Advantages and Disadvantages of a Monopoly - Term Paper Example

Advantages and Disadvantages of monopolies Table of Contents Introduction …………………………………………………………………………………… 3 Characteristics of a monopoly ………………………………………………………………... 3 Advantages of a monopoly …………………………………………………………………… 4 Disadvantages of a monopoly.……………………………………………………………....… 6 Conclusions …………………………………………………………………………………… 9 References ……………………………………………………………………………………. 10 Introduction Market structures are depicts difference in conditions or characteristics of a given market, which interrelate to determine the degree of profitability and competition in a given market in the economy (Tragakes, 2011). Different market structures resulting from different market characteristics include monopoly, oligopoly, perfect information, and monopolistic market. This study aims at analyzing the advantages and disadvantages of monopolies as a form of market structure in the economy. This aim will be achieved through a brief analysis of the characteristics of a monopoly, arguments for advantages, arguments for the disadvantages, followed by a conclusion. Characteristics of a monopoly The characteristics of a monopoly include the presence of one seller and many buyers in the market, resulting in the seller having total market power on quantity and price. In a monopoly market structure, there are no close substitutes for the good or service supplied by the monopoly resulting in consumers having to purchase at the set price by the monopoly, and lack of perfect information for the consumers (Tragakes, 2011). The other characteristic of a monopoly is presence of high entry barriers caused by factors including high capital requirement, natural causes, and ownership of production resources by the firm. Microsoft ownership of the windows operating system brand is an example when monopoly results from the ownership of a scarce resource in the economy. The other reasons for the high entry barriers in a monopoly include Government Issue of one license and ownership of patent rights for production. The other characteristics in a monopoly market face inelastic price elasticity of demand owing to lack of substitutes and consumers have to purchase at prices set by the monopoly allowing for abnormal profits (Tragakes, 2011). Monopoly, therefore, produces low quantity and sells at a high price. Examples of monopoly include Feet-First Pharmaceutical and power supply firm in a country where there is only one operating license provided by the government. Royal Mail Group was until 2006, a monopoly for the presence of only one operating license but was opened for competition to ensure efficiency in service delivery (Samuelson & Stephen, 2012). Advantages of a monopoly Monopolies have certain advantages in the economy owing to the characteristics of the market they operate. The advantages include stability of the monopoly in terms of changes in economic terms such as a recession. A monopoly consists of one large firm that supplies a product to the entire market owing to high resource amounts and ability to charge high prices generating more revenue compared to firms operating in other market structures (Samuelson & Stephen, 2012). A monopoly can be able to withstand changes in economic conditions when there is a recession. Ability to withstand changes in the economic conditions allows the consumers to have a guarantee of supplies regardless of the economic condition. One of the characteristics of a monopoly is where a market consists of one supplier and many buyers. This results in the lack of a need for wasteful duplication of certain activities that have to be carried out by each firm when the suppliers are more than one. One of the main activities is research and development that is carried out only by one firm supplying the whole market in a monopoly. This results in economic saving of funds that could be used by other firms to improve products, in other market structures. Monopoly charge high prices compared to perfect competitive markets, monopolistic, and oligopolistic markets because of total market power on quantity and pricing decisions. These high prices result in the generation of revenue for investment in research and development that aid in augmenting product quality and service delivery to the consumers. Research and development resulting in high product quality offered by a monopoly will result in the consumers purchasing a product that is of higher quality and ensure they are more satisfied compared to a firm operating in perfect, monopolistic, and oligopolistic market. The other advantage evident in a monopoly is the domination of a monopoly in a given domestic market allows the firm to have a competitive advantage when it increases operations to regional and international levels (Samuelson & Stephen, 2012). International competitiveness will allow the firm to generate export revenues for the country of origin well exemplified by British Steels. A monopoly consists of a large firm operating in the whole market. This characteristic allows the monopoly to enjoy large economies of scale resulting in lower costs of production. Economies of scale in production allows a monopoly to generate high profits that will allow for increased investment, better service delivery to the consumers, improved products, and at times lower prices (Campbell & Craig, 2005). Capital utilization increases in a monopoly when one firm produces a product that requires large capital outlays in its production depicting the other advantage of a monopoly. For example, electricity generation may require large capital outlays and its production by more than one firm may result in underutilization of capital when one fact can use less capital and supply electricity to the whole market. The result is better capital utilization and ability of the consumers to receive other services from the capital transferred for the production of other goods and services. A monopoly has the characteristic of total market power in terms of price and quantity allowing the monopoly to charge different prices to different market segments. This price discrimination allows consumers having low income to access the products at much lower prices depending on the price elasticity of demand (Samuelson & Stephen, 2012). Price discrimination allows the monopoly to gain a high market share owing to the understanding of the needs of the consumers and charging them prices they are comfortable with depending on their price elasticity of demand. An example is Indian railways, which gives discounts to students traveling through the network as a measure of ensuring the needs of the students are met. Monopoly can also result from the firm being the best in what it does despite there being other firms in the market. A good example is Google that has gained monopoly power as a search engine from the best services customers get from Google as a search engine. Apple is also the other company that has a degree of monopoly power owing to the innovativeness attributed to the visionary leadership of Former CEO Steve Jobs. A monopoly can have the advantage of being dynamic and efficient, hence the success in the market from the evidence of Apple and Google in their respective markets and product delivery. Disadvantages of a monopoly A monopoly is characterized by being sole supplier in the whole market, thereby, having no competition. This results in the lack of incentive for the reduction in prices for high and a provision of high quality for the clients to have better satisfaction in the products offered by the monopoly. A disadvantage arising from lack of competition is charging consumers high prices while producing low-quality goods and services are delivered. The consumers have low utility, as they do not receive value for their money compared to monopolistic, perfect competition, and oligopoly market structures. Another disadvantage of monopoly competition is consumers may have to pay very exorbitant prices especially when the goods and services offered by a monopoly are a necessity. An example of the goods that consumers would have no choice but to purchase from the monopoly at very high prices includes electricity, telecommunications, and gas. Lack of competition results in the monopoly being inefficient and to cover up for the loss of efficiency a monopoly may increases prices to the consumers (Samuelson & Stephen, 2012). A monopoly inefficiency results in increased cost of production, which is passed on to the consumer in terms of higher prices and in the long run the consumer pays higher prices owing to inefficiency showing another monopoly disadvantage to the consumer. The result is the wastage of resources by a monopoly when there is inefficiency in production cycles. Wastage reduces the ability of the economy to meet growth demands and meet the needs of the consumers. Another disadvantage of monopoly is the restriction of the production potential. The reason is the fact that a monopoly produces less quantity and charges higher prices compared to the production in other market structures (Tragakes, 2011). The monopoly does not use the full capacity of the production facilities resulting in wastage of resources and the inability of the economy to meet growth needs for lack of full utilization of the resources. Monopoly production remains at the same level and owing to the access of high profits, and monopoly does not pursue more clients as such does not result in use of capacity to increase production. Monopoly result in an unfair distribution of wealth owing to high prices paid by both the rich and the poor in meeting the price set by a monopoly. The rich spent a small amount of their income while the poor spend high amount of their income on the purchase of monopoly’s products. The poor will have less income and wealth while the rich will have much of their income left after consumption depicting income wealth distribution in the economy. Unequal distribution of income results from charging consumers high prices and the resulting profits distributed to the shareholders of the monopoly. This results in taking much-needed income from low-income households and distributing them as dividends to owners of a monopoly showing they have high-income depicting unequal income distribution. Monopoly also has the disadvantage of low employee remuneration and other acts of discrimination against the employees. The reason is that the monopoly controls of supply in the entire market making the employees accept low payments for lack of other employment opportunities. The reason for this acceptance of low pay can also be the dominance of the monopoly of the entire industry. A monopoly has another disadvantage of resulting in a reduction in consumer surplus and deadweight loss owing to high prices and low quantity produced. This reduction in consumer surplus and deadweight loss because of monopoly operation in the economy results in loss of economic welfare. In a monopoly, consumers lack sovereignty because the decisions are made by the monopoly in terms of prices and quantity to produce. The consumers have no decision-making power and have to accept the decision made by the monopoly especially on pricing for lack of close substitutes. Another disadvantage of a monopoly poor level of service owing to the lack of initiative by the supplier since there is a lack of competition to offer better service delivery. This lack of competition results in low quality provision by the monopoly and it may result in production of outdated goods and services for lack of an incentive to invest in information and technology to outdo the competition in terms of latest products and services. A monopoly produces less output into the market affecting the consumers who have to spend more money to get the good following the law of supply and demand, where when supply is low and demand is high, prices will definitely rise. Monopoly reduces the choice of consumers compared to other market structures that have differentiated and close substitutes to which the consumer can make the best choice. A monopoly produces the same good and offers to consumers either at the same price or at differentiated prices depending on their price elasticity f demand. Consumers in the case of a monopoly have no choice but purchase the product (Samuelson & Stephen, 2012). Conclusions From the analysis, a monopoly has certain characteristics that confer to it advantages and relay disadvantages. The main characteristics of a monopoly include single seller and many buyers, high entry barriers, no close substitutes, lack of perfect information to consumers, and total market power on quantity and price determination. It is evident that the characteristics of a monopoly confer it some advantages including stability in recession times, lack of wasteful duplication of activities like research and development, and high revenue for investment in R & D. Other advantages of a monopoly are better capital utilization, international market competitiveness, and efficient and dynamic product delivery. However, a monopoly has some disadvantages including charging high product prices for low quality, lack of consumer sovereignty, inefficiency in production, and low employee remuneration. Other disadvantages of a monopoly include loss of economic welfare, poor service, and price discrimination, restriction of supply, unfair income distribution, and restriction of production potential. It is evident that a monopoly has more disadvantages than advantages in an economy, and competitive pressures especially from globalization, research, and technology development eventually reduce monopoly power and the market structure is changed to oligopoly, perfect competition, or monopolistic competition. A change in market structure to oligopoly, perfect competition, or monopolistic competition results in better economic benefits than in the case of a monopoly. References Campbell, D. J., & Craig, T. (2005). Organisations and the business environment. Amsterdam: Elsevier Butterworth-Heinemann. Samuelson, W. & Stephen, M. (2012). Managerial Economics. Hoboken, NJ: John Wiley and Sons. Tragakes, E. (2011). Economics for the IB Diploma. Cambridge: Cambridge University Press. Read More