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