![]() Some large monopolies have successful management to avoid the inertia possible in large monopolies. However, this may have been partly monopoly power but also the lack of incentives for a nationalised firm. British Rail was noted for poor sandwich selection and some inefficiencies in running the network. Some former nationalised monopolies had inefficiencies, e.g. It depends on the ownership structure.This threat of entry will create an incentive to be efficient and keep prices low. A contestable monopoly will face the threat of entry. It depends whether market is contestable.For example, Google has monopoly power on search engines – but can we say Google is an inefficient firm who don’t seek to innovate?Įvaluation of pros and cons of monopolies Firms may gain monopoly power by being better than their rivals. Firms with monopoly power may be the most efficient and dynamic.It also gives drug companies an incentive to push pharmaceutical treatments rather than much cheaper solutions to promoting good health and avoiding the poor health in the first place. However, this can also have downsides with drug companies able to charge excessively high prices for life-saving drugs.For example, large tech monopolies, such as Google and Apple have invested significantly in new technological developments. Also, monopolies make supernormal profit and this supernormal profit can be used to fund investment which leads to improved technology and dynamic efficiency. The monopoly power of patent provides an incentive for firms to develop new technology and knowledge, that can benefit society. Without patents and monopoly power, drug companies would be unwilling to invest so much in drug research. Note these economies of scale can easily outweigh productive and allocative inefficiency because they are a greater magnitude. ![]() The large-scale infrastructure makes it more efficient to just have one firm – a monopoly. For example, it would make no sense to have many small companies providing tap water because these small firms would be duplicating investment and infrastructure. This is particularly important for firms operating in a natural monopoly (e.g. In an industry with high fixed costs, a single firm can gain lower long-run average costs – through exploiting economies of scale. Monopolies lead to deadweight welfare loss of blue triangle.Monopolies produce at Qm (which is productive inefficient – not the lowest point on AC curve).Monopolies set the price of Pm – which is higher than Pc (allocative inefficiency).A monopoly produces less (Qm) and charges higher price (Pm).But, in the Twenty-First Century, there are new monopolies which have an increasing influence on people’s lives.įor more detail see: Disadvantages of Monopoly Monopoly DiagramĪ competitive market produces at Qc and Pc This led to a backlash against monopolists. In the late nineteenth-century, large monopolist like Standard Oil gained a notorious reputation for abusing their power and forcing rivals out of business. There is a growing concern over the influence of Facebook, Google and Twitter because they influence the diffusion of information in society. 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.A monopoly may also have the power to pay lower wages to its workers. For example, farmers have complained about the monopsony power of large supermarkets – which means they receive a very low price for products. Monopolies often have monopsony power in paying a lower price to suppliers.A big firm may become inefficient because it is harder to coordinate and communicate in a big firm. ![]() With no competition, a monopoly can make profit without much effort, therefore it can encourage x-inefficiency (organisational slack)
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