Advantages and Disadvantages of Monopoly Thursday 3rd October 2019
One disadvantage of monopolies is that they reduce allocative
efficiency through higher prices than under a competitive market,
leading to consumers paying more than the true cost of
production; this is a regressive effect. There is also potential for
production inefficiencies through wasteful production and
spending on advertising. In addition, higher prices can limit output
and thus the exploitation of full economies of scale, and similarly if
a monopoly grows too big they may risk diseconomies of scale.
Protected industries also have less drive to innovate. Consumers
are also adversely affected through loss of welfare and poor
quality of service through lack of competition.
On the other hand, monopolies may not be as bad as they seem
on the surface. Firms with a high market share may actually be
more efficient and successful than other firms and competition
may actually be healthy. Profits can be used to fund investment
and research. Natural monopolies exploit economies of scale fully
and domestic monopolies still face global competition. Some
consumers will actually be aided by price discrimination as they
exploit the cheaper prices and monopolistic firms can still be
regulated where industry regulators act as proxy consumers.
Overall, it is clear that monopolies are not as good as firms who
are perfectly competitive, however there can be some benefits to
monopolistic competition.
One disadvantage of monopolies is that they reduce allocative
efficiency through higher prices than under a competitive market,
leading to consumers paying more than the true cost of
production; this is a regressive effect. There is also potential for
production inefficiencies through wasteful production and
spending on advertising. In addition, higher prices can limit output
and thus the exploitation of full economies of scale, and similarly if
a monopoly grows too big they may risk diseconomies of scale.
Protected industries also have less drive to innovate. Consumers
are also adversely affected through loss of welfare and poor
quality of service through lack of competition.
On the other hand, monopolies may not be as bad as they seem
on the surface. Firms with a high market share may actually be
more efficient and successful than other firms and competition
may actually be healthy. Profits can be used to fund investment
and research. Natural monopolies exploit economies of scale fully
and domestic monopolies still face global competition. Some
consumers will actually be aided by price discrimination as they
exploit the cheaper prices and monopolistic firms can still be
regulated where industry regulators act as proxy consumers.
Overall, it is clear that monopolies are not as good as firms who
are perfectly competitive, however there can be some benefits to
monopolistic competition.
