What are the costs of a monopoly?
We know that there is a deadweight loss to society due to the monopoly's higher than competitive pricing and restricted output. But monopolies also can cost society in other ways:
We know that there is a deadweight loss to society due to the monopoly's higher than competitive pricing and restricted output. But monopolies also can cost society in other ways:
- Predatory Pricing: This is when the monopoly firm purposely undercuts the price of their products in order to extinguish competition from other firms within the market. Because the monopoly is really large, it has a cost advantage over small firms due to economies of scale. The monopoly firm may lose some money in the short-term, but at the same time it eliminates its competition from the market. In the long-term, it makes more profit than before.
- Limit Pricing: This is when monopoly firms purpose reduce prices to stop new firmsfrom entering the market. It limits the amount of competition available.
- Lack of available substitutes: Consumers in society suffer because the monopoly is in control of what is made in the market. Without competition, there exists no other viable option to the consumer in many cases.
- Productive and cost inefficiencies: The monopoly restricts its output so it may not necessarily be producing at the cost minimising level of production. The monopoly also has no incentive to cut costs lower and improve the production process, because no competition exists. Therefore, precious resources are wasted.
- Lack of incentive to innovate: Big monopolies can become lazy. The lack of competition means that they can reduce the quality of their goods to make more profit, or limit the amount of research and development because consumers have nowhere else to go.
Are there any benefits of a monopoly?
There do exist some benefits of a monopoly:
There do exist some benefits of a monopoly:
- Economies of scale: A monopoly is better able to exploit economies of scale because they are larger than competitive firms.
- Dynamic efficiency: The monopoly is technically able to reinvest more money into R&D and innovation than competitive firms are. This is because they make higher profits and are therefore able to spend more on such things. Ultimately, the consumer can benefit from these innovations. If monopolies didn't make such huge amounts of money, then who would want to make the next revolutionary product? Human beings are rational. It only makes sense to innovate and develop if there is an appropriate reward at the end of it.
