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, Continue reading