Stigler (2010) defines a monopoly as a market structure in which there is only one seller or producer for a particular product or products. In other terms, there is a single business in whole the industry. There are restrictions in entry to such markets mainly due to high costs incurred in setting them up. However there are still other hindrances that may take the shape of political, economical or social nature. For instance, in many countries governments have created monopolies over the industries they want to control, for example power (electricity) and oil industry. Additionally, barriers against entry into such industries is that in most cases only one firm has the absolute rights to access, exploit or utilize given natural resources. Good examples of monopolies are in France and Saudi Arabia where the governments have sole control over nuclear power and oil industries respectively. Lastly a monopoly can also emerge where a particular company has a patent or copyright preventing other firms to enter the market. An example of a company that had patent is Pfizer, on Viagra.
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In a market structure of monopolistic nature, there are many advantages and disadvantages that arise. This could affect both the company and the consumers of the products produced by those particular companies. To begin with, here is a focus on the advantages that monopolies bring along:
Due to monopolies often operating on large scale they can enjoy economies of scale. For economies of scale to occur, there must be an increase in output and decrease in unit costs. This is the case in most monopolies. The reductions in costs will result to reductions in operation costs hence increasing profits for the monopolistic firms (Stigler, 2010).
Schumpeter (1994) explains that in monopoly, the fluctuation in prices can be controlled. Due to government control, the annual prices increases can easily be regulated. This is a strategy that is aimed at protecting consumers against exploitation from producer who may want to take advantage of being the only ones in the market. There will be enhanced price stability that additionally helps to prevent harmful practices such a hoarding that may result due anticipation of price increases. A firm operating as a domestic monopoly, if open to international competition, will be exposed to limited market power hence lowering the prices of their products.
They encourage research and development. Monopolies often make large profits. Part of this can be used to further research in the same line of production hence improving the company’s operations and better service provision to consumers (Shott, 1950). They have better resources that can be used to bring new techniques and products to reinforce their positions. The expenditure in innovation and invention could result to efficiency benefits in the market.
On the other hand, the first disadvantage of monopoly is that it can lead to reduced consumer surplus and increased producer surplus. This is a consequence of monopolies producing at a lower output with higher prices as compared to producers in competitive market. They end up earning supernormal profits at the expense of allocative effectiveness.
There is increased inefficiency. Due to lack of competition from other firms, it is argued that the monopolies tend to relax and as a result become less efficient in both their production and service provision to consumers (Schumpeter, 1994). Moreover, consumers lack choice in the market and the monopolies often fail to respond to their demands. This factor of lack of consumer choices is aggravated by the fact that monopolies drive other firms away.
Lastly monopolies have been largely viewed as a one form of market failure. They fail to effectively allocate resources as would have been the case in perfect competition. Inefficiency is witnessed where there is a reduction in consumer surplus.
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