Disadvantages of price discrimination.
It may widen income inequality in the case where no consideration is taken of the poor in the process of price discrimination.
Dumping or selling products at a cheaper price in another country may force firms in the country producing the same commodity out of business.
Price discrimination is un fairness to certain customers ie those charged highly.
It may lead to wastage of certain resources, by selling them at a low price eg through dumping.
Perfect price discrimination eliminates the consumer's surplus, which reduces consumer's welfare.
Positive aspects
Some argue that it can be good to allow a firm to attempt to monopolize a market, since practices such as dumping can benefit consumers in the short term; and once the firm grows too big, it can be dealt with via regulation. When monopolies are not broken through the open market, often a government will step in, either to regulate the monopoly, turn it into a publicly owned monopoly, or forcibly break it up. Public utilities, often being natural monopolies and less susceptible to efficient breakup, are often strongly regulated or publicly owned. AT&T and Standard Oil are debatable examples of the breakup of a private monopoly. When AT&T was broken up into the "Baby Bell" components, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market and began to take phone traffic from the less efficient AT&T.
It avoids duplication of goods and services which leads to resource wastage.
No competitive - persuasive advertisement is required. A lot of money is therefore saved.
Large profits earnings enable monopolies to expand and create many employment opportunities e.g Uganda electricity board ( UEB)
The huge profits earned also imply that the monopoly firms have funds at their disposal to conduct research. This may lead to innovations and improvement in quality of products.
There is a possibility of price discrimination which benefits low income groups.
Monopolism arising from protectionism leads to development of infant industries hence industrialization.
Public utilities like roads, telephones etc and strategic natural resources are more easily controlled by state monopolies. This ensures access of such services to the society at low cost and prevention of over exploitation of natural resources respectively.
Monopoly arising from patent rights encourages personal creativity and innovation. It discourages and forbids people from taking advantage of other people's works.
It avoids frequent changes in designs, models, varieties etc which are wasteful in terms of funds.
The distribution of products is cheap since the producers have a guaranteed market.
High risks and uncertainties may require monopoly operations which can have protection to avoid competition and guarantee a high degree of profitability.
Negative aspects
It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of efficiency can raise a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen where a market's barriers to entry are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a canal monopoly, while worth a great deal in the late eighteenth century United Kingdom, was worth much less in the late nineteenth century because of the introduction of railways as a substitute.
Unfair distribution of income may result from the abnormal profits earned by the few monopolists.
Little of the product is supplied and given the demand conditions, prices are normally higher than under perfect competition. Consumers are therefore exploited.
Producing at excess capacity both in the shortrun and longrun implies that there is under utilisation of resources under monopoly. This is done so as to produce less and charge highly.
In the event that a monopolist stops to produce, there automatically emerges a shortage for that particular commodity.
The practice of price discrimination is unfair to certain customers and may lead to wastage of some resources.
Monopoly firms tend to exert pressure on government and may at times influence major decision making by government since they are the controllers of the means of production.
Customers/consumers are denied of the freedom to choose from a variety of products made available on the market by different producers.
The lack of competition makes a monopolist to produce poor or low quality products which implies low standards of living for consumers.
There is a high level of inefficiency in the supply / distribution of goods and services due to lack of competition e.g the inefficiency with Uganda electricity board (UEB), Uganda railways etc..
In LDCs, foreign owned monopolies command a lot of economic power and hence political dominance. Besides these are engaged in massive repatriation of the abnormal profits gained back to their home Countries.
The Control of Monopoly Power.
Due to the disadvantages of monopoly several measures can be taken to regulate the power of monopoly firms.
Nationalisation: If the government feels the monopoly firm is making abnormal profits and exploiting consumers but can not control its power through other means, then it (government) can take over and compensate the owner.
After nationalising the firm, the government can then establish a price which enables the firm to earn just normal profits Alternatively, the government can buy some of the shares in the business so that it runs it along side the owners. Profits will be shared between the owners and the government, and the government will have power to influence the output-pricing decisions of the monopoly firm.
Price Regulation. Under this measure, the government fixes the price for the monopoly products as illustrated below.
Q Q2 Quantity
Before regulation the monopolist is making abnormal profits equal to the shaded are OC P A B. He produces output OQ at cost OC selling it at a high price OP.
If government fixes a regulated price OP1 where AR=AC the monopolist will earn normal profits. This position induces the monopolist to increase out put to OQ1 hence more is put to the Market at a lower price than before regulation
Dumping or selling products at a cheaper price in another country may force firms in the country producing the same commodity out of business.
Price discrimination is un fairness to certain customers ie those charged highly.
It may lead to wastage of certain resources, by selling them at a low price eg through dumping.
Perfect price discrimination eliminates the consumer's surplus, which reduces consumer's welfare.
Positive aspects
Some argue that it can be good to allow a firm to attempt to monopolize a market, since practices such as dumping can benefit consumers in the short term; and once the firm grows too big, it can be dealt with via regulation. When monopolies are not broken through the open market, often a government will step in, either to regulate the monopoly, turn it into a publicly owned monopoly, or forcibly break it up. Public utilities, often being natural monopolies and less susceptible to efficient breakup, are often strongly regulated or publicly owned. AT&T and Standard Oil are debatable examples of the breakup of a private monopoly. When AT&T was broken up into the "Baby Bell" components, MCI, Sprint, and other companies were able to compete effectively in the long distance phone market and began to take phone traffic from the less efficient AT&T.
It avoids duplication of goods and services which leads to resource wastage.
No competitive - persuasive advertisement is required. A lot of money is therefore saved.
Large profits earnings enable monopolies to expand and create many employment opportunities e.g Uganda electricity board ( UEB)
The huge profits earned also imply that the monopoly firms have funds at their disposal to conduct research. This may lead to innovations and improvement in quality of products.
There is a possibility of price discrimination which benefits low income groups.
Monopolism arising from protectionism leads to development of infant industries hence industrialization.
Public utilities like roads, telephones etc and strategic natural resources are more easily controlled by state monopolies. This ensures access of such services to the society at low cost and prevention of over exploitation of natural resources respectively.
Monopoly arising from patent rights encourages personal creativity and innovation. It discourages and forbids people from taking advantage of other people's works.
It avoids frequent changes in designs, models, varieties etc which are wasteful in terms of funds.
The distribution of products is cheap since the producers have a guaranteed market.
High risks and uncertainties may require monopoly operations which can have protection to avoid competition and guarantee a high degree of profitability.
Negative aspects
It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of efficiency can raise a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of contestable markets argues that in some circumstances (private) monopolies are forced to behave as if there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen where a market's barriers to entry are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a canal monopoly, while worth a great deal in the late eighteenth century United Kingdom, was worth much less in the late nineteenth century because of the introduction of railways as a substitute.
Unfair distribution of income may result from the abnormal profits earned by the few monopolists.
Little of the product is supplied and given the demand conditions, prices are normally higher than under perfect competition. Consumers are therefore exploited.
Producing at excess capacity both in the shortrun and longrun implies that there is under utilisation of resources under monopoly. This is done so as to produce less and charge highly.
In the event that a monopolist stops to produce, there automatically emerges a shortage for that particular commodity.
The practice of price discrimination is unfair to certain customers and may lead to wastage of some resources.
Monopoly firms tend to exert pressure on government and may at times influence major decision making by government since they are the controllers of the means of production.
Customers/consumers are denied of the freedom to choose from a variety of products made available on the market by different producers.
The lack of competition makes a monopolist to produce poor or low quality products which implies low standards of living for consumers.
There is a high level of inefficiency in the supply / distribution of goods and services due to lack of competition e.g the inefficiency with Uganda electricity board (UEB), Uganda railways etc..
In LDCs, foreign owned monopolies command a lot of economic power and hence political dominance. Besides these are engaged in massive repatriation of the abnormal profits gained back to their home Countries.
The Control of Monopoly Power.
Due to the disadvantages of monopoly several measures can be taken to regulate the power of monopoly firms.
Nationalisation: If the government feels the monopoly firm is making abnormal profits and exploiting consumers but can not control its power through other means, then it (government) can take over and compensate the owner.
After nationalising the firm, the government can then establish a price which enables the firm to earn just normal profits Alternatively, the government can buy some of the shares in the business so that it runs it along side the owners. Profits will be shared between the owners and the government, and the government will have power to influence the output-pricing decisions of the monopoly firm.
Price Regulation. Under this measure, the government fixes the price for the monopoly products as illustrated below.
Q Q2 Quantity
Before regulation the monopolist is making abnormal profits equal to the shaded are OC P A B. He produces output OQ at cost OC selling it at a high price OP.
If government fixes a regulated price OP1 where AR=AC the monopolist will earn normal profits. This position induces the monopolist to increase out put to OQ1 hence more is put to the Market at a lower price than before regulation