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What are the pros and cons of monopolies? Show more Show less

The word monopolies has negative connotations in economic history, but recently monopolies have been praised by people such as Warren Buffett and Peter Thiel. The arguments for and against are not new, but now they have better empirical support.

Monopolies are damaging to economies Show more Show less

Monopolies choke economies: competition is central to a healthy economic system
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Monopolies lead to higher prices

With no consumer choice, companies have pricing power. Consumers have no choice but to buy from the company who has a monopoly because they have no other options. Because of this, the company with a monopoly can set prices as high as they want, since they do not need to compete with other company's products to win consumers over.
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Context

The Argument

Monopolies are damaging to economies because they lead to higher prices. Monopolies are the only (or dominant) provider of a good or service, meaning that there is little to no competition in the market.[1] This gives the monopoly a competitive advantage because they hold most of the power. Monopolies lead to higher prices because, without competition, a monopoly can set its own prices.[2] This is known as ‘price-fixing’ and it is a tool used by monopolies to maintain their profit margins by exploiting its power over the market and the consumer. In a monopoly, the absence of competition means that the consumers have no options other than the monopoly. Monopolies, therefore, retain the power to charge what they want because they know that the consumer has no other option but to pay the price charged by the monopoly. Monopolies are especially able to fix prices for products that people need, like gasoline.[1] As sole producers in a market full of consumers, monopolies hold control oversupply of the resource and use this to control prices. When demand is high they can limit supply output, making the resource more scarce and more valuable, thus driving up the price. This is done by profit-maximizing monopolies. A monopoly can decrease production in order to charge a higher price, which people will continue to pay because they are provided with no other alternatives. [3] The monopoly’s control over the market constrains consumer choice and givers them the power to control the prices of goods and services. Doing so allows them to maximize profits by exploiting the market. With no alternative option, consumers must buy into the monopoly at the price they set. In a competitive market, competition ensures that producers offer lower prices to attract consumers. In a monopolized market, there is no competition and consumers have just one choice, one price point, and no alternatives.

Counter arguments

Monopolies are not all one and the same, and although there is the potential for price inflation, the opposite is also possible. The principle of ‘economies of scale’ points out that monopolies in certain industries can actually keep prices down.[4] In industries that have high fixed costs, like railways or gas networks, having just one key player in the market keeps costs low and maximizes efficiency. This is because, with just one industry in the market, that industry is able to pool its profits from the entire consumer base, which is larger than average, and use its large profits to pay the high fixed costs. Their monopoly allows the high fixed cost to be shared among many more people, thus lowering the cost overall to each individual. If, for example, there were multiple parties building and operating rail networks across the country, each consumer would have to pay more because there are fewer people using the service which is expensive to install, maintain and operate. Fewer users drive up the costs to each customer.

Framing

Premises

[P1] Monopolies dominate their markets and have little to no competition. [P2] Monopolies limit consumer choice. [P3] Without competing alternatives, consumers have to keep buying into/use the monopoly's product. [P4] Monopolies lack competitors which would drive down the market price, giving monopolies has freedom and power overpricing. [P5] Monopolies can exploit the lack of competition to keep prices high to maximise their profits.

Rejecting the premises

[Rejecting P4] Industries with a high fixed cost are able to keep consumer prices low with monopolies.

Proponents

Further Reading

References

  1. https://www.thebalance.com/monopoly-4-reasons-it-s-bad-and-its-history-3305945#4-reasons-why-theyre-bad-for-an-economy
  2. https://www.thebalance.com/price-fixing-types-examples-why-it-s-illegal-3305955
  3. https://courses.lumenlearning.com/boundless-economics/chapter/monopoly-production-and-pricing-decisions-and-profit-outcome/
  4. https://www.economicshelp.org/blog/265/economics/are-monopolies-always-bad/#:~:text=Disadvantages%20of%20monopolies,prices%20%E2%80%93%20giving%20consumers%20no%20alternative.

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This page was last edited on Wednesday, 24 Jun 2020 at 20:14 UTC