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When a company has market dominance in a particular industry, it is said to have monopoly power. (For example, a market share of more than 40%). Setting higher prices or limiting output could be examples of monopoly power abuse. Abuse of monopoly power can result in deadweight welfare loss, a reduction in choice, and obstacles for other suppliers.

Evidence of Monopoly Power Abuse

Excessively high prices are being charged. If they're making a lot of high profits, it's a sign that prices are higher than they would be in a competitive situation.

Predatory Pricing. This implies lowering the price and selling below cost to drive competitors out of business.

Production and access to technological advancements are being restricted.

Unfair treatment of competitors, such as giving certain parties preferential treatment while putting others at a disadvantage.

Vertical restraints. The monopoly firm imposes prices or restrictions on its suppliers or retailers.

Monopoly problems

Higher prices.compared to a competitive market, firms with monopoly power can set higher prices.

Allocative inefficiency. Because the price is more than MC in a monopoly, it is allocatively inefficient.
In a competitive market, the cost of the good would be cheaper. The triangle represents a dead-weight welfare loss caused by a monopoly. (This is the difference between the excess of the producer and the surplus of the consumer)

Productive inefficiency. A monopoly is productively inefficient because the output does not occur at the lowest point on the AC curve.

X – Inefficiency.A monopoly, it is believed, has less motivation to lower costs because it is not competing with other businesses. As a result, the AC curve is higher than it ought to be.

Diseconomies of scale - If a monopoly grows too large, it may suffer from diseconomies of scale - higher average costs as the company grows large

Worse quality. Lack of competition may also lead to less innovative products.

Suppliers will be charged greater prices. Monopolies may use their supernormal profits and monopsony power to pay lower prices to suppliers.

There are two reasons why governments are keen to crack down on monopolies. The first is that they believe they act to the detriment of consumers, charging them higher prices than if there were lots of companies competing for custom. The second is that lack of competition is seen to be damaging in another way.

Breaking up a monopoly into several competing firms

A solution to the problem of a monopoly is to destroy it by breaking it up into many competing firms.

Competition policy

As its name implies, competition policy is the part of government economic policy which tries to make the imperfectly competitive and monopolistic markets of the real world more competitive. The aims of competition policy include preventing the exploitation of monopoly power, reducing costs of production, improving efficiency, getting rid of excessive profit so that prices reflect costs of production, and removing entry and exit barriers that separate markets.

Taxing monopoly profits.

As well as controlling prices directly the government can tax monopoly profit to punish firms for exploiting their monopoly power and making an excessive profit.

Other methods to restrict monopoly abuse are the removal of barriers to entry, privatisation and price controls.

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Approaches to the problem of monopoly

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