State and evaluate the arguments made for concentration of market power.

Question

What will be an ideal response?

Answer 1

(1) Monopolies have greater ability to pursue research and development since they are sheltered from the constant pressure of competition and have the resources with which to carry out expensive R&D. The problem with this argument is that monopolists have no clear incentive to pursue R&D. (2) The lure of market power creates a huge incentive for invention and innovation. The problems with this argument are that innovators can make substantial profits in competitive markets before the competition catches up and that the presence of barriers to entry can actually dissuade entrepreneurs from following up on promising ideas. (3) If economies of scale exist, large companies can produce goods more efficiently than smaller firms. However, some firms and industries won't be subject to economies of scale, and even when economies of scale exist, there is no guarantee that consumers will benefit. (4) Monopolies have to worry about potential competition and will behave accordingly. Critics point out that the absence of existing rivals inhibits product and productivity improvements-monopolists change their behavior only in the face of actual competition, not potential competition.