Mega Corporation and BIG Enterprises are sugar producers in Brazil. The two comp
ID: 1203066 • Letter: M
Question
Mega Corporation and BIG Enterprises are sugar producers in Brazil. The two companies decide to merge and become one new company called Mega-Big Corporation. If they complete their merger the new firm would control more than 80% of the market share in the country, and thus would be classified as a monopoly. Suppose you are hired by the Brazilian government to debate on whether the government should step in to limit the formation of the monopoly. Discuss pros and cons of the government action, and use the concepts of "efficiency" and "equality" in your arguments.
Explanation / Answer
Monopoly is a type of market structure in which in which there is a single seller of a product with no close substitutes. Considering the Cost Benefit analysis of the monopoly type of market structure, in the above case will surely make the producers well off as they will be able to charge more price for their good as they will control 80 per cent of the market share, merger will also reduce the cost involved in production. Thus, overall profits will rise for the producers.
However, if we consider the economy as a whole and especially the consumers case, it will lead to the fall in the consumer surplus due to rise in prices. Moreover, monopoly also leads to the deadweight loss in the society as Prices charged are higher than the Marginal cost of production and quantity produced is not the quantity at which Average cost is minimized. Thus, monopoly does not guarantee an efficient outcome. It will also increase inequality in the society as monopolists will gain at the cost of consumers.
Thus, for the overall welfare of the economy, monopoly should be restricted where ever possible.