Monopoly and monopsony

Classifying customers[ edit ] Successful price discrimination requires that companies separate consumers according to their willingness to buy.

Monopoly and monopsony

For example, monopolies have the market power to set prices higher than in competitive markets. The government can regulate monopolies through price capping, yardstick competition and preventing the growth of monopoly power.

Why the Government regulates monopolies Prevent excess prices. Without government regulation, monopolies could put prices above the competitive equilibrium. This would lead to allocative inefficiency and a decline in consumer welfare. If a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service.

Government regulation can ensure the firm meets minimum standards of service. A firm with monopoly selling power may also be in a position to exploit monopsony buying power.

For example, supermarkets may use their dominant market position to squeeze profit margins of farmers. In some industries, it is possible to encourage competition, and therefore there will be less need for government regulation.

Some industries are natural monopolies — due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition, and it is essential to regulate the firm to prevent the abuse of monopoly power. How the government regulate monopolies 1.

Price capping by regulators RPI-X For many newly privatised industries, such as water, electricity and gas, the government created regulatory bodies such as: ORR — Office of rail regulator. Amongst their functions, they are able to limit price increases.

They can do this with a formula RPI-X X is the amount by which they have to cut prices by in real terms. In the early years of telecom regulation, the level of X was quite high because efficiency savings enabled big price cuts.

K is the amount of investment that the water firm needs to implement. Thus, if water companies need to invest in better water pipes, they will be able to increase prices to finance this investment.

Advantages of RPI-X Regulation The regulator can set price increases depending on the state of the industry and potential efficiency savings.

Monopoly and monopsony

If a firm cut costs by more than X, they can increase their profits. Arguably there is an incentive to cut costs.

In the absence of competition, RPI-X is a way to increase competition and prevent the abuse of monopoly power. There is a danger of regulatory capturewhere regulators become too soft on the firm and allow them to increase prices and make supernormal profits.

Regulation of quality of service Regulators can examine the quality of the service provided by the monopoly. In gas and electricity markets, regulators will make sure that old people are treated with concern, e. Merger policy The government has a policy to investigate mergers which could create monopoly power.

The Competition commission can decide to allow or block the merger. Breaking up a monopoly In certain cases, the government may decide a monopoly needs to be broken up because the firm has become too powerful. For example, the US looked into breaking up Microsoft, but in the end, the action was dropped.

Rate of return regulation looks at the size of the firm and evaluates what would make a reasonable level of profit from the capital base.

If the firm is making too much profit compared to their relative size, the regulator may enforce price cuts or take one off tax. This is when firms allow costs to increase so that profit levels are not deemed excessive. Rate of return regulation gives little incentive to be efficient and increase profits.

Monopoly and monopsony

Also, rate of return regulation may fail to evaluate how much profit is reasonable.The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market.

Four basic types of market structure are (1) Perfect competition: many buyers and sellers, . Definition of Monopoly in the Dictionary. Meaning of Monopoly. What does Monopoly mean? Proper usage and pronunciation (in phonetic transcription) of the word Monopoly. Information about Monopoly in the dictionary, synonyms and antonyms.

Monopsony and Buyer Power The OECD Competition Committee debated Monopsony and Buyer Power in October This document includes an executive summary and the documents from the meeting: an.

monopoly - Translation to Spanish, pronunciation, and forum discussions. Definition of Monopsony. A monopsony occurs when a firm has market power in employing factors of production (e.g. labour). A monopsony means there is one buyer and many sellers.

What is a monopoly? by The Linux Information Project (LINFO)

Monopsony in Law and Economics [Roger Blair] on *FREE* shipping on qualifying offers. Most readers are familiar with the concept of a monopoly. A monopolist is the only seller of a good or service for which there are not good substitutes.

Economists and policy makers are concerned about monopolies because they lead to higher prices and lower output.

What is a monopoly? by The Linux Information Project (LINFO)