How does a free market prevent a monopoly Essay Example for Free

How does a free market prevent a monopoly Essay We often listen to this statement that there are no monopolies in a free market or a free market prevents monopolies. Though there are some arguments about if the statement is completely true and, if a government plays a part in making or preventing a monopoly. To understand and to validate the statement first we need to understand few terms used in the statement and concepts of market. Types of market economies There are majorly four types of market economies namely: * Free-Market Economy (or Liberal Market Economy). An economic system comprised mainly of privately-owned enterprise (businesses), low levels of regulation and relies heavily on the free-price system to allocate resources. This is distinguished with a planned economy based on private enterprise. * Social Market Economy A free-market system that utilizes heavy taxation and regulation and recognizes organized labour at the national level, but relies on the free-price system rather than economic planning to allocate goods and services. * Market Socialism and Socialist Market Economies An economic system comprised of state-run or worker-run enterprises and either a free-price system or a directed and regulated market to allocate resources. This is distinguished with a socialist planned economy. * Mutualism and Cooperative Markets A form of participatory economics where enterprises are run as worker and consumer cooperatives (socially-owned) which compete with each other in a market economy. This is distinguished from participatory and cooperative planning. To describe free market economy in a nutshell, it is the kind of economy in which the system of prices is a result of a vast number of voluntary transactions, rather than of political decrees as in a controlled market. The freer the market, the more prices will reflect consumer habits and demands, and the more valuable the information in these prices is to all players in the economy. Through free competition between vendors for the provision of products and services, prices tend to decrease, and quality tends to increase. Types of Competition There are namely four major kinds of competition * Perfect Competition * Monopolistic Competition * Oligopoly * Monopoly Monopoly exists when a single seller controls the supply of a good or service and prevents other businesses from entering the field. Being the only provider of a certain good or service gives the seller considerable control over price. Monopolies are prohibited by law however; government-regulated monopolies do exist in some business areas because of the huge up-front investment that must be made in order to provide some types of services. Examples of monopolies in the India are public utility companies that provide services and/or products such as gas, water, electricity and railways. To talk about monopoly in detail while single-firm monopolies are rare, except for those subject to public regulation, it is useful to examine the monopolist’s market conduct and performance to establish a standard at the pole opposite that of perfect competition. As the sole supplier of a distinctive product, the monopolistic company can set any selling price, provided it accepts the sales that correspond to that price. Market demand is generally inversely related to price, and the monopolist presumably will set a price that produces the greatest profits, given the relationship of production costs to output. By restricting output, the firm can raise its selling price significantly. The monopolist will generally charge prices well in excess of production costs and reap profits well above a normal interest return on investment. His output will be substantially smaller, and his price higher, than if he had to meet established market prices as in perfect competition. The monopolist may or may not produce at minimal average cost, depending on his cost-output relationship; if he does not, there are no market pressures to force him to do so. If the monopolist is subject to no threat of entry by a competitor, he will presumably set a selling price that maximizes profits for the industry he monopolizes. If he faces only impeded entry, he may elect to charge a price sufficiently low to discourage entry but above a competitive price—if this will maximize his long-run profits. Though monopoly has its advantages like in some industries it is the most cost-effective way of providing services, example is public utilities, as it would obviously be inefficient to have 2 or more competing sewer or power distribution systems in a city, monopoly has many disadvantages like Poor level of service as there is no fear of competition, No consumer sovereignty. Consumers may be charged high prices for low quality of goods and services. Lack of competition may also lead to low quality and out dated goods and services hence making it necessary to check a market from becoming monopolist to safeguard the interests of consumers. Now coming back to the question ‘how does a free market prevent a monopoly? ’ In a free market, competition drives away bad ideas. What stops monopolies? Small companies being allowed to set up and compete, without loads of regulations and fees making it impossible for them to afford to keep costs down. The free market prevents people from cornering the market, because there is always someone else that is capable and willing to make the same product for the same or lesser price. Eventually, if that keeps going, everything will be free in the free market, or rather, people will start trading for goods and services again, like they used to. Of course, along this path to free produce, you have the interruption of the Laws of Supply and Demand, where you eventually have too much product for the demand, and can no longer make a profit because of your losses. Price Wars eventually even themselves out, because at a certain price, everyone will be able to buy your product, and then no one else will need it anymore. When you have a high demand for a product, the price is naturally high. This obviously attracts investors and manufacturers to that field in order to make as much profit as possible. As more competitors enter that field of production, the prices for the product fall accordingly, until the supply meets the demand, and prices regulate based on 1. The cost to produce, and 2. The fact that everyone already has one and likely doesnt need another right now. For e. g. in the early days of the automotive market, Ford used to say You can have the Model-T in any colour you want, as long as its black. Then Chevrolet came in with more colour choices, and to compete, Ford had to change its policy or they would have fallen off the face of the Earth. Though there is an argument that exists, which says government sometimes does enable formation of a monopoly for example corporate trusts. Government supports an entity to a level that it becomes very big and later, in order to keep a check on the entity from preventing it to become a monopoly, government lays down set of rules and regulations which make it practically impossible for new budding competitors to grow up to the level of first organisation and compete efficiently, resulting in formation of a monopoly. But in the end, No matter how successful a company is, it is never immune from competition. It always faces at least potential competition, as well as actual competition from companies that offer substitutes. References: http://wiki. answers. com http://www. britannica. com http://answers. yahoo. com http://www. physicsforums. com.