Are Monopolies Always Bad?

Readers Question: If monopoly is always bad, why do firms seek to become monopolists and why does government tolerate monopoly?

It is true that Monopolies have many disadvantages for society:

  1. Higher prices than competitive markets
  2. Decline in consumer surplus
  3. Less incentives to be efficient.
  4. Possible diseconomies of scale.

For more detail see: Disadvantages of Monopoly

Monopoly Diagram 

Most of these disadvantages are, of course, for the consumer and society. Firms benefit from monopoly power because:

  1. They can charge higher prices and make more profit than in a competitive market.
  2. The can benefit from diseconomies of scale
  3. They can use their monopoly profits to invest in research and development and also have resources for if the firm does badly.

Why Government Tolerates Monopolies

  1. It is difficult to break up monopolies.
  2. Governments can implement regulation of Monopolies e.g. OFWAT regulates the prices of water companies
  3. Monopolies can be more efficient because of the advantages from economies of scale. This is particularly important for firms operating in a natural monopoly. For example, it wouldn’t make sense to have many small companies providing tap water. The large scale infrastructure makes it more efficient to just have 1 firm
  4. Firms with monopoly power are not necessarily bad. Google has monopoly power on search engines – but can we say Google is an inefficient firm who don’t seek to innovate?

See also: Advantages of Monopolies

16 thoughts on “Are Monopolies Always Bad?

  1. monopolies to some extend are beneficial in the sense that ,they engage in research and devekopment there by improving quality.also there is customer care since they are th sole producer however,the social welfare is eroded in the sence that they charge exobitant prices to customers.also customers are deprived of choice

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