baseball is sometimes seen as a monopoly. However, there are substitute products in the form of other sports and entertainment activities. Though they prevent any new entries into the market, they can't be called a true monopoly. Even the US Post Office, a protected monopoly, has come under increased competition with the advent of new technology and services. Though they were once the only provider for their services, failure to innovate left them vulnerable to alternate suppliers. A criticism often leveled at monopolies is that they are complacent and slow to innovate. . Monopolies can be destructive to the economy because they give the firm the opportunity to be a price maker rather than a price taker. The monopoly will reduce the supply, which increases the price to the point that it maximizes profits (Parkin 110). This point is almost always at a point above the price that would be available in a competitive market. According to Stigler, "the purely "economic" case against monopoly is that it reduces aggregate economic welfare". For example: If a firm can sell 100 units when the price is $5 it will generate $500 revenue. If they price them at $7 they can only sell 80 units, but will have generated $560 revenue. However, the loss to the economy is 20 unsold units at $5 each, or $100. Though the firm has gained $60, the market has lost $100. This aggregate loss is known as deadweight loss and is what the anti-trust laws are designed to