Monopolies are generally considered to have disadvantages (higher price, fewer incentives to be efficient). However, monopolies can benefit from economies of scale (lower average costs) and have a greater ability to fund research and development. In certain circumstances, the advantages of monopolies can outweigh their costs.
Advantages of Monopoly
- Research and development Monopolies can make supernormal profit, which 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. In developing drugs, there is a high risk of failure; monopoly profits give a firm greater confidence to take risks and fund research which may prove futile.
- 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 several 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 the best firm for search engines. Apple has a degree of monopoly power through successful innovation and being regarded as the best producer of digital goods.
- Monopoly regulation. One possibility is for a firm to have a monopoly situation, but the government sets up a regulator to prevent the excesses of monopoly power. For example, utilities like water and gas are natural monopolies so it makes sense to have one provider. The regulator can limit price increases and ensure standards of service are met. In theory, this enables the best of both worlds – the monopoly firm can benefit from economies of scale, but the consumer is protected from monopoly prices.
- However, it depends on the quality of regulation. There is a danger of regulatory capture and the regulator allowing the firm to be too profitable.
- See also: Regulation of monopoly