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?
In view of capturing a greater market share, the firms continuously are competing with each other in the Competitive market (Baumol & Blinder, 2015). Innovation of new techniques for production are necessary for reduction of cost and increasing profit. The firm may fail to show interest in adopting better technologies if the competition is reducing continuously (Varian, 2014). They start to save their profit and not invest it in adopting technologies. As a result, wages of the workers will be reduced and this will affect the economy. Sellers will start to leave the market if this continues and there be more reduction in the competition. Thus, a few big sellers will take over the market and thus will rise a monopoly market. For the consumers and the society, this will come up to be a very bad news. The increase in the intervention of the government to regulate the market is a major cause for the rise of this situation. The government decides to intervene in the market from the fear of large firms taking over the entire market if the market is left unregulated. It was felt by the existing firm that there has been unsystematic intervention of the regulators. This prevented them to grow bigger. Consequently, the competitive market is weakening and most of the sellers started to leave the market.
In the figure given above, the demand in the marked is denoted by the curve DD. The curve SS denotes the supply of the goods in the market. The SS curve is also known as the marginal cost curve. The intersection of the DD curve and SS curve shows the market equilibrium. E is the point showing the equilibrium of the market in the figure. P* and Q* denotes the price of the commodity in the market and the quantity of the commodity supplied to the market respectively. In the monopoly market, the point where marginal revenue (MR curve) and marginal cost concur with each other is known as the point of equilibrium (McKenzie & Lee, 2016). The diagram shows that at P1 the market price is high and at Q1 the Quantity supplied is low. Thus, a lower quality can be sold at a price higher than the competitive market. As a result, the consumer surplus reduces in comparison to the competitive market. The seller enjoys all the surplus (Friedman, 2017). This reduces aggregate welfare that is defined by the surplus enjoyed by the producer and the consumer together. The shaded triangle from the figure above shows the dead weight loss of the society.
3.It has been suggested by the economist Schumpeter that a three stage strategy has to be adopted to overcome this situation. Politicians can be forced to change their decisions if the public starts to make strong campaigning. Due to the combined actions shown by the monopolists, an important reform has risen in the 1920s. The technocrats has received significant powers due to the formulation of the antitrust law. A brave move from the public is only necessary for this reform. The scholars will be given a nice lesson from the experience of the school in Chicago. The paramount role of the competition and its implications in social welfare is very important for the Americans to understand. It can be expected that, implementation of these strategies will lead to a lot of improvement in the market in the near future.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Friedman, L. S. (2017). The microeconomics of public policy analysis. Princeton University Press.
McKenzie, R. B., & Lee, D. R. (2016). Microeconomics for MBAs: The economic way of thinking for managers. Cambridge University Press.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.