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:
- Higher prices than in competitive markets
- Decline in consumer surplus
- Monopolies have fewer incentives to be efficient.
- Possible diseconomies of scale.
- Monopsony power in paying a lower price to suppliers.
- Monopolies can gain political power and the ability to shape society in an undemocratic and unaccountable way – especially with big IT giants who have such an influence on society and people’s choices.
In the late nineteenth-century, large monopolist like Standard Oil gained a notorious reputation for abusing their power and forcing rivals out of business. This led to a backlash against monopolists. But, in the Twenty-First Century, there are new monopolies which have an increasing influence on people’s lives.
For more detail see: Disadvantages of Monopoly
Most of these disadvantages are, of course, for the consumer and society. 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 government tolerates 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.g. OFWAT regulates the prices of 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.
- Monopolies can be more efficient because of the advantages of 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
- Innovation. With 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.
- 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 of promoting good health and avoiding the poor health in the first place.
- 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?
- On the other hand, the dominance of the big IT firms Apple, Facebook and Google raises concerns over their undemocratic influence on society.
See also: Advantages of Monopolies