Regulation of monopoly

Because of the potential economic welfare loss arising from the exploitation of monopoly power, the Government regulates some monopolies. Regulators can control annual price increases and introduce fresh competition into particular industries

Monopoly and Innovation (Research and Development)

How are the supernormal profits of monopoly used? Is consumer surplus of equal value to producer surplus?

Are large-scale firms required to create a comparative advantage in global markets? Some economists argue that large-scale firms are required to be competitive in international markets.

An important issue is what happens to the monopoly profits both in the short run and the long run. Undoubtedly some of the profits will be distributed to shareholders as dividends. This raises questions of equity. Some low income consumers might be exploited by the monopolist because of higher prices. And, some of their purchasing power might be transferred via dividends to shareholders in the higher income brackets - thus making the overall distribution of income more unequal.

However some of the supernormal profits might be used to invest in research and development programmes that have the potential to bring dynamic efficiency gains to consumers in the markets. There is a continuing debate about whether competitive or monopolistic markets provide the best environment for high levels of research spending.


Price Discrimination

Are there potential welfare improvements from price discrimination? Some forms of price discrimination benefit certain consumers.


Domestic monopoly but international competition

A firm may have substantial domestic monopoly power but face intensive competition from overseas producers. This limits their market power and helps keep prices down for consumers. A good example to use here would be the domestic steel industry. Corus produces most of the steel manufactured inside the UK but faces intensive competition from overseas steel producers.


Contestable markets!


Contestable market theory predicts that monopolists may still be competitive even if they enjoy a dominant position in their market. Their price and output decisions will be affected by the threat of "hit and run entry" from other firms if they allow their costs to rise and inefficiencies to develop.

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