Pros & Cons of Monopoly Economics
29 SEP 2017
Monopoly economics is a term that describes systems of commerce where there is only one seller. Prices are controlled by the monopoly, and there are barriers that prevent others from entering the market. Some monopolies are natural monopolies and are allowed to exist, while other monopolies are prevented by antitrust laws that prevent price-fixing and aggressive tactics that keep competitors from entering the market.
In some cases, monopolies are essential in order to lower cost and save space. For instance, water and electrical companies have natural monopolies because it would be too expensive for businesses to build several pipelines or power lines. Also, some monopolies prevent the destruction of the environment, since multiple competing electrical companies would have to destroy more land in order to have multiple power lines owned by separate companies.
2 Economics of Scale
Monopolies are also beneficial when the costs of having one provider are lower than the cost of multiple competitors. Since the point of antitrust laws is to keep prices as low as possible, antitrust laws would not serve the consumer if the costs of competing were great enough to raise the price of the products and services sold to the consumers.
3 Barriers to Entry
A new business might be able to create a better product than an older one, but this new business might still be in the process of establishing itself. A monopoly company can take control of the majority of essential resources needed to produce a particular product, preventing other companies from producing these products. Monopolies can also run competitors out of business by lowering the costs of their products below the cost of production. These lower prices will draw consumers away from the newer company toward the older company. Since the established company might have more money saved up, they can remain in business longer while losing profit and can wait until the other company runs out of business before raising the prices high again.
Monopolies that have been established for a long period of time might choose to raise their prices very high and cut production in order to drive up prices. If there are alternatives to the product, consumers might turn to these alternatives. But if the product is an essential one, such as if a company has a monopoly over all motor vehicle production, consumers will be forced to do business with the monopoly.
Monopolies have less of an incentive to create good products. For example, the only grocery store in a small town can provide unfriendly service because the customers in the town only have one grocery store to choose from. However, in the case of the grocery store, the town might have no choice but to have a monopoly store because the town might not be able to support two grocery stores.