"Monopolies exist mainly because businesses create barriers to entry by manipulating their prices to keep potential rivals from entering their business markets." Do you agree with this statement? [15]

It can be argued that monopolies indeed exist because of the presence of barriers to entry such as patents, licenses and substantial economies of scale which deter potential entrants from entering their market. These monopolies can also deter the entry of new firms through policies such as anti-competitive pricing. This essay will therefore talk about how artificial barriers to entry, most importantly anti-competitive pricing policies and methods lead to the existence of monopolies, then moving on to the anti-thesis, which is how then natural barriers to entry contribute to the existence of monopolies as well. The essay will conclude with an evaluation of which barrier to entry, artificial or natural barriers, is more significant.

The artificial barrier to entry would arguably be anti-competitive pricing. Anti-competitive pricing could be further broken down into limit pricing, which refers to the case where monopolists set their prices below the expected average costs of a potential entrant, to deter them from entering the market since they will make losses.

Predatory pricing, on the other hand, is a similar concept, except it is used in such a way that existing competitors would be driven out of the market due to the making of subnormal profits. Therefore, anti-competitive pricing allows for the existence of monopolies, since potential and existing competitors are out of the way.

There are also other artificial barriers to entry such as those created by governments. Governments could support the creation of monopolies by giving patents and licenses to certain firms only. The issue of patents means that monopoly rights are given to a firm to produce a new product or use a new process for a specified time period. Such actions of the government can then allow for the existence of monopolies since such firms are given substantial market power.

           

However, the existence of monopolies could also be due to natural barriers to entry, rather than just anti-competitive pricing policies.

One of which would be natural monopolies. A natural monopoly refers to a market where average costs are falling throughout the entire range of market demand, which makes it less costly for one firm to supply the entire market, hence supporting the existence of monopolies.

[Insert diagram on natural monopoly]

As seen from the figure above, if there were to be more than one firm in the market, the AR of each firm is not even enough to cover the LRAC. Therefore, such a situation supports the existence of monopolies since if there is only one firm, the firm could make supernormal profits.

Next, another natural barrier could be substantial (internal) economies of scale, where larger firms could reap more economies of scale and be more cost efficient. This means that potential entrants will have to produce at a large scale in order to compete and this deters them from entering the market. Such deterrence then leads to the existence of monopolies.

In conclusion, artificial barriers could more adequately explain the existence of monopolies. This is because most monopolies are run by governments whom create artificial barriers like patents and licenses to deter potential entrants. Therefore, upon evaluation, the existence of monopolies would be more significantly attributed to artificial barriers as compared to natural barriers. Hence, the statement should read that monopolies exist mainly because of artificial barriers to entry.

JC Economics Essays - H2 (A levels) sample, model economics essay answer: tutor's comments - this economics essay is well crafted, well argued, answers and analyses the issue very well. The main learning lessons from this essay are: it answers the essay question directly, it has a lot of good solid economic theory, and it is properly structured using the thesis, anti thesis, and synthesis approach which is a very good essay system that you should apply. You might want to think about how could you improve on this essay, and what other examples could you apply to this economics question. More relevant, real world, and specific examples would massively improve this economics answer, and the response would be improved vastly. Special thanks to kind contributors. 

"Monopolies exist mainly because monopoly firms create barriers to entry by manipulating their prices to keep potential competitors from contesting their markets." Do you agree with this argument? [15]

"Monopolies exist mainly because monopoly firms create barriers to entry by manipulating their prices to keep potential competitors from contesting their markets." Do you agree with this argument? [15]

In this essay, the thesis presented would be artificial barriers being used by firms as indicated by ‘create’. As manipulating prices was given as the method to keep potential competitors from entering their markets, the specific arguments would be limit pricing and predatory pricing as the artificial barriers. On the flip-side, the anti-thesis would be artificial barriers created by government and natural barriers already present. Hence, this essay seeks to first explain how limit pricing and predatory pricing are being used by firms before going on to explain some artificial barriers created by the government such as licenses and patents as well as some natural barriers such as reaping substantial economies of scale and a natural monopoly. The essay would then conclude by evaluating which kind of barriers is more effective in keeping potential competitors from entering a monopoly’s market. 

Firstly, limit pricing is where the monopoly sets the price of its goods lower than the average cost of that of a potential entrant. This would greatly deter the potential entrant from wanting to enter the market as he would lose out by being unable to earn any profits unlike the monopoly. As such, it is evident how a monopoly can utilize limit pricing as a mean to keep potential competitors from entering the market.

Secondly, predatory pricing is whereby the monopoly sets the price of its goods lower than the average cost of that existing competitor in the market. This would enable the monopoly to successfully remove his competitor from the market since the competitor would start to make losses and become unable to survive in the market. This would in turn deter potential competitors from entering the market as they would not want to end up in the same situation as that competitor which was defeated, showing how predatory pricing is effective in keeping new competitors from entering. 

Besides manipulating prices by firms, the government can also keep potential competitors from entering the monopolies’ market through issuing of licenses and patents. Licenses and patents from the government give the monopolies the legal authority and right to produce their goods which are therefore even more differentiated and new firms are prevented from entering by law. This illustrates how the government, and not the firms themselves, can create artificial barriers to disallow potential competitors from entering the market. 

On the other hand, natural barriers also exist. Large firms like monopolies already existing in the market reap substantial economies of scale. This keeps potential competitors out of the market as the start-up costs are very high and it is thus very hard for them to survive in the industry, thus deterring them from entering. 

Another natural barrier would be a natural monopoly which already has high barriers to entry to begin with, allowing it to keep potential competitors from entering the market. [NOTE: Economics tutor's comments on this short sentence: This is not really the case; it’s more of the fact that no two firms can exist in the market at the same time because of the falling LRAC throughout the entire range of demand.]

[Insert diagram of Natural monopoly]

In conclusion, artificial barriers are usually more effective than natural barriers in keeping potential competitors from entering the market of monopolies. This is due to the fact that monopolies are mostly run by governments who then can create artificial barriers on their own. At the same time, it is also within the control of the firms to create their own barriers, especially by manipulating prices, to keep their competitors out of the market. 

JC Economics Essays - standard 'A' level H2 Economics essay: Tutor's comments on the essay - Special thanks to A.G. for her contribution, as well as the econs students behind this very impressive work. Other than the section in which I had to explicitly correct the students' written work, this essay is still generally quite good. Why is this essay good, and what makes it worthy of a grade A? It addresses the question and generally gets to the point quickly. It identifies the theme and then does a very good job of trying to address the parts of the question that help to get good grades. Although the student did require me to address one section by writing in an explicit comment on the concept, the general idea was still there, and overall the paper was quite good, especially with the natural monopoly diagram. Think of how to draw the economics diagrams for all your essays properly, and be careful as to what they look like. All the best, and think of how you could do better. Thanks for reading and cheers!

Since large firms enjoy EOS, they are therefore more efficient and should be welcomed by society. Do you agree? [25]

Since large firms enjoy EOS, they are therefore more efficient and should be welcomed by society. Do you agree? [25]

Economies of scale (EOS) refers to the cost savings derived from large scale production of the firm. EOS can be generated internally or externally. If the average costs decrease due to the increase in the scale of production of the firm itself, we say that the firm experiences internal EOS. EOS allows efficiency to be achieved. To be economically efficient a firm has to achieve productive and allocative efficiency. Productive efficiency refers to the least cost method of production. Allocative efficiency on the other hand, occurs when the right amount of the right kind of goods are being produced. This occurs when the marginal social benefit is equal to the marginal social cost, society welfare is thus maximized. On top of that, Pareto efficiency also has to be achieved. Pareto efficiency is when it is no longer possible to change the allocation of resources such that it makes at least one individual better off without making any other individual worse off.

Large firms are firms usually classified as oligopolistic or monopolistic firms. An oligopolistic market occurs where the industry is dominated by a few large firms which control a large proportion of the industry’s output. These firms have a large share of market power. Similarly, in a monopolistic market, there is market dominance because a single firm controls the whole supply of a product which has no close substitutes. As a result of the large market share, profits gained from production will allow these large firms to achieve efficiency through EOS. As long as these EOS can be filtered down to consumers in terms of lower prices and higher output, I agree that because large firms enjoy EOS, they are therefore more efficient and should be welcomed by society.

A firm enjoys internal economies of scale if its average cost of production falls as its scale of production increases. This is represented by a movement along the downward sloping portion of the Long Run Average Cost (LRAC) curve. Average cost refers to cost per unit of output. This is illustrated in the figure below.

Insert Economics diagram - thinking question: what will this economics diagram look like?

A large firm can enjoy internal economies of scale through marketing economies. This occurs when a firm gets bigger and it buys inputs such as raw materials in bulk. Suppliers of these inputs, in their eagerness to secure the firm’s orders, will often offer a discount on its purchase. This lowers the firm’s unit cost of production. A firm can also enjoy marketing economies when it enjoys the ability to spread its advertising costs. Since a bigger firm produces more output, its total advertising cost is spread over a large output, thus unit cost is reduced. Such large firms can also enjoy EOS through financial economies whereby larger firms may be able to obtain financial loans at lower interest rates due to more credit worthiness. It can also raise funds in the capital market by issuing shares to member of the public. Moreover when a firm expands, it is also able to hire professionals to specialize in different areas of work. Different departments can be set up, each led by an expert in the field. With these expertises, a firm’s output can be increased, thus lowering its unit cost of production. This may not be worthwhile or economical for a smaller firm. This is known as managerial economies of scale. As such EOS allows for large firms to be more efficient as they get to reduce costs of production, achieve a minimum efficient scale (MES) and be more productively efficient. This will eventually result in costs savings passed on to consumers in the form of lower prices for the goods and services provided.

However, in the case of a natural monopoly, society has no choice but to welcome it into the market. A natural monopoly occurs when a tremendous amount of capital is required to produce a product or service. This leads to very large economies of scale and the firm’s MES occurs at a very high level of output, such that there will only be one firm in the market. This huge capital requirement means that total fixed costs make up a very large part of the total cost. Such examples of a natural monopoly would include producers for utilities such as gas, water and telecommunications. In the case of Singapore, the telecommunication lines are monopolized by Singtel. Although a natural monopoly is allocatively inefficient in P=MC pricing, where the cost of the good is equal to the marginal cost of producing a good, it is definitely more efficient than trying to duplicate the number of firm through liberalization. This is because the new entrant will eventually collapse to form a monopoly again because the duplicity of firms would cause the new entrant to incur large losses. As such, society would still accept such natural monopolists in the industry. This can be depicted by the existence of Singtel.

However, society should not welcome such large firms because there are disadvantages of EOS when it is being reaped beyond MES. These are internal diseconomies of scale (disEOS). Internal diseconomies of scale are the cost disadvantages a firm experiences as it increases its scale of production. When a firm becomes too large, its average cost of production rises as its scale of production increases. This is represented by a movement along the upward sloping portion of the LRAC curve. Internal disEOS are largely managerial inefficiencies. This can arise from the increase in complexity in management and greater difficulty in co-ordination in a large organization. A firm grows so large that it becomes more cumbersome to manage. It becomes more bureaucratic and decision-can also making process slows down. Work efficiency can be reduced by excessive paper work which results in low productivity and higher unit cost. Management problems of co-ordination may also appear as the organisation of the firm becomes too big. It becomes increasingly more difficult for top management to co-ordinate and monitor all operations, thus inefficiency may creep in. This increases unit cost.

Insert diagram - how will this economics diagram look like? Remember now that it is about disEOS rather than EOS.

Society should also not welcome such large firms because these firms tend to be monopolies. Monopolists experiences static inefficiency, or a lack of dynamic efficiency. Static efficiency is attained when there are both productive and allocative efficiency. The monopolist is productive efficient as long as it maximises profits. However, a profit maximising monopolist produces output up to the level where P>MC. Since consumers value the last unit of the good more than it costs to produce, the good is underproduced and increasing the output can increase the welfare of the consumers. The underproduction of the good has led to the loss in welfare for the society. This can be illustrated in the diagram below.

Insert economics diagram. Apply usual thinking!

As such, under similar cost conditions, the output produced by a single monopolist is lower and the price charged higher than the perfectly competitive industry. The perfectly competitive industry will produce where demand equals to supply, at output Qpc, and charge a price Ppc. However, the monopolist would produce at Qm, and charge a price equal to Pm.

Moreover, society should not accept large firms because there will be an unequal income distribution. This is because the monopolist can earn supernormal profits even in the long run due to barriers to entry. If a monopolist makes supernormal profits, these profits will go to shareholders who may be mainly upper income earners, This may worsen the income distribution in the economy. The existence of supernormal profit suggests that producers receive greater income than is needed to induce them to undertake their operations. The lack of competition enables them to receive higher profits than is economically justified. Thus income is more unequal than it needs to be.

In conclusion, large firms who enjoy EOS are accepted in the economy but too much of it will be non-beneficial for the industry. Hence, to ensure that society benefits equally, government intervention is needed where policies such as AC-pricing and taxation of profits are carried out.

JC ECONOMICS ESSAYS: Tutor's Comments: A very good attempt! Covers the majority of the points needed to tackle this exam question. This model Economics essay was written under "A" level Economics examination conditions. Economics tutor's suggested grade: 20/25. How would you improve this essay, and how would you approach the task of crafting a well argued, nuanced, balanced, and evaluative Economics answer? Perhaps the evaluation in the conclusion could be better, more argumentative, and more justified with relevant examples. Thanks for reading and cheers. Stay here for more Economics essays and materials.