Question: Discuss if PC is more desirable than a monopoly
P1: Define M and PC
P2: Thesis: PC is better – discuss efficiency, price, variety, consumer welfare
- Consumer sovereignty is high because many producers to choose from, since monopoly is single seller only
- PC might charge lower price because it is a price taker and prices at P=MC, instead of M who restricts output to raise price (at P>MC).
- PC is allocative efficient (produce at DD=SS); social welfare is maximized and economically efficient. PC is also productive efficient (AC=MC), it produces at the minimum average cost, ie producing with the lowest cost.
- Also, if PC becomes M, it gets too large and suffer from DOS (AC rising as output increases)
- M might be more productively inefficient because of lack of competition
Cost and Revenue Diagram
P3: Anti-thesis: M is better
- M is good if natural monopoly with significant EOS (high overhead costs, internal eos like bulk purchasing, financial eos). This means that firms get lower average costs as they produce more output. This leads to lower costs, and rise in productive efficiency, and is usually applicable in industries with high overhead costs (cost of machineries for instance), firms are able to spread the costs over a huge output if they become monopolistic, hence reducing cost of production
AC QM diagram
Prices might be lower than PC industry (illustrate using diagram)
Pure monopoly output diagram
- has abnormal profits and can engage in R&D, better quality products and better differentiation if there is competition in the market (M might become dynamic efficient)
- Whether M or PC is better depends on the type of industry. M is better in natural monopoly; industries like telecommunication, water, utilities because its one characterized by high overhead costs and significant eos. PC would suffer from under-capacity and inability to produce at the lowest cost although competition is high. IN other generic industry, PC is better due to higher allocative and productive efficiency
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