Monopolies in Todays Market Essay Example | Topics and Well Written Essays - 2000 words

Monopolies in Todays Market - Essay Example Atimes, monopolies exist as a result of government backings in which case the monopolies provide goods, products or services which the government considers essential to the well being of the people. The absence of supply curve in the monopolized market causes inefficient allocation of society's resources. Therefore there is that tendency for a monopolist to charge high prices and probably making higher profits compared with firms in perfect competition. The objective of this paper is to unravel the role of monopolies in today's market and the implications of technology and systems on the monopolies. The rest of this paper examines different types of monopoly, its revenue, monopoly and price discriminations, and implications of technology and systems. (a) Pure Monopoly: This is a type of monopoly that exists in a particular region or city in which its products have no close substitutes. This makes it possible for the monopolist to charge extra prices because their products are necessities. (b) Natural Monopoly: A monopoly that exists because of economies of scale it enjoys in which large scale production brings lower average cost. Even though a competitor arises in the industry lower prices the monopolist would charge is capable of sending the competitor off the market. (c) Efficiency Monopoly: When government does not legalize monopoly, a monopoly may exist largely due to its ability to satisfy the customers in which case competition is inadvertently rule out. (d) Legal Monopoly: This form of monopoly has government backing such that laws are enacted to simply rule out competition. Wikipedia says "when such a monopoly is granted to a private party, it is a government granted monopoly; when it is operated by government itself, it is government monopoly or state monopoly". Monopoly Revenue Basically, a monopolist faces downward sloping demand curve which is also the firm's average revenue curve. As the monopolist sells a single price for its products, average revenue per product is the same as the price. For the monopolist to increase its sales it charges lower unit price for its products. At price P1 the monopolist only manages to sell Q1 quantity of the product; in order to increase its sales it reduces the price from P1 to P2 and as such sales is increased from Q1 to Q2 which he now gains in figure 1 below. Given the above scenario, the differential of the total revenue in relation to quantity gives marginal revenue which shows that the additional revenue large enough to offset the reduction in price. Figure 1: Showing Monopolist's gain brought about by price reduction. However, the monopolist maximizes profit where marginal revenue equals marginal cost. The reason is the since marginal cost is always greater than zero the monopolist will operate at profit because marginal revenue will be positive and where demand is elastic. If the monopolist stops production where marginal cost is less than marginal revenue, he will be leaving his profit untapped while quantity in which marginal revenue is greater than marginal cost the firm will be operating at losses. Profit maximizing price is determined by drawing a line where marginal co