Economics blog

Analysis and evaluation - do monopolies always make supernormal profits?

This is another great example to teach students about the difference between analysis and evaluation.

The theory states that the existence of strong barriers to entry generally allow for monopolies to make long-run supernormal profits. An example or two plus a well-drawn diagram will be the icing on the cake in terms of analysis. But is it always true?

One example to show how it is not always true is the postal service. In many countries, the postal service has been (or still is) a statutory monopoly. However, it is not immune to the impact of technology and the advent of email and social media has led to a significant decrease in demand. Students may be surprised to know that 15 years ago most people sent birthday cards through the post. Nowadays, a quick message on facebook seems to suffice. This changing behaviour is having a significant impact on the US Postal Service, which delivered 3 billion pieces less in the 2011 fiscal year than the year before it. All up this led to a loss of $5.1 billion and calls for help from the US government. The article can be found here..

The power of innovation and technology is also a game changer. Ten years ago, Microsoft was public enemy # 1 in terms of being a powerful monopoly and stifling competition. Much smaller companies like Apple were simply unable to compete….....well that was then and this is now.

By producing products that consumers want, Apple has forged ahead and is now a larger company (by market capitalisation). And there are not too many calls for Apple to be regulated or split up!

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