Courses : Intermediate Microeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Traditional Or Conventional Monopoly Theory Traditional or conventional monopoly theory states that monopoly is the result of the first advantage or technological advantage possessed by one producer. In this theory, a monopoly producer is able to produce a good or service at a lower cost than its competitors. Thus, the monopoly producer can set a higher price and earn a large economic profit. This theory was popularized by classical economists such as Adam Smith and David Ricardo. However, traditional monopoly theory cannot explain the formation of monopolies caused by other factors such as government regulations, strategic asset ownership, or unfair business practices. In addition, this theory also ignores competition that occurs outside the product market, such as competition in finding resources or the labor market. Therefore, this theory is criticized by other theories that are more complex and encompassing. One alternative theory related to monopoly is the theory of industrial concentration. This theory states that the structure of an industry governed by a significant concentration of producers or buyers in the market can affect competition and prices. The higher the concentration of the industry, the greater the possibility of forming a monopoly or oligopoly. Traditional Monopoly Theory states that in a monopoly market, there is one company that monopolizes the market and has full control over the production and prices of the goods or services it produces. These monopolists also face a declining overall demand curve, so they can maximize profits by charging a higher price than the cost of production. Traditional Monopoly Theory concludes that monopolists can obtain high economic profits because there are no competitors who limit production and suppress prices. However, this can be detrimental to consumers because higher prices can reduce their purchasing power, and it also reduces the incentives for monopolists to increase production efficiency and innovation. To overcome this problem, several antitrust policies have been implemented by the government to limit the power of monopolists and encourage competition in the market. One policy that is commonly used is maximum price setting and separation of companies to prevent monopolistic practices and other policies that are detrimental to consumers and the market as a whole. Traditional Monopoly Theory views monopoly as a market situation where there is only one seller or producer in the market, so there is no significant competitor. In this theory, monopoly is defined as a market where one producer has full control over the determination of prices and production quantities, and has full control over the factors of production used. This theory also assumes that consumers in a monopoly market have no other alternative, so they will buy goods from monopoly producers even at high prices. As a result, the monopolist can charge a higher price than in a perfectly competitive market, and produce a smaller quantity of a good. One implication of traditional monopoly theory is that monopoly can lead to welfare losses, because monopoly producers make profits by charging higher prices and producing fewer goods than in a perfectly competitive market. This condition can be detrimental to consumers because they have to pay higher prices and receive smaller quantities of goods. However, criticism of traditional monopoly theory has also emerged, mainly because its underlying assumptions do not always apply in real situations. For example, in some cases, a monopolist does not have full control over pricing and production quantities, due to external factors such as government regulation, potential competition from substitute products, or the strong bargaining power of buyers. In Traditional Monopoly theory, it is also known as the reverse demand theory, which is a theory which says that in a monopoly market, demand is reversed to price. That is, the higher the price set by the monopolist, the lower the quantity of goods demanded by consumers. Conversely, the lower the price set, the higher the quantity of goods demanded by consumers. This theory assumes that there are no substitutes that are the same as the product produced by the monopolist, so that consumers have no other choice but to buy the product. So monopolists can set high prices without worrying about losing customers. However, this theory does not always occur in all types of monopoly markets, depending on the level of elasticity of demand and the level of success of competitors in entering the market. Therefore, the theory of Traditional Monopoly continues to be developed with new, more complex theories to describe a more realistic monopoly market.