Monopoly And Monopoly Case Study

A REVIEW OF THE COMPARISON BETWEEN MONOPOLY AND COMPETITIVE MARKET STRUCTURE FOR THE BANKING INDUSTRY

BY

ADEOTI AKINYEMI

FEBRUARY, 2017

Table of Contents

Introduction 3

Competitive Markets 4

Monopolies 4

Why competitive markets are more beneficial for the optimization of social welfare than monopolies. 5

Competition, Monopoly and Banking Services 7

Stability of the Banking system 9

 Competition Fragility 9

 Competition Stability 9

Too big to fail 9

Conclusion 11

Reference 12

Introduction

An essential goal of any government is to promote the social welfare of its citizens and one of the ways of doing this is by ensuring safety of the citizens’ funds deposited in banks, and ensure that the people have access

Perfect competition and Monopoly are the two extremes of the neoclassical theory of a firm. Generally speaking in a free market economy and according to the SCP paradigm, competition is more beneficial for the welfare of the citizenry than monopoly.

Although companies within the perfect competition market have some similarities with those in the monopoly market, there are major differences between them. The similarities are that they both have similar production and cost functions. They also both operate with maximum profit as their target. The differences are that in perfect competition, profit = zero and price (P) = Marginal Cost (MC). Meanwhile, for monopolistic companies, their gains are ‘abnormal’ and P is greater than MC (Boundless, 2017).

For Perfect competition, there is an economically efficient equilibrium between price and output, while for monopoly, there is an economically inefficient equilibrium because price is higher and output is lower (Boundless, 2017). Using the Long Run Average Cost (LRAC) function, perfectly competitive companies operates at a minimum average cost on the long run, while monopoly does

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Consumer Surplus refers to the amount a customer is willing to pay for the purchase of an item and the amount he/she eventually pays. For example in the competitive market, the market price (PC) = N10, however the customer is willing to pay N15. The consumer surplus in this case is N15–N10=N5. This is represented by the shaded area A+B+C in figure 1. However, in a monopoly market, using the above example, the customer will have to pay N13 for the item and this is represented with the shaded area A only thereby limiting the purchasing power of the people and hence their welfare.

Producer Surplus implies the excess amount gained by the producer. This is usually above the normal profit for the production of the item. For competitive market, producer surplus = zero while for monopolistic market, producer surplus = the abnormal profit represented with the shaded area B in figure 1.

Deadweight loss is represented by the shaded area C in figure 1 is the welfare loss under monopolistic market as a result of insufficient output when compared with competitive