Monopolies are generally considered to have disadvantages. However, in certain circumstances monopolies can have various advantages for consumers and social welfare.
Advantages of Monopoly
- Research and Development. Monopolies can make supernormal profit; this can be used to fund high cost capital investment spending. Successful research can be used for improved products and lower costs in the long term. This is important for industries like telecommunications, aeroplane manufacture and Pharmaceuticals. Without monopoly power that a patent gives, there may be less development of medical drugs.
- Economies of scale. Increased output will lead to a decrease in average costs of production. These can be passed on to consumers in the form of lower prices.
See: Economies of Scale This is important for industries with high fixed costs, such as tap water and steel production.
If a monopoly produces at output Q1, average costs (AC 1) are much lower than if a competitive market had firms producing at Q2 (AC 2).
See also: natural monopolies – where the most efficient number of firms is one.
- International Competitiveness. A domestic firm may have Monopoly power in the domestic country but face effective competition in global markets. E.g. British Steel. With markets increasingly globalised, it may be necessary for a firm to have a domestic monopoly in order to be competitive internationally
- Monopolies can be successful firms. A firm may become a monopoly through being efficient and dynamic. A monopoly is thus a sign of success not inefficiency. For example – Google has gained monopoly power through being regarded as best firm for search engines. Apple has a degree of monopoly power through successful innovation.
Monopoly Essay Questions
- Discuss whether the govt should be concerned with an increase in the size of firms (15)
- Consider why it is difficult for firms to enter some markets but not others (15)
- Discuss whether Monopolies always lead to an increase in inefficiency (15)
- Discuss the economic consequences of a merger between Nescafe and local growers of coffee in Columbia (15)