Two Theories of Monopoly and Competition: Implications and Applications Brian P.

Simpson National University

Definition..
O There is only one firm, the sole producer

of a good, no close substitutes, total market supply is identical with single firms supply.
O monopolist can raise its price and

consumers have no alternative firm to turn to in that industry, they will pay for the good or get nothing.

O Is a price maker. But it is still constrained

by its demand curve. Price rise, quantity demanded get lower.

O Barriers to entry; 1. Ownership of a key sources 2. The government gives a single firm

the exclusive right to produce some good. 3. Costs of production make a single producer more efficient than a large number of producers.

Article review..
O Monopolies arise naturally out of the free

market ? O Comparing and contrasting two theories of monopoly Economic Monopoly and Political Monopoly
O Not true ! Why?

O demonstrates that the two theories of

monopoly have their separate roots in two opposite theories of competition: perfect competition and competition as rivalry.
O show that only one of these theories of

competition accurately describes the nature of competition in an economy

Typical assumption.
O free market leads to large firms gaining

monopoly power and being able to restrict the output of the goods they produce to arbitrarily raise their prices (Gwartney, et al., 2000, pp. 126-127)
O lead to greater economic inefficiency, a

lower productive capability, and a lower average standard of living.

Writers findings
O invalid view of competition and monopoly. O free market leads to the most intense competition

that is possible in any industry O government interference decreases the intensity of competition, level of economic efficiency, the productive capability, and the standard of living. Markets Dont Fail! (Simpson, 2005, pp. 31-57).

Situation given
O Microsoft, Wal-Mart, and the United

States Postal Service (USPS) O considered monopolies based on the economic concept due to their large size and market share in their respective markets
O only the USPS is a monopoly based on

the political concept.

monopolies arise out of the free market accepted by most economists today the greater the market share a firm has the greater its monopoly power.

provides a sound understanding of monopoly monopolies arise from the governments initiation of physical force to reserve a market or a portion of a market to one or more sellers. as long as a firm is being protected by the government, no matter what its size, then that firm has monopoly power.

Conclusion..
O monopolies are not created by the free

market. O only by government interference into the free market O when the government gives some firm(s) special privileges over others through the initiation of physical force. O Free market create more natural competition..