How to control monopolies?

1. The extent to which monopolists can charge high prices and earn hug profits is limited by the possibility of new substitute’s product being produced and also by the possible entry of new firms into the industry. Thus a good safeguard against exploitation by a monopolist o keep industries open to new firms and new ideas

2. Legislate in favour of the public interest Maximum price legislation can be set to make it illegal to raise prices above a

certain level Quality control and standard control can be set by the government department

concerned Stock can be controlled in times of acute shortages and those monopolists who

do not abide to the law can be made to pay fine or even sentenced to imprisonment

3. Another way of tackling the problems of monopoly is to remove the barriers, which prevent the growth of competition. New permits and licences can be issued to prospective/potential producers. The formalities and administrative procedures can be made more flexible to encourage the entry of new firms. Moreover if a domestic monopoly is protected from foreign competition by existence of a tariff, which restricts imports, the government might reduce or remove this tariff.

4. The government can also impose a lump sum tax (fixed tax, such a tax would not place unnecessary burden on the consumers and it has no effect on the monopolist’s price and output. The main aim is to remove away part of the monopolist’s profits. This is seen in the diagram below. Equilibrium output and price is unchanged after the imposition of the lump sum tax. The effect of the lump sum tax is seen in the new average cost curve. A higher total cost means a higher average cost curve. With the new average cost, profit level is reduced.

Before the imposition of the lump sum tax, original equilibrium price and output are OP and OQ respectively

After the imposition of the lump sum tax, total profit is reduced from area EPRF to area SPRT, area ESTF represent the profits, which has been removed by the government. However price and output does remain unchanged

Basically , the lump sum tax does not solve the problem of allocative inefficiency , it only helps in redistribution of profit from the monopolist to the government

5. The government can set up a separate body or institution which will be given the responsibility to control the activities of monopoly firms. For example, institutions like standard bureau and Monopoly and Merger Commission have the right to control monopoly activity and to take necessary actions if the need arises.

6. The private monopolist who is profit motivated can be brought under public ownership and control such that the objective will be shifted from profit maximisation towards welfare maximisation and the public sector monopoly will operate at that point where price=mc( i.e. adopting the techniques of marginal cost pricing)

7. The government can give more power to the association of consumers through the setting up consumer protection act ( CPA) to allow the association to perform its activities properly and effectively to ensure that the welfare of consumers is maximise.

Benefits of monopoly

1. Certain projects can only be operated by a monopolist. This is particularly true of public utilities such as water, gas and electricity. If such projects are left to the private sector initially there may be cut throat competition, duplication of services, waste or unnecessary inconvenience to the public. To prevent duplication of services, it is found to be desirable for such projects to be undertaken by monopolies. Under monopoly there is relatively less resource used than under competitive market. When there is competition many firms will be engaged in producing broadly the same commodities. Each firm will require a given amount of land, labour and capital. Resources are scarce and we should make a rational use of it, and under monopoly we require relatively less resources than under competitive market.

2. When there is a single supplier much of waste of competitive advertising is eliminated. Advertising may be limited only to the dissemination of information i.e. advertising would only be informative

3. There is much support for the view that monopoly organisation encourages technical progress. A monopoly is more likely to have the resources required for research and development. In addition, the monopolist has more incentive to innovate since his

secure market ensures that he obtains all the gains from any successful new product or any new production technique.

4. Monopoly may lead to a better exploitation of natural resources. National resources can be exploited to the best technology advances only if one production unit is very large, and the monopolist may be in a better position to employ heavy and expensive machinery.

5. An important issue is what happens to the monopoly profits both in the short run and the long run. Undoubtedly some of the profits will be distributed to shareholders as dividends. This raises questions of equity. Some low income consumers might be exploited by the monopolist because of higher prices. And, some of their purchasing power might be transferred via dividends to shareholders in the higher income brackets - thus making the overall distribution of income more unequal. However some of the supernormal profits might be used to invest in research and development programmes that have the potential to bring dynamic efficiency gains to consumers in the markets. There is a continuing debate about whether competitive or monopolistic markets provide the best environment for high levels of research spending.

6. If the firm produces in an industry with very high fixed costs, consumers can benefit from a large firm which can exploit economies of scale. Economies of scale lead to lower average costs and therefore the potential of lower prices. Example:Would you want several firms providing tap water? Would it make sense to have 2-3 companies laying a network of water pipes and sewage systems across the country? No. It is better to have 1 firm. This is an example of an industry which is a natural monopoly.Industries like car production and airline production also have significant economies of scale so it makes sense for firms to have some degree of market power. However, just because a firm has monopoly power doesn’t mean that the industry necessarily has economies of scale or that lower average costs lead to lower prices.