Monopoly power is not automatically bad as long as it is regulated

Monopoly power occurs when a business is a dominant seller of a good or service with a market share that exceeds 25%. There are many disadvantages for societies where monopolies exist. A higher price than those in competitive markets is one of the main disadvantages for society. As monopolies are the main seller of goods and services in the market they can use their market power in order to raise the prices well above the marginal cost and thus make supernormal profits. As their prices are set so high and people have little other choice than to pay for them this reduces the amount of consumer surplus income.

Green area = supernormal profit (AR-AC)

Pink area = Deadweight welfare loss (the combined loss of producer and consumer surplus) compared to a competitive market.

This would be bad for the economy as people would have less disposable income than they would otherwise have had if the good/service was at a cheap price, so cannot spend as much in other aspects of the economy. Another disadvantage of monopoly is that there are fewer incentives to be efficient. If it is protected by high barriers to entry (meaning there are a few or no competitors in their market), the business may become complacent and thus operate less efficiently that it could. In this instance it is also possible for diseconomies of scale to occur. For example if the business did become complacent and chose not to bother to invest in technology to improve its efficiency it could suffer from technical diseconomies of scale as with new equipment/machinery, goods can be produced at cheaper and more effective levels. The monopoly may also choose to deliberately erect barriers of entry into the market to ensure that they do not lose market share.

This is bad for small businesses in the economy as it gives them little opportunity to grow and compete with such large companies as they may purposefully decide to lower their prices so that consumers choose to go the monopoly instead of the small business. As small businesses are unable to compete with the monopoly this would mean that there is a rise in unemployment. Increased levels of unemployment bring many negatives to the economy as the government will have to pay out more benefits meaning they have less money to spend on public and merit goods. As there would be more people out of work, they also do not have as much disposable income to spend on goods and services. As consumer spending is a key component of aggregate demand, this could reduce its levels and as a result bring down the GDP for the economy.

However, monopolies aren’t necessarily bad; they can be advantageous in some aspects of the UK economy. Although they can achieve supernormal profits through having higher prices, this can then be used to invest in research and development to further their business, or protect it if it does badly. This will also lead to the creation of employment. More people employed will mean fewer benefits have to be paid out and the government can spend this money saved on improving the country. Another advantage of a monopoly is that they can achieve economies of scale (purchasing large quantities of materials for a cheaper price) as they are such a large business. Increased output (Q to Q2) will lead to a decrease in average costs of production(C to C1) and these savings can be passed on to consumers in the form of lower prices.

UK firms may have to be of a larger size if they want to compete on an international basis. To become large enough to compete in the international market a business is likely to need to become a monopoly if they are to stand a chance with competing with many other firms in different countries. Providing that monopoly power is regulated so that it is not abused to exploit consumers and purposefully make it difficult for new firms to enter the market, they are not necessarily bad. After all, firms grow by satisfying customers and companies that are monopolies wouldn’t be the size they are if they didn’t have satisfied customers. They provide many jobs within the economy and lots of revenue that can be invested elsewhere in the economy as well as being able to increase the GDP of a country.

What do you think?

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