Advantages and Disadvantages of a Monopoly: Companies or businesses that control and dominate the market are known as monopolies. Either a company with a pure monopoly (100%) or one with monopolistic power (greater than 25%). Lower consumer surplus results from monopolies setting prices higher than those of competitive markets is just one of the demerits of this system. On the other side, monopolies may profit from economies of scale that reduce average costs, which might theoretically be passed along to customers.
You’ll discover both the negative and positive aspects of monopoly in this article, along with a few other crucial business tips. To find out more, scroll down.
Characteristics of a Monopoly
a. With many purchasers, the market is controlled by one person. Even if the pricing is unfavorable, buyers cannot switch.
b. Other than the item offered by one party, there are no alternatives or equivalent goods.
c. For new businesses, there are many obstacles to market entry. Laws, technology, and large sums of money can all act as barriers.
d. Because there are no competitors, sellers in a monopolistic market are free to establish prices as they see fit.
e. The market’s demand curve and the monopolist’s demand curve are identical.
Disadvantages (Demerits) of Monopolies
1. Pricier than in a market where there is competition: Because there is no competition when there is a monopoly, prices may rise. For instance, Microsoft commanded a high price for Microsoft Office throughout the 1980s when it controlled the market for PC software.
2. A reduction in the surplus of consumers: Consumers pay greater prices and have less available spending money. Because the price exceeds the marginal cost, this also results in allocative inefficiency.
3. The incentives for efficiency are lower under monopolies: A monopoly can profit with little effort if there is no competition, which may encourage organizational slackness and other forms of x-inefficiency. Scale-related inefficiencies are also a possibility. Because it is more difficult to coordinate and communicate in a big organization, it is possible for a big firm to become inefficient.
4. Monopolies frequently possess the authority to pay suppliers less: For instance, farmers have criticized the monopsony dominance of big supermarkets, which results in them receiving very little for their goods. A monopoly may also be able to control the wages that its employees get.
5. Undue political advantage: Particularly with large IT giants that have such sway over society and people’s choices, monopolies can amass political power and the capacity to reshape society in an undemocratic and unaccountable manner. Facebook, Google, and Twitter’s influence on how information spreads through society is a rising source of worry.
Large monopolists like Standard Oil developed a bad reputation in the late nineteenth century for abusing their power and driving competitors out of business. A backlash against monopolists resulted from this. However, there are new monopolies in the twenty-first century that are influencing people’s lives more and more.
6. Taking advantage of consumers: The most common attribute of a monopoly market is customer exploitation. There aren’t any alternatives, which means that the consumer is treated unfairly in terms of availability, value, and cost. Since there are no competing products for the already existing market, the company may find it simple to produce inferior or substandard goods if it so chooses. After all, they are confident that the goods will be purchased.
7. Unhappy customers: A monopoly market gives customers a raw deal because the quality will be sacrificed. As a result, it is not surprising to hear frequent complaints from extremely disappointed customers regarding the company’s goods.
8. Price hikes: When there is no competition in the market, there aren’t any price wars that could have benefited consumers. As a result of this monopoly, businesses tend to charge higher prices for goods and services, which is inconvenient for the consumer.
9. Price discrimination: Monopoly businesses are occasionally cited as engaging in price discrimination, whereby they impose various costs on the same good depending on the consumer.
10. Poor treatment of employees: Their employees receive lower pay. Companies with monopolies hold the power to control the whole market. As a result, they were unable to focus much on the internal welfare of their workforce. They might be persuaded to approach their staff with a low-wage offer.
Advantages (Merits) of Monopolies
It’s not all bad news, either: The benefits of a monopoly are tremendous. Let’s check them out.
1. It is cheap to run: Since there are no near substitutes for the items in question because of their unique nature, the monopolist corporation can differentiate its products without incurring significant marketing and advertising expenses.
2. The economies of scale: A single firm can reduce its long-term average expenses in a sector with high fixed costs by taking use of economies of scale. This is crucial for businesses that operate in natural monopolies (e.g. rail infrastructure, gas network). For instance, it would be absurd to have numerous small businesses delivering tap water because they would be duplicating infrastructure and financial resources. Simply having a large-scale infrastructure makes it more effective to have just one firm– a monopoly.
3. Economies-of-scale-growth-in-firm: Note that due to their increased magnitude, these economies of scale can readily exceed inefficiencies in allocation and production.
4. Some services are effectively and efficiently provided by monopoly businesses: It is best to monopolize some services, such as those that are sensitive or security-related, in order to protect any potentially sensitive information and to preserve its confidentiality.
5. Innovation: Medication corporations wouldn’t be prepared to invest as much in drug research without patents and monopoly power. The monopolistic power of patents encourages businesses to create new knowledge and technologies that can benefit society. Additionally, monopolies generate supernormal profit, which can be utilized to finance investments that result in more advanced technology and dynamic efficiency.
For instance, major tech monopolies like Google and Apple have made significant investments in emerging technologies. As a result, drug companies may be able to charge exorbitant prices for medicines that save lives. Additionally, it encourages pharmaceutical corporations to promote their products over much more affordable methods of maintaining good health and preventing illness in the first place.
6. Monopoly-holding companies may be the most effective and dynamic: By outperforming their competitors, businesses might acquire monopoly power. For instance, Google has a monopoly on search engines, yet can we conclude that Google is a wasteful company that doesn’t try to innovate?
7. Price stability: Prices are often stable in a monopoly market. This occurs as a result of the market having just one corporation that has the sole authority to set pricing whenever it pleases. Because of the competition that exists in other types of market systems, prices tend to fluctuate and are less stable, but this is not true in monopoly markets because there is little to no competition.
8. Government revenue source: Taxation from monopolistic companies is the government’s main source of funding.
9. Massive profits: Monopoly enterprises typically generate super-profits from their operations because there are no rivals, which results in a high number of sales. Among many other things that could be advantageous to the company, the enormous earnings made could be put toward developing and marketing new items.
10. Competitiveness on a global scale: A company has a significant edge to grow its business abroad if it holds a domestic monopoly. With the strong earnings they make on the domestic market, the corporation may invest more in the global market.
11. Bolster loss-making services: The supernormal monopoly revenues can be used to sustain loss-making services provided by the government or by the community.
An illustration of a monopoly would be railroad firms. With the peak hour services, these businesses make a supernormal profit. However, the loss-making late-running services will be the starting point for this. in order for the railroad corporations to offer round-the-clock service.
12. Amass cash reserves in preparation for challenging times: Businesses with monopolies have a greater possibility of building up their cash reserves from above-average profits. The money they get from the sales will help them get by during hard times.
The covid pandemic, for instance, affected the majority of enterprises worldwide between 2020 and 2022. The businesses with cash on hand were able to deal with and endure this circumstance with ease.
After learning about monopoly, you might look at business opportunities to expand your company by creating a new product. Pick a market where no business controls the supply of any particular good or service. Additionally, maintaining accurate books for the organization is crucial for its development. The business strategy will become more structured as a result, with financial reports containing the company’s cash flows.