The large-scale infrastructure makes it more efficient to just have one firm — a monopoly. Note these economies of scale can easily outweigh productive and allocative inefficiency because they are a greater magnitude. Without patents and monopoly power, drug companies would be unwilling to invest so much in drug research. The monopoly power of patent provides an incentive for firms to develop new technology and knowledge, that can benefit society. Also, monopolies make supernormal profit and this supernormal profit can be used to fund investment which leads to improved technology and dynamic efficiency.
For example, large tech monopolies, such as Google and Apple have invested significantly in new technological developments. However, this can also have downsides with drug companies able to charge excessively high prices for life-saving drugs. It also gives drug companies an incentive to push pharmaceutical treatments rather than much cheaper solutions to promoting good health and avoiding the poor health in the first place. Firms with monopoly power may be the most efficient and dynamic.
Firms may gain monopoly power by being better than their rivals. Evaluation of pros and cons of monopolies It depends whether market is contestable. A contestable monopoly will face the threat of entry. This threat of entry will create an incentive to be efficient and keep prices low. It depends on the ownership structure. Some former nationalised monopolies had inefficiencies, e.
British Rail was noted for poor sandwich selection and some inefficiencies in running the network. However, this may have been partly monopoly power but also the lack of incentives for a nationalised firm. It depends on management.
Some large monopolies have successful management to avoid the inertia possible in large monopolies. For example, Amazon has grown by keeping small units of workers who feel a responsibility to compete against other units within the firm.
It depends on the industry. In an industry like health care, there are different motivations to say banking. Doctors and nurses do not need a competitive market to offer good service, it is part of the job. If we take the banking industry, the economies of scale in offering a national banking network are limited. If it was a merger of two steel firms, which has much higher fixed costs, the economies of scale may be greater. If two pharmaceutical firms or aeroplane manufacturers merged, there could be a good case to say they would use their combined profit for research and development.
It depends on government regulation. If governments threaten price regulation or regulation of service, this can reduce the excesses of some monopolies. Environmental factors — A monopoly which restricts output may ironically improve the environment if it lowers consumption. It depends on how you define the industry. A domestic monopoly in steel may still face international competition — from foreign steel companies. Eurotunnel faces a monopoly on trains between the UK and France but it faces competition from other methods of transport — e.
Advantages of being a monopoly for a firm Firms benefit from monopoly power because: They can charge higher prices and make more profit than in a competitive market. The can benefit from economies of scale — by increasing size they can experience lower average costs — important for industries with high fixed costs and scope for specialisation.
They can use their monopoly profits to invest in research and development and also build up cash reserves for difficult times.
Why governments may tolerate monopolies It is difficult to break up monopolies. The US government passed a lawsuit against Microsoft, suggesting it should be split up into three smaller companies but it was never implemented. Governments can implement regulation of Monopolies e. OFWAT regulates the prices for water companies. In theory, regulation can enable the best of both worlds — economies of scale, plus fair prices.
However, there is concern about whether regulators do a good job — or whether there is regulatory capture with firms gaining generous price controls. I think you could say Online advertising has more contestability than say tap water. I present insurance coverage as an example of a service where a government regulated monopoly can provide more efficient service than a competitive market of private insurers can, for the following reasons: — Insurance is a commodity service it provides cash in exchange for cash.
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The cookie is used to give a unique number to visitors, and collects data on user behaviour like what page have been visited. One case where scrutiny is certainly needed is one economists call a "natural monopolies. It happens naturally, often because of economies of scale that are still in effect even after the entirety of market demand has been satisfied. Because the monopoly power cannot be prevented by regulating the firm's strategic behavior, and because breaking it up would often result in higher costs and hence higher prices for consumers, the best course of action is to regulate the prices and quantities such a company can charge.
A firm's size and market share do not necessarily indicate that it is exploiting its market power or that substantial market share even exists. A dominant firm in an industry could, for example, face substantial new entrants and competition if it attempts to raise its prices and exploit its dominant position in the marketplace. But firms that exploit their market power or undertake strategic behaviors that make it more difficult for other companies to compete should come under the careful watch and, when appropriate, receive penalties from regulators charged with promoting the public interest.
His research focuses on how monetary policy affects the economy, and he has worked on political business cycle models. Mark Thoma. Please enter email address to continue. Please enter valid email address to continue. Chrome Safari Continue. Be the first to know. Ben Davis May 31, What are advantages and disadvantages of monopoly?
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