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Posted on April 17th, 2014, by

5 Pure monopoly guarantees economic profits. Discuss whether this is a valid statement and show an illustration of such.

Pure monopoly is quite a controversial phenomenon because, on the one hand, pure monopoly seems to be economically beneficial for the company, while, on the other hand, pure monopoly has a destructive impact on the company’s development in a long-run perspective. To put it more precisely, benefits and advantages of pure monopoly are obvious, when they are analyzed in a short-run perspective. The company can exercise its monopolistic position to maximize its profits. The company can manipulate with the supply of its products, set prices which meet its interests, regardless of customers expectations, the company can even deteriorate the quality of products and the customers will keep buying them because they do not have any alternative, while the company holding the monopolistic position can rise barriers to entry to the level unachievable for other companies. As a rule, barriers to entry are unsurpassable for potential rivals of the company holding the monopolistic position in the market. In such a way, the company may rip off all the profits and enjoy its monopolistic position in the market.

However, in a long-run perspective, pure monopoly is not beneficial and cannot guarantee economic profit. To put it more precisely, the company holding the monopolistic position in the market can deteriorate its performance because of its relatively secure position. As a result, the quality of its products may decrease substantially, while the pursuit of profits may raise prices exorbitantly high. Therefore, customers will suffer from the high price they have to pay for products of the low quality that naturally raises the strong desire to find a substitute for the product they buy from the company.

Another problem that arises in a long run is the problem of the poor performance. The company deteriorates its performance because, as a rule, monopolies tend to bureaucratization and ineffective use of available financial and material resources. Therefore, the deterioration of the performance of a pure monopoly may provoke internal conflicts and stimulate the further rise of prices that may confront the customer dissatisfaction. In such a situation, profits of the company may drop, while, ultimately, the company may face the problem of the appearance of substitutes or rivals that will outpace the company fast because customers will move immediately to any company offering an alternative product.

6 What are the major features of monopolistic competition compared to pure competition and pure monopoly? Show models of each.

The monopolistic competition is the competition between companies, who hold monopolistic position in the market and manufacture similar products. However, in spite of similarities, products are not perfectly substitutable. All companies are able to enter the industry if profits are available. In addition, companies involve in the monopolistic competition are profit maximizes and price makers. Hence, the monopolistic competition includes several large monopolies, who manufacture similar but not substitutable products.

The pure competition is the most efficient for the economic development and the most beneficial for customers because they have a large choice of products, while companies cannot make the price of products. Instead, it is the demand, customers, conjuncture and other factors that influence the price, while the companies have to match their price to the price that exists in the industry at the moment under the impact of multiple factors. Companies operating in the purely competitive market are approximately of the same size, manufacture similar and substitutable products, and hold the similar market share.

The pure monopoly is quite different from the pure competition since the pure monopoly implies that one company enjoys the full control over the market and industry. The company holding the monopolistic position sets the price of the product, sets the barriers to entry and actually prevents the appearance of any rivals that could have challenged the position of the company in the market. In addition, the company can regulate the supply of products creating the deficit and stimulating the demand. Hence, the pure monopoly is the total domination of one company in the market.

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