Monopoly Vs. Competition

Yesterday, we Blogged about Does SM create higher prices?
Today, we will look at compare and contrast monopoly vs. competition.  Does a competitive supply system really perform better than a monopoly?

First, I propose and assume that both monopolies and competitive suppliers must operate within a rules-based framework that retrains, guides, and enhances their performance.  Without that framework, the system will be worse for it, and has a high likelihood of spinning out of control, and becoming a disservice to its stakeholders and owners.  For example, selling addictive drugs can be highly profitable, but is not in the long term best interest of society, so it is made illegal, and becomes part of the rules-based framework.  If this was not part of the rules-based framework, short turn optimums can lead to long term dysfunction.

There is a 37 minute video on YouTube called "Sticky Prices Microfoundations in a Supply Chain Agent Based Model", by Ernesto Carrella, Dept. Computational Social Studies, George Mason University, Fairfax VA, USA. which explores the differences between a monopoly and a competitive market.  

Figure 1:  With zero knowledge of the rules, the computer simulation of a Monopoly
is able to discover the maximum profit point (22 units of production and 79
units of price) by adjusting production and price every 20 days.

Figure 2:   With zero knowledge of the rules, the computer simulation of a
competitive market is able to discover each supplier's maximum profit point.
Note that with the same market demand (ie. q= 101-p), the competitive market
with 5 suppliers has an optimum price at 58, instead of the optimum price
in a monopoly of 75. 

From this presentation, we get Figure 1, where we see the output from a computer simulation of one firm with 100% market share (ie. a monopoly) doing price discovery to maximize their profits by adjusting their quantity of production and selling price.  With no prior knowledge of the optimum (22 units of production at 75 units of price), the system is able to seek and discover the optimum (Marginal Benefit vs. Marginal Cost).  To help achieve stability, adjustments in production were assumed to occur every 20 days, allowing time for successfully seeking the optimum without excessive hunting, instability, overshoot, or noise.

In Figure 2, we see a similar computer simulation for a competitive market with 5 suppliers, all who compete for market share against each other by adjusting their prices and their production, each seeking to maximize their individual profits.

The wide, black line, fluctuating above and below the optimum value in Figure 2 is formed by the 5 suppliers continuously jostling for a better position in the market place.  There is never a feast or famine, the market is always well served.  There just needs to be a small amount of inventory in the system to cover this day to day fluctuation in the system.

Even though the competitive market simulation uses the same price-demand function as the monopoly (ie. q= 101-p where q= quantity produced, and p= price market is willing to pay), the optimum price in the competitive market place is 58, which is 29.3% cheaper than the monopoly market optimum price of 75.

This computer simulation, and many others like it, clearly show that monopolies cause or contribute to higher prices in the market place.

What are the reasons that justify the government purposely creating monopolies in supply management goods?  SM Mafia argue that this is a necessary evil so that farmers are protected from the foreign producers in low wage, low cost producing countries, thereby achieving domestic food security.

Unfortunately, this assumes that there is no other alternative than a monopoly.

In fact, that is an assumption that is un-necessary.

For example, the SM system could reward the most productive producers with additional quota, while the least productive are frozen with the quota they have already been given.  In this way, the system gets more and more efficient over time.  There are many other alternatives.  However, to say there is no other solution is false, mis-leading, and self-serving to the SM Mafia's special interest, and against the greater good that the public is owed.

Why, oh why is  this obvious error allowed to continue?