Market failure arises in a situation where the outcomes that the market produces are not efficient in meeting the consumers’ needs. Alternatively, it can arise when the market is incapable of meeting the equilibrium. Notably, the market performance depends on the interaction between consumers and produces, government participation, and other externalities.
There are different forms of market failures namely, externalities, existence of public goods, failure of competition, information asymmetry, inequities, and economic recession or swings (Market Failure, n.d.). In this aspect, a detailed analysis of failure in competition is going to be examined. These aspects include in-depth analysis and practicable remedies in the real market.
Failure in competition occurs in a market when there is a sole or a few producers or buyers of a given commodity. This results in accumulation of disproportionate powers thus, disrupting the normal demand and supply of the given product or service. In this situation, price mechanism that involves interaction of supply and demand curves does not determine the prices (Forms of Market Failure, 2012).
For instance, a cartel in the oil industry can decide to package the product at her/his desired quantities for strategic reasons. The cartel does this at will without any influence from the market forces. Another example can be a sole sugar supplier who decides to hoard his/her products then, sells at a time when there is no sugar in the market.
Clearly, the supplier will quote his/her own price, as he/she is not controlled by the market pricing mechanisms. Since there is no alternative or substitute to the products, this situation will force consumers to purchase the products far beyond the expected market price. From this aspect, monopoly or absence of competition in the market leads to clear market failure. In my opinion, failure in competition in a market will give the suppliers and cartels the opportunity to dictate their own prices, which are not in line with the current market trends (Forms of Market Failure, 2012).
On the other front, in a case where there is a sole buyer of a product, it will force the producers to sell their goods far below the real market price. Therefore, failure by the government to intervene and control monopoly in a market, apparently, leads to market failure.
Monopoly, if allowed to continue in a market may lead to exploitation of consumers in terms of high pricing, timely deliverance, and low product quality. In a monopolistic market, it is rare for other companies to enter and offer similar services due to the dominance of the other company. For that matter, there should be solutions that can be adopted to minimize the above scenario.
Firms that misuse their monopolistic powers can work under price controls. Here, the government can set up price controls, where the firm/company agrees with the regulator on the maximum possible price they can levy on their products. A real example is the setting up of the Office of Fair Trading by the United Kingdom’s government.
This body’s sole mandate is to ensure that the prices of essential goods like water and gas are below the present inflation rate (Monopoly Power, n.d.). The government, therefore, should intervene and set up such bodies to monitor price variation of goods or services from monopolistic firms. Apart from this, the government can acquire some parts of the company; for example, acquire about 50% of the company’s shares.
This approach will make the company change tact, even though it will still be the only producer, as it will be under the government’s close watch. It also changes the company ownership from full privately owned to partially privately owned company. The government will ensure that the goods or services offered as are not beyond the consumers reach and not exploiting them.
Additionally, the government can encourage setting up of smaller firms that offer same services. The government can subsidize the initial cost of starting such firms or reduce the procedures of setting up such firms (Monopoly Power, n.d.). When this happens, decentralization of production occurs thus, creating a competitive market that mainly determines its prices through the forces of demand and supply.
For example, the entry of other communication firms in Britain made the British Telecom increase their efficiency and even lower their prices in order to cope up with the current state of competition in the market (Stigler, n.d.).
An example of setting up smaller firms can be seen in the Microsoft dominance in providing both the operating systems and the software. The EU is contemplating of splitting the company into two main wings, that is, the software wing and the operating system wing.
Conclusively, monopolistic markets come with adverse effects to the consumers; therefore, needs immediate government involvement. However, economists argue that monopoly is of great benefit to the producers, as they get higher returns on their investments than when such scenario was not at hand.
Although the producers make a lot of wealth, there is the moral aspect that is not addressed. Therefore, putting the ethical aspects in mind, markets need fair competition to avert the above discussed situations.
Forms of Market Failure. (2012, October 24). The ICT Regulation Toolkit. Web.
Market Failure. (n.d.). Oxford University Press. Web.
Monopoly Power. (n.d.). Economics Online Home. Web.
Stigler, G. J. (n.d.). Monopoly: The Concise Encyclopedia of Economics | Library of Economics and Liberty. Library of Economics and Liberty. Web.