The dairy industry is initially perfectly competitive. There are thousands of sm

Question

The dairy industry is initially perfectly competitive. There are thousands of small dairy farms across the country. Then Bill Gates goes and purchases every single dairy farm.

2.2 In your own words compare the outcome in the market under monopoly and under perfect competition.

The dairy industry is initially perfectly competitive. There are thousands of small dairy farms across the country. Then Bill Gates goes and purchases every single dairy farm.

2.3 Do you believe Bill Gates would be able to keep his monoploy in the long run? Explain

Explanation / Answer

Monopoly and perfect competition mark the two extremes of market structures, but there are some similarities between firms in a perfectly competitive market and monopoly firms. Both face the same cost and production functions, and both seek to maximize profit. The shutdown decisions are the same, and both are assumed to have perfectly competitive factors markets.

However, there are several key distinctions. In a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero. In a monopoly, the price is set above marginal cost and the firm earns a positive economic profit. Perfect competition produces an equilibrium in which the price and quantity of a good is economically efficient. Monopolies produce an equilibrium at which the price of a good is higher, and the quantity lower, than is economically efficient. For this reason, governments often seek to regulate monopolies and encourage increased competition.

The above explanation clearly lays down the differences between monopoly and perfect competition, which is applicable for the dairy industry given in the question aswell.

However sustaining a monopoly form of market in the long run is not possible, as more market players are attracted to the market for the handsome profits made by market maker in the monopoly form of market.

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