Monopolies and their impact on the market

Monopolies and their impact on the market

Introduction

Monopolies are usually firms that dominate the market. These can be a pure monopoly with 100% market share or even a company that has monopoly power, holding at least 25% of the market (Marshall, 2015). Monopolies benefit from economies of scale because of reduced average costs, and these can be passed down to the consumers. Some firms turn to monopolies through horizontal integration. They buy their competitors, and they remain the only ones in the market. Monopolies are also made through vertical integration in which the company controls the entire supply chain from production point to the retail. Also, some monopolies enjoy government regulations that offer them a market. The government may do this to ensure the production of electricity and delivery since it cannot stand the disruptions that result from free-market forces. This study will focus on the impact of monopolies in the market, the positive and the negative sides of monopolies and my opinion on monopolies.

The first disadvantage of monopolies is that they restrict free trade as well as prevent the market from setting prices. This results in price-fixing and charging higher rates since they know consumers have no choice (Marshall, 2015). This is especially true when there is inelastic demand for goods and services. Consumers are left with no flexibility. Lack of competitors allows monopolies to charge higher prices than if the market was free. For instance, Microsoft had monopoly power on PC software back in the 1980s; thus it charged high rates for Microsoft office.

The second disadvantage of monopolies is the loss of innovation. Monopolies do not have any incentive for promoting their products even for improving it. This is because the companies do not face any competition to make them think of change. For instance, cable companies were not innovative until online streaming and satellite dishes came into the picture and altered their market. The third disadvantage for monopolies is inflation that happens because monopolies can set any price they want, thus raising the cost for the consumers (Hirst, 2018). Either, monopolies have monopsony power over the suppliers and end up paying low prices to suppliers. For instance, farmers receive meagre prices from supermarkets, and they have always complained about this. Also, monopolies may have the power of paying lower wages to their employees. Monopolies can also supply inferior quality products in the market. The monopolies realise that consumers have few alternatives; they can choose to offer substandard products at the same cost.

There are times when monopolies are excellent and necessary. Monopolies are useful because they ensure consisted of product and service delivery that requires a very high upfront cost. For instance, water and electricity utilities need costly dams or electric plants to build (Hirst, 2018). Therefore, it makes sense when the government allows monopolies to control the prices to pay for these costs. Also, monopolies ensure economies of scale through high outputs and average production costs.

Also, monopolies make supernormal profits that are used to facilitate research and development that would otherwise be impossible. These projects are majorly high cost and too risky. For instance, when developing drugs, there is a high probability of failure; however, monopolies profits gives the firm the confidence of funding such projects that my turn out futile (Hirst, 2018). Another possible reason for having monopolies is to subsidise loss-making services. Monopolies can use their super high profits to fund socially useful but loss-making services. For instance, a train may charge high prices in the peak time, which allows it to subsidise the costs in unprofitable time late services that are useful.

My Opinion on Monopolies

There are some cases in which the economic benefits for monopolies outweigh their disadvantages. This is, for instance, the situation where the goal is encouraging innovation, keeping costs low and cutting redundancy. In the case of encouraging investment and innovation in the economy can be encouraged using patents. Patents offer companies significant right to market their invention for 20 years after which their invention becomes public (Marshall, 2015). Patents protect investors from copyrights who steal an idea flooding the market. It is, therefore, a driving force for innovation amongst entrepreneurs. Entrepreneurs are encouraged to move forward and sell new technology or try a new idea. This is as opposed to going around something of sale which is already established. Interfering with monopolies can lead to the death of ideas yet to be created.

Also, monopolies are needed to keep costs low in the economy. To attain low prices, then natural monopolies are necessary to ensure economies of scale. Also, having big companies is efficient in the production of products (Hirst, 2018). Also, in terms of environmental conservation, monopolies ensure burning of less fuel, thus lower levels of environmental damage.

Also, harm from monopolies depends on how they are framed. Some monopolies are considered harmful since they give an unfair advantage to monopolies. For instance, a bridge-building monopoly may be expensive, however affordable. The damage from this kind of monopoly mainly depends on the framework.

References

Hirst, F. W. (2018). Monopolies, trusts and cartels. Routledge.

Marshall, A. (2015). Industry and trade. Vani Prakashan.