Market Structure and Technological Change Policy

Question: Discuss about the Market Structure and Technological Change Policy. Answer: Introduction: A natural monopoly is a type of monopoly that takes place due to high fixed costs as well as startup costs in order to operate a business in a detailed industry. This situation takes place when a single firm can supply the entire demand of the market for a commodity or service at a lower price as compared to other firms. This type of monopoly does not take place due to complicity or aggressive takeovers. One of the most common examples of natural monopoly is the utilities industry. Due to high cost structure of an industry, natural monopoly takes place. In order to offer the lowest unit price to customers, natural monopolies makes the use of limited resources more effectually (Baldwin Scott, 2013) Analysis A market refers to a particular place where commodities are acquired as well as sold. However, in economies, market indicates a particular place as well as an entire area where purchasers and sellers of a commodity are spread. Depending on the characteristics of competition, a market is mostly structured in different ways. One of the most common extreme forms of market competition is perfect competition. The most important characteristics of perfect competition are large number of buyers and sellers. As a result, the demand of individual purchaser comparative to the total demand is negligible and as a result, he cannot persuade the price of the commodity by his individual action (Lun, Hilmola, Goulielmos, Lai, Cheng, 2013). Under perfect competition, the supply of an individual seller is too small as compared to the total output and as a result, he is not able to persuade the cost of the product by his action alone. Another most imperative characteristic is that the firms are free to enter or leave the industry. Each of the firm under perfect competition manufactures and sells a homogenous good. The sellers also do not have an independent price policy under this market structure (Baldwin Scott, 2013). The above figure indicates the monopoly market structure under which there is only one producer or seller of a particular commodity. As a result, there is no difference between a firm and industry under this market structure. There is no competition under this market structure regarding the manufacturing or selling of a particular goods or services. There is a single producer and he is regarded as the price maker. Electricity companies are the most common type of example under monopoly (Bauer, 2013) The above figure shows the change of a firm from perfectly competitive market to a monopoly market. Under the perfect competition, firms mostly earn normal profits where price equals marginal cost. Under perfectly competitive market, firms produce at price Pm a quantity of Qm. The graph shows the intersection of demand and supply curve in order to evaluate the price and quantity of a product. The major purpose of the graph is to show that demand of a firm no longer remain perfectly elastic as the firm gets shifted from perfectly competitive market to monopoly market. The graph shows that under perfect competition, X-axis is equivalent to the horizontal straight line. However, the MR (marginal revenue) curve is below the AR curve under monopoly market (Baumol Blinder, 2015) It is important to understand the structure of the market in which a firm operates as it helps to determine the total number of firms in the market. It also helps to determine the degree to which the industry is vertically incorporated. The turnover of customers is also determined with the help of market structure (Hawley, 2015) The natural monopolies economies of scale are very important so that minimum efficient scale is not accomplished until the firm has become very large in relation to the total size of the market. Minimum efficient scale is the level of output at which all scale economies are exploited. Natural monopolies are popular in markets for essential services that require an exclusive infrastructure in order to deliver the commodity or service. As there is a probability to exploit monopoly power, the governments mostly have a tendency to nationalize as well as regulate them. There are several disadvantages that are associated with natural monopoly and the most common type of disadvantage is that there is no customer sovereignty. Customers are also likely get charged with high prices for low quality products and services. The lack of competition also leads to low quality products and also outdated services (Carvalho Marques, 2014) The government intervenes in the market of natural monopoly with the objective of reducing the dead weight loss and increase social welfare. According to the views of (Redmond, 2013), during natural monopoly, the producer has the potential of increasing the profit by increasing the price at such a high level that the consumers utility reduces rapidly. The government counters this situation by reducing the price level of the natural monopoly. The situation can be depicted in the figure below: As shown in the figure above, the producer who is producing in the natural monopoly market can produce where his marginal cost (MC) is equal to the marginal revenue (MR). This helps him in charging a price level of Pm at which the output supplied is Qm. As stated by (Stiglitz, 2015), this makes the society incur a loss. This is called the dead weight loss. The consumers also lose a proportion of their consumer surplus. To balance the situation the government intervenes in the natural monopoly market. The government can set a price level which will maximize the social welfare and also benefit the consumers and the producer as well. Following the views of (Scitovsky, 2013), the government can set the price level where the marginal cost is equal to the demand curve or the average revenue curve of the monopolist. This will increase the level of efficiency in the market. It will also benefit the consumers as the price level (Pe) will be much lower than the monopoly level of Pm. The quantity supplied at this level of price by the producer will also increase from Qm to Qe. But while doing so, the producer will incur a loss. At the output level Qm the producer will only get his marginal cost of production. The marginal cost of production only connects to the total variable cost of production. The total fixed cost will be still there for the producer. If by selling Qe quantity the producer only gets the marginal cost, he will incur a loss. The primary objective of the government is to increase the social welfare and reduce dead weight Loss. While doing so, if the government makes the price ceiling at Pe, the company will incur a loss as his total cost of production will not be recovered by selling at the level of quantity Qe. Hence, the objective of the government to increase social welfare will not be met at this point although the efficiency level will increase in the society. As stated by (Lim, 2015), at this level of price there is a chance of the producer leaving the market as the producer has no way of gathering his fixed cost back from the market. As stated by (Schubert, 2013), to address this issue the government can reduce the level of price to that level where the average revenue (AR) is equal to the average total cost (AC). This situation can also be written as: the government can set the price level at that point where the demand is equal to the average cost. Here, the price level will be Pr and the quantity will be Qr. At this point of production, the market looks similar to a perfectly competitive market. At this point of production the level of price rice is greater than Pe and lower than Pm. The quantity supplied at this level of price, Qr, is greater than Qm and lower than Qe. This shows that the consumers will not be better off at this level of price than in the monopoly price level. The quantity supplied at this level of price is also much higher which will benefit the consumers. In the views of (Simon, 2015), the social welfare will also increase at this level of price. There will be no dead weight loss associated to this level of production. The producer will also can recover the cost of production and hence will not incur a loss. The producer can enjoy normal profit at this level of production, which is not the case at price level Pe. Hence, it will benefit the consumer, producer, and the society as well. Deviating from the price output combination (Pr, Qr) will make any of the market agents worse off. Hence, it can be said that this combination represents a win-win situation. Conclusion There are various types of market structure that can be present in an economy regarding a good or a service. The monopoly market also can be divided into different categories like pure monopoly, natural monopoly, and others. In case of pure monopoly, the producer has to make sure that there remains a barrier to enter the market for other producers. For this purpose he uses his resources, which in turn increases his cost of production. The natural monopoly presents a situation where the monopoly market exists without any such initiative taken by the producer. This situation gives the producer the potential of charging a price which can lead to market failure due to inefficiency and as a result, the society can incur a dead weight loss. The consumers will also be worse off. The government thus intervenes in a natural monopoly market. The objective of the government is to reduce the dead weight loss of the society and to help the consumers to get a certain level of utility. For this pur pose, the government will set the price of the commodity or service at a level where the average revenue or the demand is equal to the average cost. This will ensure that the consumers will pay less for the products and the social welfare will be maximized. The producer will also enjoy normal profit here. It can also be concluded that there is no competition under monopoly market structure regarding the manufacturing or selling of a particular goods or services. References Baldwin, W., Scott, J. (2013).Market structure and technological change(Vol. 18). 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