JC Economics Essay Antitrust Laws & Monopoly Model Answers
How many of you dread the test question on Monopoly in the Market Structures topic question in your “A” Levels H2 Economics? How many of you in JC1 can afford to skip this essay question? Not many actually, as most JC Promos exams do set one question for Market Structures. Worse, if it is set as a compulsory section on its own!
Furthermore, Monopoly and its impacts on society is also relevant to Market Dominance, which means it can be combined with other forms of Market Failure, including externalities, market imperfections, public goods, etc. Hence, let’s master some content right now, as well as build your exam skills and techniques!
Question
(a) Compare the features of monopoly with those of monopolistic competition. [10]
(b) in recent years, there has been a recent spate of antitrust laws to break up monopolies. Discuss whether the break up of monopolies will always benefit the public. [15]
Market Structures – Monopoly vs Monopolistic Competition
Suggested Answer:
Compare the features of monopoly with those of monopolistic competition
| Monopoly | Monopolistic Competition | |
| Definition |
A market structure characterized by a single firm in the market selling a unique product with no close substitutes. |
A market structure characterized by many small firms selling differentiated products or services. |
| Examples | Natural monopoly in train services & public utilities (In S’pore, SP Services is a monopoly) |
Hairdressing salons, GP clinic, bubble tea stores, restaurants |
| Nature of product | Unique product (only producer), no close substitutes | Differentiated product (by their services, packaging, small scale advertising), many close substitutes |
| Barriers to entry. |
High barriers to entry. (Could be due to legal or contrived barriers, high fixed cost) Supernormal profits due to high barriers to entry. (Sketch your own diagram as an exercise) |
Ease of entry. Normal profits. Any profits made will be eroded supernormal by new entry of firms. (Diagram) |
|
Conduct (behaviour) |
Extent of competition depends on market contestability (whether there is danger of new entrants entering or govt regulation). Monopoly maintains their mkt power by engaging in R & D. |
Very competitive. monopolistically competitive firms differentiate their products by small scale advertising & product differentiation rather than R&D as it didn’t have enough capital to do so compared with monopoly |
Marking Scheme:
L1 (1-4marks): Mere listing of each market structure without any attempts to make a distinction between the 2.
L2 (5-6m): Able to compare closely the similarities & differences of the structure & conduct of each market model.
L3 (7-10m): Detailed & clear distinction made between the 2 economic models & use diagrams or examples to illustrate.
More essays on monopolistic competition and on Market Structures here.
JC Economics Essay – Antitrust Laws & Monopoly
In recent years, anti-trust laws have been made by governments to break up monopolies to benefit the public.
Why break up monopolies?
To encourage competition
To protect the public from monopolies who use their monopoly power to exploit consumers
To get rid of inefficient monopoly
(In Singapore, the Competition and Consumer Commission of Singapore aka CCCS, puts up a Competition Act and Guidelines to ensure no abuse of monopoly or large market power.
Thesis: The break up of monopolies will always benefit the public.
With the break up of monopolies, the public will benefit
Reasons why monopolies should be broken up (harms of monopoly).
• Price higher & output lower, compared to perfectly competitive industry, assuming identical cost. The public ends up paying more for the good than they should. Wealth is transferred from the public to the monopolist. Monopoly equilibrium is allocatively Inefficient with P>MC which reflects too few of the goods are produced, hence there is under-allocation of resources. Deadweight welfare loss. Public Interest is not taken care of.
(Illustrate with diagram)
A private & unregulated monopoly is able to charge a high price due to its strong market power it derives from high barrier to entry. The monopolist can earn supernormal profits in the long run. The high price charged is at the expense of public interest.
A monopoly in the absence of competition may become complacent & X-inefficient. Such a monopoly may operate at higher unit cost & finds no incentive to innovate. Less choice for the public.
Anti-Thesis: The break up of monopolies will NOT always benefit the public.
With the break-up of monopolies, the public will NOT always emerge victorious.
Reasons why monopolies should not be broken up.
(1) In the case of a natural monopoly that provides public utilities, only one firm should operate in the market to fully exploit substantial economies of sale (EOS). The monopolist can produce output at a P than that in a competitive market. The public actually gains with a higher output that can be bought at lower price. Diagram to illustrate.
(2) Break up of monopolies means the existence of more than 1 firm would mean unnecessary duplication of infrastructure (e.g. pipes & expensive equipment) leading to wastage of resources & production at higher AC. The public may end up paying more than they should.
(3) Monopolists can be dynamic efficient to do R & D to benefit the public.
(4) More competition may not necessarily mean P. Public may end up paying more because of excessive non-price competition like advertising. (iv) A monopolist practising price discrimination can cause a loss-making monopoly to break even & hence provide the goods to the public rather than not produce at all. Furthermore, excessive advertising is itself a form of overallocation of resources to advertising, another market failure!
(Qn: possible to link to macroeconomic objectives?)
Evaluation
Whether consumers will benefit depends on the type or/& nature of the industry that the monopoly is operating in. In markets where breaking up a natural monopoly is not encouraged, government regulation like MC pricing or AC pricing or 2 tier pricing should be adopted for public interest.
Judgment: depends on objectives of the monopoly, roles of government and nature of monopoly power.
(Qn: Is tax on monopoly profits to reduce monopoly power a sound microeconomics policy?)
Marking Scheme:
L1: Listing of benefits of breaking up or not breaking up a monopoly to the public without much discussion.
L2: For accurate but undeveloped explanation or a lopsided explanation examples.
L3: For a well-balanced answer that explains the critique of breaking up a monopoly with egs
E1 (1-2m): For an unreasoned Judgement on benefits of monopoly or otherwise
E2 (3-5m): For an evaluative assessment that is elaborated & is based on sound economic reasoning (a well-reasoned judgement)
JC Econs tutor’s comments:
It is a relatively simple diagram. Expect to get 20 or more marks.