Is it good for a market to have a single large seller?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The first answer is correct when it says that monopolies are bad, but it does not correctly set out the economic criticisms of a monopoly.

First, it is not correct to say that monopolies can simply raise prices and that customers will be "forced" to pay what the monopoly charges.  A monopolist faces an downward sloping demand curve, not a vertical one.  If a monopolist raises its prices, it will lose customers.  Therefore, monopolists cannot simply raise prices as high as they like.  Customers may choose to buy or to go without and if the prices are too high, they will not buy.

Second, the first answer does not really set out the main economic reason for opposing monopolies.  Monopolies are a bad thing (to economists) because they misallocate resources.  Resources are properly allocated when the price of the last unit produced (marginal cost) is equal price of that last unit.  In perfect competition, firms produce at the point where MC = Price and resources are efficiently allocated.  By contrast, a monopolist produces a quantity where MC < Price.  This means (this is most easily seen on a graph) that the quantity produced will be lower than equilibrium and that the price charged will be higher than equilibrium.  This is a misallocation of resources.

So, the first answer is correct to say that monopolies are a bad thing, but it does not explain why in proper economic terms.

justaguide's profile pic

justaguide | College Teacher | (Level 2) Distinguished Educator

Posted on

The presence of a single large corporation in a market leads to the creation of a monopoly which is generally not a good thing in terms of the efficient allocation of resources.

Though in many cases, monopolies arise due to the fact that a state of maximum efficiency has been reached. Starting with perfect competition, as the competitors improve efficiency, prices drop and slowly a majority of the players are forced to shut shop with only the player which has been able to reduce its costs to the least remaining in the market.

In case the monopoly has been artificially created, the large entity can set prices and there is no requirement for it to improve the efficiency of its operations to increase profits. Instead, it just increases prices. The buyers are forced to accept the high prices and anything else the seller offers without a chance to exercise their own choice.

It is to prevent this, that large businesses are sometimes split forcibly. This increases the number of competitors in the market, thereby improving the overall efficiency and providing a choice to buyers.

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