Is it necessarily a good thing, in terms of the welfare of society as a whole, for the government to step in to break up a monopoly in order to create a competitive industry?
A monopoly exists when one single firm is the only producer of a commodity in the market, allowing them to set prices as they wish and maximise profits due to the high barriers to entry. In this case, the firm is given the ability to exploit their consumers in terms of price discrimination based on price elasticity. In this essay, I will be discussing whether it is wholly reasonable for a monopoly to operate, or whether there is a need for the economy to revert to a more perfectly competitive alternative.
Firstly, some would say that it is feasible to break up a monopoly, as consumers will no longer be charged extortionate prices, leaving pricing to be determined competitively by supply and demand. In this case, consumers will benefit from the lower pricing and also the better quality goods.
Conversely, it can be said that with a monopoly being a price maker, the firm will make supernormal profits in the short run. This can be shown from the diagram below.
Firms maximise profits where marginal revenue is equal to marginal cost, at Qmon output. However, instead of selling at perfectly competitive price Pc, the firm is able to sell at Pm, and this creates short-run supernormal profits. On the contrary to a monopoly being detrimental for society, it can be said that with these supernormal profits, firms are able to innovate and invest in research and development in order to provide consumers with products of the best quality more efficiently.
On the other hand, there is a loss in consumer surplus as a result of a monopoly in the market, as shown below. Consumer surplus can be defined as the difference between what consumers are willing to pay for a good or service relative to its market price. A consumer surplus occurs when the consumer is willing to pay more for a given product...