Monopole et compétition parfaite

Is perfect competition better than monopoly to welfare?

To begin with, our capitalist economy is based on markets, and competition, that exist to satisfy people’s welfare. Markets are influenced by producers and consumers. We find many types of markets in our economy, but we can focus on two extreme cases: monopoly and perfect competition. In a monopoly, only one single company sells a good that many consumers want to buy. In a perfect competition, many companies sell a good that many people want to buy. The question we ask is: is perfect competition actually better than monopoly for consumer’s welfare?

In a monopoly market, we can notice at first sight that companies are privileged, and consumers are prejudiced.

Indeed, being the unique company that sells a good in the market, it will introduce scarcity in order to increase profit. As we can see in the graph, by reducing the quantity (Q), the company can set a higher price for its good. The maximisation of profit being reached when marginal cost (MC) equals marginal revenue (MR), the company may actually increase its surplus. Therefore, consumers’ surplus will decrease, and so they will be fairly prejudiced. Nevertheless, it is not so simple. Indeed, profit may be used to develop that good, and therefore the quality of the good can be better than in a perfectly competitive market. So, even if on the short run monopoly may prejudice consumers, it might help them on the long run, by improving the quality of the good. A monopoly is therefore dynamic. We actually cannot surely say that monopoly is not good for consumers.

We have seen the effects of a monopoly on consumers’ welfare; let us now analyze the opposite extreme case: the perfectly competitive market.

A perfectly competitive market seems at first sight to benefit consumers, and so raise their welfare.

When many companies sell the same good to many consumers, it is inevitable that demand equals marginal revenue, because companies cannot introduce scarcity to increase their profit. The market equilibrium is reached when market demand equals marginal cost, and so profit will be equal to zero. That situation is pareto-optimal. Therefore, consumers’ surplus is maximized. Perfect competition prejudices companies, that is why they try to avoid to the maximum this situation, only reached when the information is perfectly symmetrical, there are no preferences, and sold products are perfectly homogeneous. Indeed, when all those conditions are reached, companies are price-takers, that mean they cannot establish the price of the good. They are almost forced to sell it at the market price, in order to maximize the profit (that is actually zero). Perfect competition is therefore better for consumers than for producers. However, as company’s profit equals zero, there will be no re-investment to improve the good, and that can in the long run prejudice consumer’s welfare. For instance, if cell phone market was perfectly competitive, as profit would be equal to zero, there would be no improvement in cell phones, that mean that market would stagnate. Indeed, perfectly competitive markets tend to stagnate.

To put it in a nutshell, in the short run, perfect competition is clearly better than monopoly for welfare, because in perfect competition dead weight loss equals zero, and consumers’ surplus is maximized whereas in monopoly there is actually a fairly important dead weight loss, and so consumers’ surplus is not maximized.

In the long run, we can notice that the lack of investment in perfect competition may prejudice consumers too, while goods from monopolists may have been improved thanks to a bigger profit and re-investment. To my mind, in a short and medium run, perfect competition is clearly much better for welfare than monopoly; but in the long run, monopoly has advantages that may help to increase consumers’ welfare whereas perfect competition tends to stagnate.

Diogo Braganca