Business / Monopoly Economics Essay

Monopoly Economics Essay

This essay Monopoly Economics Essay is available for you on Essays24.com! Search Term Papers, College Essay Examples and Free Essays on Essays24.com - full papers database.

Autor:  anton  24 December 2010
Tags:  Monopoly,  Economics
Words: 576   |   Pages: 3
Views: 530

Monopoly Essay Question 1

"Having been found guilty, in April 2000, of abusing its monopoly, Microsoft, the software giant was ordered to be broken in two."

- Economist 7 Nov 2002

a) Why do monopolies exist? [ 10 ]

b) What are the relative merits or demerits of breaking up a monopoly like Microsoft? [ 15 ]

Suggested essay outline:

Part (a)

INTRODUCTION

1. (i) Define monopoly

Spectrum of Market Structures:

Definition: Most extreme form of imperfect market with little or no competition & firm supplies a major part of industry output.

Definition: Most extreme form of imperfect market with little or no competition & firm supplies a major part of industry output.

(ii) State the characteristics of a monopolist

· There are no close substitutes

· There is presence of barriers to entry.

· Demand is likely to be price inelastic

BODY

2. Why monopolies exist?

- EOS

In some industries, high overheads mean that the market size limits the no. of firms that can exist & simultaneously benefit from EOS in the industry. (Natural monopoly)

- Legal Barriers

Patent creates the exclusive right for an inventor to exploit his invention for a no. of years.

It has used its Windows monopoly of PC operating systems, built in the 1980s, to extend its grip on the software market.

Microsoft had restrictive licensing agreements with PC makers & would not grant access to 95% of the source code of its Windows 2000 and Windows XP operating systems to its users.

- Advertising and brand loyalty as a barrier to entry

Advertising а build up brand loyalty а prevent new company to compete with microsoft

- Aggressive tactics & intimidation

The practice of predatory pricing or limit pricing i.e. using anticompetitive measures to preserve its monopoly and by being predatory towards its competitors (using deliberately low prices to limit entry to the market).

Eg: During 1996, Microsoft giving away its web browser, Internet Explorer, for free (zero dollars а very very low price)

- Mergers and takeovers

Microsoft has been actively seeking out & buying up new businesses related to its core business area.

CONCLUSION

3. The monopolist is a price setter and can choose which price to charge.

Still it is constrained by the demand curve. A monopolist (like a perfectly competitive firm) will maximize profits where MR = MC.

Diagram - (not necessary to show profit position).

Part (b)

b) What are the relative merits or demerits of breaking up a monopoly like Microsoft? [ 15 ]

Demerits of breaking up a Monopoly

- Loss of EOS

а AC ↑ а increase in price а loss of consumer surplus

- Loss of ability to engage in R&D

Unable to have the funds (supernormal profits) to invest in R&D to product innovate

Eg: Types of product innovation by Microsoft: Windows update, newer version of MSN etc.

- Price discrimination impossible

When a monopoly breaks up а could no longer third degree price discriminate.

Merits of breaking up a Monopoly

а Greater Competition

Increased Efficiency and Lower costs

а Price would be lowered а benefit consumers а consumer surplus increase

More firms producing and greater innovation

а Product differentiation а a variety of products to choose from а variety of choices а consumers’ welfare would be enhanced

Allocative efficiency could be achieved

а Society’s welfare could be maximized

а no DWL

Conclusion

Breaking up а might not be the best

Because there would still be advantages of remaining as a monopoly only if they could pass their cost savings (EOS) to consumers, could make use of their supernormal profits to engage in R&D to product innovate and to improve the quality of products.



Get Better Grades Today

Join Essays24.com and get instant access to over 60,000+ Papers and Essays

closeLogin
Please enter your username and password
Username:
Password:
Forgot your password?