Can Monopolies Be Beneficial To Consumers?
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Keywords: definition of monopoly, monopolies pros and cons, effect of monopoloy
Natural monopolies are a main type of monopoly. Natural monopolies may arise because a service may have high fixed cost attached with it is not profitable for a second firm to enter. It can also arise due to supply of geographical area. For example, the supply of diamond in the western's world is mainly controlled by South Africa and in Trinidad and Tobago, WASA.
Advantages of Monopolies
There are ways consumers benefit from monopolies. Some are indicated by Hosein and Stanlake:
Monopolies are usually large dominant firms which allows them to achieve economies of scale as compare to small firms. Therefore, monopolies are able to produce at low costs which subsequently could be lower prices for consumers.
In some industries, such as water and electricity, if there is competition it would lead to duplication of capital equipment. Also, in those industries the fixed costs are high so costs that it has to spread over a large geographical area. If there is competition, most consumers would not be able to pay for such services. Therefore, consumers benefit from low prices.
Monopolies usually achieve supernormal profits.
This shows that their average cost are lower than their average revenue. Hence, supernormal profits are obtained. Supernormal profits may be used in research and development which would help create more technological advanced products and in the long run would benefit the consumers.
Disadvantages of Monopolies
Although consumers may benefit from monopolistic firms, sometimes monopolies may abuse their power and exploit consumers. Some disadvantages of monopolies identified by Pearly are:
Monopolies have control over the entire market and may sell at higher prices by restrict supply of some goods and services which has an inelastic demand. This results in increase prices of products and services. This therefore takes advantage of the consumer.
Products tend to be standardized and mass produced in monopolistic competition which limits the choice of consumers. This limits the freedom of consumers since they can only buy goods and services available to them. Whereas if there was competition, there would have been variety of goods and services offered by competing firms.
There are so many barriers restricting competition.This encourages inefficiency in monopolies since there are no incentives for them. Since there is no competition, monopolies do not produce at minimum cost. If there were competition, firms try to keep cost down and improve quality of product which would benefit the customer. Therefore, monopolies are less efficient than firms where there is competition.
This shows that monopolies restrict output and raise prices so the monopolist takes advantage of society. Monopoly is an inefficient structure because it passes cost to consumers. It is both allocatively and productively inefficient. It results in a loss to welfare of the society.
In monopolistic competition, there is price discrimination. Price discrimination can be described as the sale of the same product or services but are charged differently according to customer. For example, electricity rate for commercial use are higher than domestic use. Consumers whose demand is inelastic would pay a higher price. Therefore, consumers are exploited.
Policy Prevention of Monopolies
Government intervention is needed to prevent monopolies from taking advantage of consumers. Therefore, they develop policies to deal with these problems. In the United States, there are many policies to counteract the monopolies from abusing consumers. Some of the policies which they use are:
By trying to create more competition in monopolized industry - For example, if Sprite and Coca Cola wanted to merge, it would be closely examine to determine if it would make the industry in the US less competitive and if it would cause any reduction in the economic welfare of the country. If it would, it would be placed in court by Department of Justice and if the judge agrees they would not be able to merge. They promote competition via Anti trust Laws. It allows government to prevent mergers, break up firms and preventing companies from activities that can make the industry less competitive.
By regulating monopolies - government may choose to allow monopolies to continue but prevent it from abusing their power and acting against the public interest. In cases of natural monopolies, government regulates their prices. They are not allowed to set their prices. For example, utilities such as water and electricity. Government determines rates of these services. Therefore, government would prevent consumers from being abused.
To take over monopolies - For example, the postal service in the United States. The government may take over a monopoly in order to benefit the country. Government took over many monopolies with their objective being to control the monopolies power.
To prohibit monopolies - The government may choose to ban the formation of monopolies.
These views are supported by Beardshaw (1998).
In conclusion, monopolies have a considerable amount of power. This power can benefit the consumer but in most cases abuse consumers. Therefore, the government formulates policies to prevent consumer from the abuse by monopolies. There are policies such as creating more competition in monopolized industry, by regulating industry, take over monopolies, and preventing the formation of monopolies.
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