Is Perfect Competition Better for Consumer Welfare than Monopoly?

I wrote this essay for my Economics assignment during my Summer School with Oxford Royale Academy.

Indian economy ran on monopolies before 1991. Today, it is based on the concept of competitive markets.

Indian economy ran on monopolies before 1991. Today, it is based on the concept of competitive markets.

An ongoing debate in microeconomics is about whether the consumer is better taken care of in a monopolistic market or in a market that breeds perfect competition. A monopoly is where a single company or a group of companies has exclusive possession or control of the supply and trade in a commodity or service. A perfect competition market is the theoretical state of a market where no company is large enough to have the market power to set the price of a product or service. In the former system, the company revels in unlimited power over the prices, quality and technicalities of their product or service; in the latter, companies find themselves in cut-throat competition with fellow organizations and have to constantly modify their prices, quality and technicalities in order to ensure survival.  To find out which of these two systems is better for consumer welfare, one must not compare them on the basis of the profits they generate or the resources they use, one must instead rely simply on consumer satisfaction.

Students around the world attending their initial economics classes are taught that monopolies are a bane for the market and it is perfect competition that drives economic progress and consumer welfare. This is indeed a valid point. If there is only one company that dominates the entire market, what incentive does it have to progress with its product and not become complacent? And once a product’s development becomes complacent, does a consumer get the best that can be offered to him/her? The answer is negative. If one examines the state of the Indian economy at the beginning of 1991, one realizes that because of the nation’s strict opposition to foreign products being produced and sold indigenously, the consumer went to a market plagued with meagre choices and no new development.

In the pre-liberalization India, superannuated cars like Ambassador were the only ones sold, and Lifebuoy was the only good soap available. Pepsi and Coke were banned and the local cola tasted like acid. The Indian consumer was stuck in a heavily monopolistic market where Indian brands never felt the need to improvise or innovate.

Then in May 1991, when India was in a financial turbulence, the then Finance Minister Dr. Manmohan Singh ‘globalised’ the nation and unleashed an era of consumer satisfaction over foreign protection. Since then, Ambassador has been discontinued and Lifebuoy has lost a considerable amount of its market share and has gone over several makeovers. The reason is not difficult to comprehend – without foreign competition, Indian brands had become mega monopolies, they crushed new ventures and never had to worry about development, makeovers or advertisements. But when their foreign counterparts started competing with them they found themselves under immense pressure to innovate, enhance and revolutionize their brands or be trampled. This was India’s moment of evolving from a monopoly into a competitive market and is reason enough to believe that Indian consumers have since had their welfare taken care of.

It is rightfully said that every individual has unique preferences. He yearns for change and variation until he finds his perfect liking. A monopolistic market bars him from choice and fiddles with his preference.

A competitive market offers him an umbrella of options to choose and experiment from, he may go for the chocolate pasties first, then the blueberry pasties and then the ginger pasties before ending up and loving pumpkin pasties. How sinking would he feel if there were only chocolate pasties on the platter!

Before Apple, Microsoft dominated the OS market and its system lags were (and are still) famously hated. Today it finds itself in teeth-over-teeth competition with Apple and has been forced to make attempts to do away with lags and ‘think differently’. The consumer has been able to get what he deserves rather than a system called Windows which constantly requires him to reboot his computer. The closer the market is to a perfect competition, the better it gets in terms of consumer welfare.

So, to conclude, consumer welfare is directly proportional to the versatility of the market. When companies work under pressure, they reduce prices, provide discounts, equip their product with the latest innovation, and put customer satisfaction over their comfort zones. In a nutshell, no pressure, no diamonds!

Bibliography

  1. Bourdet, Yves. Internationalization: Market Power and Consumer Welfare. Routledge, 1992.
  2. The Economic Times. “How the Indian Economy changed in 1991-2011”. July 24, 2011. http://articles.economictimes.indiatimes.com/2011-07-24/news/29807511_1_market-economy-scooters-india-s-gdp
  3. Princeton. “A Comparison of Perfect Competition, Monopolistic Competition, Monopoly and Oligopoly”. http://www.princeton.edu/wwac/academic-review/files/511Notes2.pdf
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2 comments on “Is Perfect Competition Better for Consumer Welfare than Monopoly?

  1. […] 1. Sautet has a long part on the purpose of abstract models at the beginning of the book that is wonderful. He contrasts his own use of an abstraction as an intellectual foil to the real world, compared to other economists who use this abstraction as a goal like in the case of perfect competition. […]

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