We have seen that under perfect competiton, firms will make only normal profit in the long run. Freedom in the long run. Freedom of entry and exit will ensure that there will be only normal profit in the long run. A firm under perfect competition is only price a price taker. Under monopoly the firm is a price maker. This is the reason why consumers prefer competition. This is the reason why governments are enacting policies that control monopolies and encourage competiton.
Under perfect competition, super normal profit will disappear in the long run. Entry of new firms attracted by super normal profit will ensure this. what about monopoly ?
Monopoly is characterised by a single firm. And, there is no freedom of entry. The monopolist will create entry barriers. This will ensure that super normal profits continue in the long run also. This is the theoretical situation. Practically, the situation can be different. In the practical world most products have substitutes. Availability of substitutes reduces monopoly power, Threat of competition deters firms from making super normal profit. Similarly, threat of government takeovers and price controls are other restraining factors. One arguments in favour of monopoly is the large monopoly firms with high level of profits can invest money in research and development thereby, contributing to rechnical progress. Small firms under perfect competition will not have the resources for R & D
Global experience is that private monopolies are bad. That is why governments control monopolies through anti-monopoly laws and encourage competition through competition policies.The practice of charging different prices for the same product or service is called price discrimination.
Sometimes a monopolist may charge different prices from different customers. For examples, the state electricity board charges different rates for electricity used by agriculturists, industrialists and domestic consumers. This practice of charging different prices from different customers is called price discrimination. The monopolist who practises price discrimination is a discriminating monopolist. This form of monopoly is called discreiminating monopoly.
Monopoly is characterised by a single firm. And, there is no freedom of entry. The monopolist will create entry barriers. This will ensure that super normal profits continue in the long run also. This is the theoretical situation. Practically, the situation can be different. In the practical world most products have substitutes. Availability of substitutes reduces monopoly power, Threat of competition deters firms from making super normal profit. Similarly, threat of government takeovers and price controls are other restraining factors. One arguments in favour of monopoly is the large monopoly firms with high level of profits can invest money in research and development thereby, contributing to rechnical progress. Small firms under perfect competition will not have the resources for R & D
Global experience is that private monopolies are bad. That is why governments control monopolies through anti-monopoly laws and encourage competition through competition policies.The practice of charging different prices for the same product or service is called price discrimination.
Sometimes a monopolist may charge different prices from different customers. For examples, the state electricity board charges different rates for electricity used by agriculturists, industrialists and domestic consumers. This practice of charging different prices from different customers is called price discrimination. The monopolist who practises price discrimination is a discriminating monopolist. This form of monopoly is called discreiminating monopoly.
