Comments on: Are Monopolies Always Bad?

By: Market Contestability and the Internet — Economics Blog

Market Contestability and the Internet — Economics Blog — Wed, 28 May 2008 15:01:57 +0000

[...] See also: Are Monopolies always bad? [...]

By: Monopoly Here and Now | Economics Blog

Monopoly Here and Now | Economics Blog — Sun, 02 Mar 2008 21:08:29 +0000

[...] Are Monopolies always bad? [...]

By: Tejvan Pettinger

Tejvan Pettinger — Sun, 10 Feb 2008 19:46:09 +0000

Very Good Point John, this would definitely get a few evaluative marks at A Level.

It is true, there are few perfectly contestable markets. But it is always helpful to think in terms of degrees of contestability.

e.g. I think you could say Online advertising has more contestability than say tap water

By: James

James — Sun, 10 Feb 2008 12:08:44 +0000

Hi, I’m a first year economics student and just thought I’d add the theory of contestable markets to this discussion, as it provides another view on why monopolies might not always be ‘bad’.

The theory of contestable markets suggests that if barriers to entry and exit are practically non-existent (or totally non-existent in the case of a perfectly contestable market), firms can freely enter and exit the market at will. Therefore, there is a constant threat of so-called ‘hit and run’ competition, where rival firms can enter the market as soon as they see an opportunity to make supernormal profits.

So if a monopolist attempted to exploit its position in a perfectly contestable market, e.g. by raising prices, it would be undercut and would lose profit.

But there are few contestable markets in existence. I believe my A-level teacher said that local bus or taxi industries are two examples.

Source: John Sloman, “Economics” 6th Edition, p172