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Monopoly Market vs. Perfect Competition

Analyse why price can be lower in a monopoly market than in perfect competition.

Category:

Market Structures and Competition

Frequently asked question

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Answer

Revise and edit your essay multiple times to improve its clarity and coherence.

In a monopoly market, there are several factors that can contribute to prices being lower compared to perfect competition:
➡️1. Economies of scale: Monopolies often have the potential to achieve economies of scale due to their control over a large portion of the market. By producing goods or services on a larger scale, monopolies can benefit from lower average costs per unit, allowing them to set lower prices. In contrast, perfect competition may involve numerous smaller firms that are unable to achieve the same economies of scale, resulting in relatively higher average costs and prices.
➡️2. Subsidies or state ownership: Some monopolies, particularly state-owned enterprises, may receive subsidies or government support that allows them to operate at lower costs. This can enable them to offer lower prices to consumers compared to firms in perfect competition.
➡️3. Avoidance of duplication: Monopolies may have the advantage of avoiding wasteful duplication of resources. In perfect competition, multiple firms may engage in redundant investments, such as duplicating infrastructure or distribution networks, which can drive up costs and prices. Monopolies, on the other hand, can centralize operations and eliminate such duplication, leading to lower costs and potentially lower prices for consumers.
➡️4. Barriers to entry: Monopolies can maintain lower prices as a strategy to discourage new firms from entering the market. By keeping prices artificially low, monopolies can create barriers to entry for potential competitors with higher average costs. This strategy aims to protect the monopolistic position and limit competition, allowing the monopoly to maintain lower prices for a longer period.
➡️5. Pricing power: Unlike perfectly competitive firms that are price takers, monopolies have the ability to influence prices as price makers. They have greater control over market conditions and can adjust prices based on their own profit-maximizing objectives. This pricing power may allow monopolies to set prices lower than what would prevail in a perfectly competitive market.
➡️6. Economic welfare goals: In the case of state monopolies, the objective may not be solely focused on profit maximization. Instead, these monopolies may aim to promote economic welfare and affordability of essential goods or services. As a result, they may intentionally keep prices lower to make the product or service more accessible to the general population.
In summary, in a monopoly market, factors such as economies of scale, subsidies, avoidance of duplication, barriers to entry, pricing power, and welfare objectives can contribute to lower prices compared to perfect competition. However, it is important to note that monopolies also have the potential to exploit their market power and charge higher prices, leading to potential negative consequences for consumers and competition.

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I. 🍃Introduction
- Definition of monopoly and perfect competition
- Importance of understanding the impact of monopolies on the economy

II. Lower average costs for monopolies
- Explanation of economies of scale
- Examples of monopolies that enjoy economies of scale
- Comparison to perfect competition

III. Subsidies for monopolies
- Explanation of state-owned enterprises
- How subsidies can lower average costs for monopolies
- Comparison to perfect competition

IV. Avoiding wasteful duplication
- Explanation of wasteful duplication
- Examples of monopolies that avoid wasteful duplication
- Comparison to perfect competition

V. Keeping prices low as a barrier to entry
- Explanation of barriers to entry
- How a monopoly can use low prices as a barrier to entry
- Comparison to perfect competition

VI. Price-making ability of monopolies
- Explanation of price-making ability
- Comparison to price-taking ability of perfectly competitive firms

VII. State monopolies and economic welfare
- Explanation of economic welfare
- How state monopolies may prioritize economic welfare over profit maximization
- Comparison to profit-maximizing monopolies and perfect competition

VIII. 👉Conclusion
- Recap of key points
- Implications for policymakers and consumers

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It can be lower if the monopoly enjoys economies of scale/perfect competition unable to enjoy economies of scale - examples (➡️2) if possible to enjoy economies of scale would lower average costs -. It can be lower if the monopoly is subsidised - e.g. state owned enterprises -. It can be lower if the monopoly avoids wasteful duplication/perfect competition may result in wasteful duplication - e.g. provision of water pipes -. It can be lower if a monopoly keeps price low as a barrier to entry - making it difficult for new firms with high average costs - to enter the market -. A monopoly is a price maker/can influence price - a perfectly competitive firm is a price taker/unable to influence price -. A state monopoly may not be trying to maximise profit - may be trying to promote economic welfare - keep prices low to make the product affordable -

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