Market Inefficiencies Caused by Monopolies
The simulation game taught me that monopolistic models are detrimental to both market actors and consumers. The dominance of monopoly in the marketplace produces two types of inefficiency, namely consumer exploitation and allocative inefficiency. When only one entity rules the entire market, consumers cannot purchase better or cheaper substitutes and analogs for goods and services. It eventually leads to monopolists setting high prices by directly influencing the price of its output (Monopoly versus competition, 2021). Allocative inefficiency refers to a situation when the dominant actor distributes its products in a way that does not fit consumer needs and preferences.
Market Inefficiencies Caused by Monopolistic Competition
Price Discrimination showed me that the very market setting of monopolistic competition is also harmful to both producers and consumers. Consumer exploitation and high prices for products and services lead to the consumer surplus beginning to decline. When all products are at their highest price, consumers become less generous to sellers (Profit maximization, 2021). Low consumer surplus leads to members of a monopolistic competition starting to sell less of their goods and services. The combination of these inefficiencies results in a deadweight loss.
Monopolies and Monopolistic Competitive Firms Profitability
The market setting of monopolistic competition is beneficial only to monopoly and monopolistic competitive firms. Since this market model is inherently inefficient, there is only one tactic by which monopolists can maximize their profits. Experts note that “a monopoly maximizes profit by choosing the quantity at which marginal revenue equals marginal cost” (Profit maximization, 2021, para. 1). The next step includes the monopolist using “the demand curve to find the price that will induce consumers” (Profit maximization, 2021, para. 1). It is this model that generates the inefficiencies described above.
References
Monopoly versus competition. (2021).
Profit maximization. (2021).