Consumers can be made better off if monopolies are broken up and a more competitive market
arises. This is because monopolies are assumed to be profit maximisers and therefore operate where
MC=MR at P1 as shown in figure 1, where Q1 is sold. Allocative efficiency is reached where P=MC
which is shown at P2, where there are more units sold (Q2) at a lower price. This therefore benefits
the consumers because they pay a lower price for the good and more goods are sold to the market,
reducing the area of deadweight loss (A,B,C) and therefore providing a more optimal allocation of
resources for society. However, we are assuming that a more competitive market, likely an
oligopoly, that is formed when the monopoly is broken up, won’t collude and therefore keep prices
high. If this were the case then not only would prices remain high and output remain limited,
maintain the area of deadweight loss, but there would be less profit to be reinvested into research
and development, and collusion may also reduce the need for the market to be dynamic. As a result
there may be less dynamic efficiency in the market, so costs remain high over time and consumers
do not benefit from lower costs or higher quality of products over time.
Consumers may suffer if monopolies are broken up, because this will reduce the scale of a firms
output and may therefore reduce the firms ability to benefit from economies of scale by moving the
long run average cost further away from the minimum efficient scale (productive efficiency). This
would therefore lead to higher average costs which would therefore increase the price from P1 to
P2, as firms continue to profit maximise where MC=MR, however MC because greater and therefore
output is reduced and price increased, negatively impacting consumers who have to pay a higher
price for goods. This may not be the case however, if the monopoly is operating at diseconomies of
scale whereby its long run average cost is greater then the MES due to issues with communication
and coordination over such a large scale operation. In this case breaking up the monopoly may
increase economies of scale and therefore reduce long run average costs and so lower prices for
consumers.
Furthermore, in certain markets where it is only practical for there to be one firm, (Natural
Monopoly) due to extremely high fixed costs and seemingly endless economies of scale, it is not
practical to break up a monopoly. This is because breaking up a monopoly will simply increase the
average cost of a natural monopoly which will increase the price and reduce output. This is an issue
because natural monopolies are often already heavily subsidised by the government. This is because
when the profit maximise producing where MR=MC, then the price is too high and output is too low
for society causing deadweight loss. To reach an optimal allocation of resources for society and
therefore cut out welfare loss, the monopoly such as a train operator, must operate where P=MC. In
most cases for a natural monopoly, this leads to the price being lower than the average costs and so
the trainline operator makes a loss. Therefore to ensure that the trainline operator produces at this
point, the government provide subsidies to cover the difference between normal profit (AC=AR) and
the loss at (MC=AR). Variable costs are costs that vary directly with output, and due to the high fixed
costs of natural monopolies, there are seemingly endless economies of scale whereby the average
cost continues to decrease as output increases. Therefore it is not practical to ever split up natural
monopolies, as it wil lust increase governemtn expenditure on subsidies and increase costs for
consumers, becoming less allocatively and productively efficient. In these circumstances a better
alternative to breaking up the monopoly to foster competition, would be for the government to
offer performance incentives to the natural monopoly, which would increase the quality of the
service and encourage the monopoly to be more x-efficient, because if they were to do so they
would receive bonuses from the government which would increase the level of supernormal profit,
or alternatively for the government to provide penalties should the monopoly not perform within a
certain range of objectives. This would also increase x-efficiency and quality of service, because
failure to run within set objectives such as trains being no more than 10 minutes late, would result in
arises. This is because monopolies are assumed to be profit maximisers and therefore operate where
MC=MR at P1 as shown in figure 1, where Q1 is sold. Allocative efficiency is reached where P=MC
which is shown at P2, where there are more units sold (Q2) at a lower price. This therefore benefits
the consumers because they pay a lower price for the good and more goods are sold to the market,
reducing the area of deadweight loss (A,B,C) and therefore providing a more optimal allocation of
resources for society. However, we are assuming that a more competitive market, likely an
oligopoly, that is formed when the monopoly is broken up, won’t collude and therefore keep prices
high. If this were the case then not only would prices remain high and output remain limited,
maintain the area of deadweight loss, but there would be less profit to be reinvested into research
and development, and collusion may also reduce the need for the market to be dynamic. As a result
there may be less dynamic efficiency in the market, so costs remain high over time and consumers
do not benefit from lower costs or higher quality of products over time.
Consumers may suffer if monopolies are broken up, because this will reduce the scale of a firms
output and may therefore reduce the firms ability to benefit from economies of scale by moving the
long run average cost further away from the minimum efficient scale (productive efficiency). This
would therefore lead to higher average costs which would therefore increase the price from P1 to
P2, as firms continue to profit maximise where MC=MR, however MC because greater and therefore
output is reduced and price increased, negatively impacting consumers who have to pay a higher
price for goods. This may not be the case however, if the monopoly is operating at diseconomies of
scale whereby its long run average cost is greater then the MES due to issues with communication
and coordination over such a large scale operation. In this case breaking up the monopoly may
increase economies of scale and therefore reduce long run average costs and so lower prices for
consumers.
Furthermore, in certain markets where it is only practical for there to be one firm, (Natural
Monopoly) due to extremely high fixed costs and seemingly endless economies of scale, it is not
practical to break up a monopoly. This is because breaking up a monopoly will simply increase the
average cost of a natural monopoly which will increase the price and reduce output. This is an issue
because natural monopolies are often already heavily subsidised by the government. This is because
when the profit maximise producing where MR=MC, then the price is too high and output is too low
for society causing deadweight loss. To reach an optimal allocation of resources for society and
therefore cut out welfare loss, the monopoly such as a train operator, must operate where P=MC. In
most cases for a natural monopoly, this leads to the price being lower than the average costs and so
the trainline operator makes a loss. Therefore to ensure that the trainline operator produces at this
point, the government provide subsidies to cover the difference between normal profit (AC=AR) and
the loss at (MC=AR). Variable costs are costs that vary directly with output, and due to the high fixed
costs of natural monopolies, there are seemingly endless economies of scale whereby the average
cost continues to decrease as output increases. Therefore it is not practical to ever split up natural
monopolies, as it wil lust increase governemtn expenditure on subsidies and increase costs for
consumers, becoming less allocatively and productively efficient. In these circumstances a better
alternative to breaking up the monopoly to foster competition, would be for the government to
offer performance incentives to the natural monopoly, which would increase the quality of the
service and encourage the monopoly to be more x-efficient, because if they were to do so they
would receive bonuses from the government which would increase the level of supernormal profit,
or alternatively for the government to provide penalties should the monopoly not perform within a
certain range of objectives. This would also increase x-efficiency and quality of service, because
failure to run within set objectives such as trains being no more than 10 minutes late, would result in
