Disadvantages Of Monopoly

There are a number of reasons why monopolies are deemed to be against the public interest.  It is these reason that have lead to legislation to regulate monopoly power.

Higher price and lower output

Assuming firms under perfect competition and monopoly face the same cost curves, the monopolist will produce a lower quantity at a higher price.

allocatively inefficient

Assuming that a monopolist and a competitive firm have the same costs, the welfare loss under monopoly is shown by a deadweight loss of consumer and producer surplus compared to the competitive price and output. This is shown in the diagram below.

productively inefficient

Under monopoly, however, the presence of barriers of entry allow the monopolist to earn abnormal profits in the long run.  The monopolist is not forced to operate at the lowest point on the AC curve.  The monopolist is therefore unlikely to be productively efficient (unlike the firm in perfect competition).

possibility of higher cost curves

Due to the presence of barriers to entry there is no incentive to reduce costs. 

Unequal distribution of income

The high profits of monopolists may be considered by many as unfair.  The scale of this problem depends upon the size of the monopoly and the degree of its power.  The monopoly profits of a village store may seem of little consequence when compared to that of a giant national or international company.

Advantages of Monopoly

Monopolies can have some advantages.

Economies of scale

The monopolist may be able to exploit substantial economies of scale.  If this results in a MC curve dramatically below that of the same industry under perfect competition, the monopoly will be able to produce a higher output at a lower price.  The monopoly produces Q₁ at a price of P₁, whereas the perfectly competitive industry produces Q₂ at the higher price of P₂.

This result will only occur if the monopoly MC curve is below point X on the diagram above.  If the monopolist produced where P=MC, the price would be further reduced (P₃) and output increased (Q₃).

Lower cost curves due to increased r&d and investment

The monopolist can use its abnormal profits for research and development and investment.  It therefore has greater potential to become efficient than the smaller firm with limited funds.

Competition for corporate control

If the monopolist operates inefficiently it will see a decline in its value on the stock market.  This may lead to take-over bids from firms who believe they can operate more efficiently.  It is this threat of take-over that strives a monopolist towards efficiency.

Innovation

As the monopolist faces no competition, there is an incentive to introduce new products, as they will receive all of the industry profit.