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Analysis In The Competitive Market

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Questions:

1.Explain why this scenario is considered bad for the economy and what are the possible explanations for the weakening of  Competition?

2.Use simple demand and supply analysis to show how a monopolist can affect total welfare.

3.What does Schumpeter suggest as solutions to Improve Competition?

 

Answers:

1.In a market with perfect competition, the firms are competed with each other to capture a greater market share ( Baumol & Blinder, 2015) In doing this they try to innovate new technique of production to reduce cost and capture higher profit. However, if the competition is decreased continuously then the firms will not go for new innovation to find a better technology ( Varian, 2014).. They then started to hoard their profit instead of investing it. Consequently, the workers will receive a lower wages and demand in the economy will be affected. Some seller might leave the market leading to a further declination in competition. If this continues then few big seller will capture the market inducing a monopoly condition. This is bad for the consumer as well as for the entire society. The declining trend in competition is actually resulted from the increasing government intervention to regulate the firms. The possibility that in an unregulated market few large firms may dominate the entire market led the government to take the decision to regulate the market. The existing firm felt that regulators are intervening unsystematically. Thus, preventing them to grow bigger or attain economies of scale. That is why most of them are leaving the market weakening the competitive environment.

2.                                                                                 Figure 1: welfare loss in a monopoly market

Figure 1 gives the welfare analysis in the competitive and monopoly market.  Market demand curve is indicated by DD and the correspondingly market supply curve is SS. The supply curve coincides with the marginal cost curve.  Point E shows the competitive market equilibrium. The equilibrium occurs where market demand equalizes market supply.  Equilibrium price and quantity are P* and Q* respectively. Equilibrium in the monopoly market is attained at the point of intersection of marginal revenue and marginal cost (McKenzie & Lee, 2016). The monopoly price is P1 and the quantity supplied in the market in Q1. It is clear from the figure that P*<P1 and Q*>Q1. Hence, in a monopoly market a lower quantity is sold at a significantly high price. This reduces the consumer surplus as compared to competitive market. The seller enjoys the entire surplus. The reduced consumer surplus imposes a cost on the society, which is termed as deadweight loss (Friedman, 2017).The dead weight loss to the society is indicated by the shaded region.

3.Schumpeter has suggested taking a three stages strategy to overcome the situation. Strong campaigning by the public can make the politician to change their decision. The combine action of the monopolist had lead important reform in during 1920s.  The formulation of antitrust law has given significant power to the technocrats. All that is needed is the brave move by them. The scholars in the society should learn from the experience of Chicago school. America should understand the importance of competition and its implication for social welfare. By following these strategies the scenario can expected to be improved in the near future.

 

References:

Baumol, W. J., & Blinder, A. S. (2015). economics: Principles and policy. Cengage Learning.

Friedman, L. S. (2017). The economics of public policy analysis. Princeton University Press.

McKenzie, R. B., & Lee, D. R. (2016). economics for MBAs: The economic way of thinking for managers. Cambridge University Press.

Varian, H. R. (2014). Intermediate economics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.

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