Discuss the extent to which monopoly is a realistic market structure in Singapore.

The characteristics of a monopoly

  • Single seller, market power
  • Unique product, highly inelastic demand curve
  • Many high barriers to entry; high fixed costs, e.o.s., control of raw materials, control of retail outlets, patents, brand royalty, government policy
  • Imperfect knowledge
  • Demand, Average Revenue and Marginal Revenue curves are downward sloping. While the former two are identical the MR is different
  • Control over price or quantity but not both
  • Produces where MC=MR i.e. profit maximizing point as any other point suggests that more profits could be realized by increasing production or losses could be minimized by reducing production
  • Price is determined by the AR curve since the consumers are willing and able to pay that higher price
  • The position of the AC determines the level of profit. Usually supernormal profits

Show long run equilibrium of a monopoly. (Diagram)

Monopolies are bad for the consumer:

Explain the negative consequences of a monopoly

  • price is always higher while output is lower
  • welfare loss due to deadweight loss
  • allocative inefficiency as P is not equal to MC; wastage of resources
  • a monopoly will be less productively efficient than other firms as it has a higher level of excess capacity
  • absence of competition compared to other structures
  • monopolist can be X inefficient which means cost controls may become lax without competitive pressure on profit margins. The result may be overstaffing and spending on prestige buildings and equipment
  • less effort to keep technologically up-to-date, research new products or develop new markets

Therefore consumers are disadvantaged.

Monopoly is more beneficial for the consumer:

Explain the advantages of a monopoly

  • able to practice PD to make production possible in view of the high fixed costs whereas in other structures such as the MC industry, each firm will be making losses if they have to provide the good. In the end, no firm will provide the good. It could be a necessity like electricity supply which is important to households. This will ensure higher consumer’s welfare
  • able to enjoy greater EOS which reduces the cost of production. The firms in other structures such as MC firms cannot enjoy such EOS because each will be producing at a lower level of output compared to the monopolist. Assuming the cost savings are passed to consumers, the price level charged by a monopoly may be lower than a MC firm
  • the ability to earn supernormal profits in the LR implies that a monopoly is able to engage in R&D for product development which benefits the consumers in terms of better and cheaper products. Whereas in the PC and MC industries, firms will only earn normal profits in the LR, they have no incentive to engage in R&D
  • a monopoly, if need be, can be regulated in order for society to benefit. Among the regulatory devices available are:
  • price fixing or controls
    • MC Pricing
    • AC Pricing
    • 2 part tariff (optional)
  • lump sum taxes
  • nationalization, legislation
  • evaluate the above policies pointing out the pros and cons of each policy. With MC pricing allocative efficiency is achieved as P=MC but when forced to do this the monopoly will incur losses which must be covered by subsidies to the monopoly in order to continue production of the good or service. The subsidies are not without costs as taxpayers will now have to bear it. The firm may still not be productively efficient since it may be producing at excess capacity
  • with AC pricing the need for subsidies is alleviated since now the firm will produce where normal profits are made. Consumers are better off compared to the original equilibrium price and output while taxpayers are spared higher taxes. However, there is allocative inefficiency as P>MC.  There is also less incentive to innovate while the definition of ‘normal profits’ may lead to problems in deciding what is acceptable
  • AC pricing has the advantage of firm not incurring losses but the output is still too low. On the other hand, the MC pricing has the advantage of producing the right quantity but the firm will incur losses
  • a compromise between AC & MC pricing is the 2-part tariff – this method makes it possible to price at MC without incurring a loss. Consumers pay 2 charges:- a standard fixed charge & charge per unit consumed. The minimum fixed charge is necessary to ensure that monopolist breaks even. However, there are other problems since the fixed charge for access to the good may be too high for some consumers while the costs of enforcing the systems might be high.
  • the government may take complete control by nationalizing the monopoly but this kills the incentive to enterprise and will lead to disadvantages. Taxpayers are also burdened with running the firm. Finally, the government may regulate monopoly behaviour through legislation.

Monopoly as a realistic market structure in Singapore

Students should discuss the extent to which monopoly is common or otherwise in Singapore. The birth of the movement in the late 1970s to increase social efficiency and hence societal welfare led to the demise of public monopolies all over the world. As a result in recent decades pure public monopolies have become rare and few examples of this exist. In Singapore, the PUB stands out prominently. The movement also affected private monopolies and made these also rarer.

However, when looked upon as a market share issue we find that many firms that are identified as oligopolies may actually exhibit monopoly tendencies as their share may surpass the mandatory 40%. Examples of such firms abound in Singapore, in transport, telecommunications, banking, pharmaceuticals, hospitals etc.

Students should then consider the influence of such firms and compare with the prevalence of firms that are prominently monopolistically competitive. Such firms include restaurants, clinics, retail outlets etc.

Among the reasons for the shift away from monopolies is the intensity of competition, the demand of the consumer for greater quality in the goods they consume, the proliferation of modern technology, mass markets that are big yet diversified, the need to take advantage of EOS, large capital outlay requirements and entrepreneurship. These demands cannot be easily fulfilled by just one type of market structure and could explain the rise and realism of the oligopoly and mc structures.

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