Article Review; Monopoly

Name

Institution/Affiliation

Date

1.0 Introduction

The article titled ‘Amazon Bites off Even More Monopoly Power’ was written by Lina M. Khan. The New York Times published it in June 2018. According to Khan (2018), Amazon has initiated strategies to purchase Whole Foods, a popular grocer. The move to purchase the company in a deal worth over $13.5 billion will give Amazon new sources of consumer data, an extensive chain of distribution and control of more than 400 stores. With the control of online American grocery market, Amazon will be able to control the market pricing (Khan, 2018). By acting like the price maker, the company will determine the price level by establishing the quantity of groceries to be supplied. The lack of economic competition in the production of goods and services results in monopoly firms achieving maximum profit returns. To explain the economic dominance of Amazon, this article reflects on the various principles of monopoly, for example, profit maximization, market power and, causes of monopoly regarding the company.

2.0 Monopoly Profit Maximization  

            Marginal revenue equals marginal cost after the establishment of the quantity supplied hence through this provision monopolies manage to attain the profit maximization function. As a monopoly, at Amazon, this function will be used in the calculation of the marginal revenue curve that will subsequently help in the determination of how quantity will lead to profit maximization. The demand curve for groceries will determine the marginal revenue curve of Amazon through its subsidiary Whole Foods. With a downward sloping demand curve monopolies achieve profit maximization when the demand curve lies above the marginal revenue curve at any positive quantity. According to Perloff and Brander (2014), the demand curve of a firm reveals the price of selling a given quantity of goods. By increasing its economies of scale as a monopoly, the marginal revenue of Amazon will differ from that of a company with a competitive market structure. Competitive firms have an upward-sloping demand curve while competitive firms have a downward-sloping demand curve.

            As depicted in Figure 1 competitive firms posses a demand curve that is horizontal, for that reason, these firms get to sell extra units of output without reducing the selling prices. The market price of a competitive firm during the selling of the last unit of the production is equal to the marginal revenue. Being a monopoly Amazon faces a market demand curve that is downward sloping as in Figure 1. Competitive firms get to sell extra units of output without altering the market price; therefore, such a firm does not have to give up its revenue. Perloff and Brander (2014) assert that in a monopoly set up the price of goods and services is higher than the marginal revenues as a result of the demand curve sloping downwards. To attain maximum profits, monopolies are required to reduce the market price so that to sell an additional unit of the output where the marginal revenues exceeds the price of the additional unit.

Figure 1: Average and Marginal Revenue (Perloff & Brander, 2014)

            Through purchasing Whole Foods, Amazon will increase its market share of the $800 billion American grocery market. According to the article in The New York Times as a monopoly, Amazon will maximize its profits by ensuring it operates where its marginal cost equals the marginal revenue (MR=MC). Amazon will also have the capacity to change its price, unlike competitive firms. Therefore, as a price maker, the company has the potential to set its process of quantity to result in profit maximization. Due to the lack of room to control prices in a competitive market structures firms get to maximize profits by setting the quantity levels. Dunne et al.  (2013) opines that despite monopolies being price makers, the market demand curve is also affected by other variables. As the result of the downward sloping demand curve in the monopolized online grocery market in the United States, there is a trade-off between a lower price and a higher quantity of a higher price and a smaller quantity.

            Through Whole Foods, Amazon will attain maximum profits by choosing the exact point on the demand curve where the company can maximize its profit levels. However, the authority of Amazon over its market will be limited because monopolies do not set both the price and the quantity supplied. This ensures that monopolies do not set a price that is extremely high and unaffordable for the customer base. Despite the failure to establish both the price and quantity as a monopoly, Amazon will still earn maximum profits. According to Dunne et al. (2013), monopolies also do not get to chose points that are above the firm's demand curve. If these firms get to pick these points, it is possible they will set both the price and the quantity to be supplied. Then executives at a monopoly firm will have the responsibility of picking an output level with the demand curve determining the price levels. Monopolies use the same profit-maximization function on setting the output or price so that to achieve maximum profits.

GET THE WHOLE PAPER!