Every producer is a monopolist in a way..

The micro textbooks are written around firms and consumers. But with most writers of these books i.e. econs never having done any business themselves, these books are just too unreal. The examples of producers/markets are just randomly picked up without much clarity on how firms actually work.

Frank Shostak of Mises Institute points to one such fallacy of perfect competition and monopolies. He actually criticises the 2014 prize winner Jean Tirole’s work on monopolies..

The greater the variety is, the greater the competition will be and therefore more benefits for the consumer. Once an entrepreneur introduces a product — the outcome of his intellectual effort — he acquires 100 per cent of the newly-established market.

Following the logic of the popular way of thinking, however, this situation must not be allowed for it will undermine consumers’ well being. If this way of thinking (i.e., the perfect competition model) were to be strictly adhered to, no new products would ever emerge. In such an environment, people would struggle to stay alive.

Once an entrepreneur successfully introduces a product and makes a profit, he attracts competition. Notice that what gives rise to the competition is that consumers have endorsed the new product. Now the producers of older products must come with new ideas and new products to catch the attention of consumers. 

The popular view that a producer that dominates a market could exploit his position by raising the price above the truly competitive level is erroneous. The goal of every business is to make profits. This, however, cannot be achieved without offering consumers a suitable price. It is in the interest of every businessman to secure a price where the quantity that is produced can be sold at a profit.

In setting this price the producer-entrepreneur will have to consider how much money consumers are likely to spend on the product. He will have to consider the prices of various competitive products. He will also have to consider his production costs.

This differentiation suggests that every producer is actually a monopolist but not a harmful one as we are told….

 

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