2.

3 Why Monopolies Can Be Harmful

Large monopolies have considerable potential to damage both economies and
democratic governments (although they can be very beneficial for other types of
governments9). Unfortunately, the full extent of the damage is usually not as obvious, at
least to the general public, as are the seemingly beneficial effects. And monopolists
often go to extreme lengths to disguise or hide such harmful effects. Among the ways in
which unregulated monopolies can harm an economy are by causing:
(1) Substantially higher prices and lower levels of output than would exist if the product
were produced by competitive companies.
(2) A lower level of quality than would otherwise exist. This includes not only the quality
of the goods and services themselves, but also the quality of the services associated
with such goods and services.
(3) A slower advance in the development and application of new technology. Advances
in technology can improve the quality (e.g., ease of use, durability, environmental
friendliness) of products, and they can also reduce their costs of production. Innovation
is not as necessary for a monopolist as it is for a highly competitive firm, and, in fact, it
can be a bad business strategy. Research and development by monopolists is often
largely focused on ways of suppressing new, potentially competitive technologies (and
includes such techniques as stockpiling patents) rather than true innovation 10. This can
be a serious disadvantage, because economists have long recognized that innovation is
a key factor (and possibly the single most important factor) in the growth of an economy
as a whole11.
The adverse effects of monopolies can be much more noticeable on an individual level
than in the aggregate. These effects include the destruction of businesses that would
have survived had competition been based solely on quality and price (with a
consequent loss of assets of the owners and jobs of the employees) and prices for
products so high as to cause hardship or be unaffordable for some people.
It is often said, even by those who have negative opinions about monopolies, that
"monopoly itself is not necessarily bad, but rather it is the abuse of monopoly power that
is harmful." This statement is an excessive simplification, and it can be indicative of a
lack of understanding of the full extent of harm that can be caused by monopolies.
The abuse of monopoly power clearly can be harmful to an economy. The term abuse in
this context refers to such tactics as predatory pricing, colluding with suppliers and the
leveraging of a monopoly in one product to gain a monopoly for another product. But
what is often overlooked, even by legislation whose supposed purpose is to restrain or

regulate monopolies, is the fact that monopolies can be harmful even if they do not
engage in such practices.
If a monopolist engages in behavior that produces results similar to that by firms in an
industry that is characterized by intensive competition (i.e., charges prices close to cost
and does not engage in price discrimination), then there might not be a problem.
Unfortunately, however, this is rare even for a seemingly benevolent monopolist. The
reason is that the very strong incentives to maximize profits that exist for virtually any
business, whether pure monopolist, perfect competitor or somewhere in between,
produce very different results for a monopolist than they would for a firm in a highly
competitive industry. And monopolists (as is the case with competitive firms) usually do
not rank benevolence as a top corporate priority.
Thus, the management and employees in a monopoly might not at all be aware that
they are harming the economy, especially if their behavior is similar to that by a nonmonopoly. In fact, they may even genuinely believe that they are benefiting the
economy because of their conviction that they are more efficient and productive than a
number of firms competing with each other would be.
Another reason that the positive effects of even a benevolent monopolist would not be
as great as for a competitive company is that innovations that improve quality and
reduce production costs are often the result of desperation. (This is something that is
easy for many owners of struggling businesses to understand, but is often difficult for
others to fully grasp without experiencing it firsthand.) Monopolists generally consider
themselves successful, and thus, although they often are innovators to some extent
(typically mainly in their earlier years), they usually just do not have that extra motivation
to produce truly breakthrough innovations that smaller companies desperate to gain
market share (or to just survive) have.

2.5 Disadvantages of a Monopoly

Higher Prices Higher Price and Lower Output than under Perfect Competition.
This leads to a decline in consumer surplus and a deadweight welfare loss

Allocative Inefficiency. A monopoly is allocatively inefficient because in

monopoly the price is greater than MC. P > MC. In a competitive market the price
would be lower and more consumers would benefit

Productive Inefficiency A monopoly is productively inefficient because it is not

the lowest point on the AC curve.

X - Inefficiency. - It is argued that a monopoly has less incentive to cut costs

because it doesn't face competition from other firms.Therefore the AC curve is
higher than it should be.

Supernormal Profit. A Monopolist makes Supernormal Profit Qm * (AR AC )

leading to an unequal distribution of income.

Higher Prices to Suppliers - A monopoly may use its market power and pay
lower prices to its suppliers. E.g. Supermarkets have been criticised for paying
low prices to farmers.

Diseconomies of Scale - It is possible that if a monopoly gets too big it may

experience diseconomies of scale. - higher average costs because it gets too big

Worse products Lack of competition may also lead to improved product

innovation.

Charge Higher prices to suppliers. Monopolies may use their supernormal

profits to charge higher prices to suppliers.

A Few Problems
Three problems often associated with a market controlled totally by a single firm are: (1)
inefficiency, (2) income inequality, (3) political abuse.

Inefficiency: The most noted monopoly problem is inefficiency. Market control

means that a monopoly charges a higher price and produces less output than
would be achieved under perfect competition. In addition, and most indicative of
inefficiency, the price charged by the monopoly is greater than the marginal cost
of production.

Income Inequality: A lesser known problem with monopoly is an inequitable

distribution of income. To the extent that monopoly earns economic profit,
consumer surplus is transferred from buyers to the monopoly. Buyers end up with
less income and the monopoly ends up with more. In addition, because price is
greater than marginal cost and a monopoly receives economic profit, factor
payments to some or all of the resources used by the monopoly are greater than
their contributions to production. A portion of this economic profit is often "paid" to
the owners of the labor, capital, or land.

Political Abuse: A third potential problem, one tied directly to the concentration of
income by the monopoly resources, is the abuse of political power. The
monopoly could use its economic profit to influence the political process,
especially policies that might prevent potential competitors from entering the
market.