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Monday, May 7, 2012

Recovery : Monopoly, Revised with 2002 data

Barry, My Liege :

Monopolies and oligopolies are bad for the country simply because they exist.

These firms face a downward sloping demand curve for their products as opposed to a horizontal demand curve faced by a firm in competition.

This gives monopolies and oligopolistic firms the ability to change the price of the products. And, because all firms normally want to maximize profits, these firms will charge higher prices and sell a lower quantity than would all the firms in a competitive market.

Economists call the economic activity lost from this decision a 'Deadweight Loss' ; in other words it is economic activity lost forever from the economy.

Even worse is the ability and the practice of these firms to increase their profits at the expense of consumers.

In the graph below which shows the cost and revenue curves and decisions faced by a monopoly, the 'Deadweight Loss' is the pink area to the left of the intersection of the MC, AC and AR curves intersect. The point where those three curves intersect represents the point where there would be a competitive equilibrium or efficient price and production quantity.

Since the actual monopoly point of price is where the line labelled Pm intersects the AR line and the monopoly quantity is where the Qm line intersects the AR line, the loss of production and higher price represents the 'deadweight Loss.'

Further, the green area represents the area of consumer benefit that is transferred from consumers to the firm as 'Monopoly Profit'.



Thus, monopolies and oligopolies which act as monopolies increase their profits at the expense of the economy as a whole ; they are inefficient.

Would that it were just a graph, My Liege, but these actions take large amounts of income from consumers and transfer it to these companies.

Here is a list of industries in which companies earn these abnormal profits [the numbers after the name of the industry refer to the percentage share of total revenues for the industry earned by the four {4} largest firms] in 2002 :


Cigarettes 97.8
Guided Missiles 94.8
Aircraft 81.3
Breakfast cereal 80.4
Electric Lamps, Light Bulbs 75.4
Tires 77.6
Automobiles 67.6
Cookies, Crackers 69.3
Tortillas 57.4
Men's and Boy's Shirts 56.4
Dolls, Stuffed Toys 56.9
Fluid Milk 46.0
Ships, Boat Building 44.0

As a comparison, here are the industries and concentration ratios in 1997 :

Cigarettes 99
Cane Sugar Refining 99
Primary Copper 95
Glass Containers 91
Beer 90
Small-arms Ammunition 90
Electric Light Bulbs 89
Aircraft 85
Breakfast Cereals 83
Motor Vehicles 82
Household Refrigerators 82
Photo Equipment and Supplies 81
Turbines and Generators 78
Flat Glass 77
Fiber-Optic Cable 71
Men's Slacks 69
Tires 69
Motorcycles and Bicycles 68
Gypsum Products 68
Soap and Detergents 66
Lawn, Garden Equipment 64

Our economic recovery will be made more difficult until the concentration of monopoly profits is reduced or eliminated.

Your faithful servant,