Are monopolies always bad?

Micro Project

Group 4
UEH-International School of Business
Principles of Economics-T322PWB-2
Dr. Nguyen Thi Hoang Anh
Oct 30, 2022
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Definition
Monopoly is an economic term for a situation in which a market has only one seller produces that product for
the buyer without any other choice between them. It is one of the forms of market failure, which is an extreme
case of an uncompetitive market. Although in practice it is almost impossible to find a case that perfectly meets
the two criteria of monopoly due to lack of competition. that pure monopoly can be considered non-existent,
but non-pure forms of monopoly all lead to the ineffectiveness of social benefits. Monopoly is classified
according to many criteria: degree of monopoly, cause of monopoly, and structure of monopoly.
Types of monopoly
Simple monopoly: a situation where the monopolists charge a single price to all the customers. Things like
sugar, corn, and wheat, … generally have the same price among sellers.
Discriminatory Monopoly: the monopolists charge different prices to a different groups of customers. We can
often see price discrimination in the airline industry.
Legal monopoly: refers to a company that is operating as a monopoly under a government mandate. A legal
monopoly offers a specific product or service at a regulated price. It can either be independently run and
government-regulated, or both government-run and government-regulated. A legal monopoly is also known as
a "statutory monopoly". A clear example of this is AT&T (USA) operated as a legal monopoly until 1982 due
to its low price and availability for everyone. In 1982, it broke down into seven regional operating companies
called “Baby Bells'' (Historyfactory, 2022).
Natural monopoly: A natural monopoly exists in a particular market if a single firm can serve that market at a
lower cost than any combination of two or more firms. A natural monopoly arises out of the properties of
productive technology, often in association with market demand, usually having patents or extensive research,
and development costs, and not from the activities of governments or rivals. Some examples of this are utility
companies such as Pacific Gas & Electric (USA), Enel SpA (Rome), and pharmaceutical companies like
Johnson & Johnson (USA).
Unlike a legal monopoly, a natural monopoly’s entry barrier is not related to the legal factor.
Unnatural monopoly: Unnatural monopolies are a combination of natural and state monopolies. They are
natural monopolies in the traditional sense but are enforced by the state. Patents are a clear example of an
unnatural monopoly. (Artificial monopoly within a period). AT&T Patent Monopoly from 1876 to 1894 is a
good example of an unnatural monopoly being needed within a period. (Cato Journal, Vol. 14, No. 2, 1994)
Public monopoly (State monopoly): form when the government has full ownership of a product, business, and
service. State monopolies exist to encourage fair pricing strategies and conditions in sectors that supply
necessary services, like utilities. The state creates specific standards these services follow to benefit the
customers (Indeed, 2021). The monopoly is allowed and heavily regulated by government municipalities and
rates and rate increases are controlled. A good example of public monopolies is the US Postal Service or
Veikkaus, a Finnish government-owned betting agency, which has ready to dissolve its monopoly state because
it is losing its market power, approximately 5 percent compared to the corresponding period in 2021. (Finnish
Gambling Company Veikkaus Wants to Dissolve Its Monopoly, 2022).
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Pure monopoly: a market structure where a certain product is produced or sold by a single company, occurring
when no competitors or substitute products exist in the market. Pure monopolies are very rare in real life.
Microsoft used to be a pure monopoly in operating system brands until the case in 1999 when Judge Thomas
Penfield Jackson found Microsoft to have monopoly power in the market (Thurrott, 2019).

Are monopolies good?

Sometimes, monopolies bring various positive effects that are beneficial to the economy. For example, a
government may sanction or take partial ownership of a single supplier for a commodity to keep costs to
consumers to a necessary minimum. Taking such actions is in the public interest if the good in question is
relatively inelastic or necessary, that is, without substitutes. These are called legal monopolies and natural
monopolies. We can see the good side of monopolies in the utility industry with companies like Nextera Energy
(USA) and Adani Total Gas (India) where the entry cost is enormous. Once the generators and cables’ cost
problems are paid off, each additional unit of electricity costs very little; the more units sold, the more the fixed
costs can be spread, creating a reasonable price for the consumers. These natural monopolies create a stability
of price due to few to no competitors and it is usually regulated by the government. They also lead to large
economies of scale by mass producing electricity and water at lower cost per unit and it ensures a consistent
supply of a commodity that is too expensive to provide in a competitive market. With lowered costs, they also
have the budget to develop new technology to increase their efficiency to produce more units.
A country has to face international competitiveness and a monopoly is needed. A domestic firm may have
monopoly power in the domestic country but face effective competition in global markets. E.g. British Steel has
a domestic monopoly but faces competition globally. With markets increasingly globalized, it may be necessary
for a firm to have a domestic monopoly to be competitive internationally. (Pettinger, 2019)
Monopolies can be successful firms. A firm may become a monopoly by being efficient and dynamic. A
monopoly is thus a sign of success, not inefficiency. For example – Google has gained monopoly power by
being regarded as the best firm for search engines. Apple has a degree of monopoly power through successful
innovation and is regarded as the best producer of digital goods. (Pettinger, 2019b)
With monopolies, we can subsidize loss-making services. Another potential advantage of a monopoly is that it
can use its supernormal profit to subsidize socially useful but loss-making services. For example, a train
company can use its monopoly power to set high prices on peak services, but this allows the firm to subsidize
unprofitable late-running services on Saturday night, which is useful for people going out for the night.
the assurance of a consistent supply of a commodity that is too expensive to provide in a competitive market.
Monopolies over a particular commodity, market, or aspect of production are considered good or economically
advisable in cases where free-market competition would be economically inefficient, the price to consumers
should be regulated, or high risk and high entry costs inhibit initial investment in a necessary sector.
The last good side of monopolies is avoiding the duplication of services. In some areas, the most efficient
number of firms is one. For example, if a city deregulates its bus travel, then rival bus companies may compete
for profitable peak-hour services. This may lead to increased congestion as several buses turn up at once. It is
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more efficient to have a monopoly and avoid this inefficient duplication of services. Such large corporations
like Reading, Pennsylvania, B&O, and Short Line can use their power to do so.
Why are monopolies problematic?
Monopolies are generally considered to be bad for consumers and the economy. When markets are dominated
by a small number of big players, there’s a danger that these players can abuse their power to increase prices to
customers. Since they can set any prices they want, they will raise costs for consumers to increase profit. This is
called cost-push inflation. The Organization of Petroleum Exporting Countries (OPEC) is a good example of
how this works. The 13 oil-exporting countries in OPEC are home to nearly 80% of the world's proven oil
reserves, and they have considerable power to raise or reduce oil prices. (OPEC : OPEC Share of World Crude
Oil Reserves, n.d.)
This excessive market power can also lead to less innovation to design a better product, losses in quality, and
higher inflation. Monopolies lose any incentive to innovate or provide "new and improved" products, and have
fewer incentives to be efficient. With no competition, a monopoly can make a profit without much effort,
therefore it can encourage x-inefficiency (organizational slack). A 2017 study by the National Bureau of
Economic Research found that U.S. businesses have invested less than expected since 2000 in part due to a
decline in competition. (Gutiérrez and Philippon) That was true of cable companies until satellite dishes and
online streaming services disrupted their hold on the market.
In a monopoly, a single supplier controls the entire supply of a product. This creates a rigid demand curve. That
is, demand for the product remains relatively stable no matter how high (or low) its price goes. Supply can be
restricted to keep prices high. This leads to underprovision or scarcity. Thus, according to general equilibrium
economics, a monopoly can cause deadweight loss, which is not good for the economy.
Since monopolies are loan providers, they can set any price they choose. That's called price-fixing. They can do
this regardless of demand because they know consumers have no choice. It's especially true when there is
inelastic demand for goods and services. That's when people don't have a lot of flexibility about the price at
which they will purchase the product. This will create a decline in consumer surplus. Consumers pay higher
prices and fewer consumers can afford to buy. This also leads to allocative inefficiency because the price is
greater than the marginal cost. For example, in the 1980s, Microsoft had a monopoly on PC software and
charged a high price for Microsoft Office. (Pettinger, 2021)
Possible diseconomies of scale. A big firm may become inefficient because it is harder to coordinate and
communicate in a big firm, mostly due to its hierarchical line often being long and complex.
Monopolies often have monopsony power in paying a lower price to suppliers. For example, farmers have
complained about the monopsony power of supermarkets – which means they receive a very low price for
products. A monopoly may also have the power to pay lower wages to its workers.
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. There is a growing
concern over the influence of Facebook, Google, and Twitter because they influence the diffusion of
information in society.
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Conclusion
In reality, monopolies are always said to be bad for both the economy and consumers because it creates higher
inflation, market power abuse, and deadweight loss. But we have concluded that monopolies do have positive
effects on the economy too like monopolies over a particular commodity, market, or aspect of production are
considered good or economically advisable in cases where free-market competition would be economically
inefficient, the price to consumers should be regulated, or high risk and high entry costs inhibit initial
investment in a necessary sector. These are the reasons why we think that everything has two sides and it
balances each other in their way. Microsoft is surely a dominant company in the operating system with a 76
percent market share (Statista, 2022) but it is the foundation of the desktop operating system, pushing other
companies such as Apple’s Mac or Linux to innovate their systems as they have partnered with Microsoft.
Are monopolies always bad? 6

Reference List
Finnish gambling company Veikkaus wants to dissolve its monopoly. (2022, September 2). Mynewsdesk.
https://www.mynewsdesk.com/bonusetu/pressreleases/finnish-gambling-company-veikkaus-wants-to-dissolve-
its-monopoly-3201712?utm_source=rss

Grabel, S. (2022, January 24). This Month in Business History: The Breakup of the Bell System. History
Factory. https://www.historyfactory.com/insights/this-month-in-business-history-bell-system/

Germán Gutiérrez & Thomas Philippon, 2017. "Declining Competition and Investment in the U.S," NBER
Working Papers 23583, National Bureau of Economic Research, Inc.
https://ideas.repec.org/p/nbr/nberwo/23583.html

OPEC : OPEC Share of World Crude Oil Reserves. (n.d.). Retrieved October 30, 2022, from
https://www.opec.org/opec_web/en/data_graphs/330.htm

Pettinger, T. (2019b, November 28). Advantages of monopoly. Economics Help.

https://www.economicshelp.org/microessays/markets/advantages-monopoly/

Pettinger, T. (2021, September 23). Advantages and disadvantages of monopolies. Economics Help.
https://www.economicshelp.org/blog/265/economics/are-monopolies-always-bad/

Statista. (2022, July 27). Operating systems market share of desktop PCs 2013-2022, by month.
https://www.statista.com/statistics/218089/global-market-share-of-windows-7/

Thierer, A. (n.d.). UNNATURAL MONOPOLY: CRITICAL MOMENTS IN THE DEVELOPMENT OF THE

BELL SYSTEM MONOPOLY. https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/1994/11/
cj14n2-6.pdf

Thurrott, P. (2019, January 23). Findings of fact: Microsoft is a monopoly that hurts competition and
consumers. ITPro Today: IT News, How-Tos, Trends, Case Studies, Career Tips, More.
https://www.itprotoday.com/windows-78/findings-fact-microsoft-monopoly-hurts-competition-and-consumers
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