Under monopolistic market structure, one seller dictates the conditions and prices. It means that the demand curve of the company is equal to the demand of the whole industry (Monopoly, n. d.). There are different types of monopolies. For instance, pure monopoly occupies the biggest market share. Any company that has more than 25% of share in the market may be categorized as a monopolistic entity (Monopoly, n. d.). This type of firm is prohibited by law in many countries. There is also a natural type of monopoly, which essentially means that the industry is characterized by high fixed costs (Monopoly, n. d.). It is extremely easy to find natural monopoly in the modern markets, as it includes oil and gas companies, telecommunications, electricity, postal services, etc. Even though monopoly may not be allowed by some states legally, natural monopolies still have a list of advantages. This paper will explore the positive side of monopolies and make relevant conclusions about their relevance in the modern economy.
First of all, monopolies can emerge not only because of high fixed costs, but also after a thorough and effective market strategy. It may happen that after a fierce competition, only one company stays in the market and enjoys the large market share. It essentially means that the firm has reached economies of scale, and it can offer high yield and low prices (Carare, 2011). Long term marginal costs of such producer are low (Carare, 2011) and thus he/she creates an artificial barrier to entry for new entrants in the form of economies of scale. The main idea behind economies of scale is decreasing marginal cost of production of each new offering (see Fig 1).
Secondly, since monopolies are large enterprises who have reached economies of scale, their production costs are marginally decreasing (Ison & Wall, 2007, p. 108). Thus, they are in a position to allocate more resource and capital towards research and development (Carare, 2011). As a result, such firms make use of technological advancements, produce more goods, deploy more efficient production methods and can offer incomparable quality (Carare, 2011).
Thirdly, such large monopolistic firms as Microsoft are investing generously in innovation (Carare, 2011). Even though it is often argued that monopolies prevent the industries or sectors from expanding as fast as they would under perfect competition, large players are able to benefit the community more (Ison & Wall, 2007, p. 137). Usually, monopolies would protect their innovative techniques with the help of patents thus preventing new rivals from copying their developments (Carare, 2011).
Fourthly, from my own experience, what concerns electricity or gas, natural monopolies in these cases are the only solutions available to the consumers (Carare, 2011). Therefore, the advantage of a natural monopoly is the fact that it makes otherwise expensive produce available to buyers. Small competitive firms would not be able to invest as much in the infrastructure and maintenance of water, gas or electricity supply as large monopolistic players.
Moreover, monopolies or quasi-monopolies should not be subject to criticism on the basis of prices they offer, because the investments they had to undergo usually justify the price they offer to consumers (Swedish Competition Authority, 2007, p. 9). If there is excessive or anti-competitive price in the market, a sector regulator will inevitable intervene and solve the issue (Swedish Competition Authority, 2007, p. 9). Therefore, another advantage of a natural monopoly is the fact that it is regulated by the sector and it is thus in no position to exploit its buyers.
Among other economic advantages of monopolies, it is important to mention lowest prices possible. Paradoxically, a monopolistic company can offer lower prices than a competitive structure, because monopolists usually purchase their factors of production from one supplier in large quantities. It is not possible to achieve economies of scale under competition to the same extent as under a monopolistic structure (Ison & Wall, 2007, p. 137). Thus, a monopoly has much bargaining power in the market. Referring back to fig. 1, when purchasing more from its suppliers, a monopoly gets a lower price, and thus it is able to offer consumers lower prices as well as better quality.
Lastly, Baumol & Blinder (2009, p. 220) state that a natural monopoly is a structure which can reach a level of production where it spends less on production than individual competitive firms would. For an average buyer like me, it is a great opportunity to enjoy low prices. What is more, additional cash will be spent by monopolies for new products, which means that differentiation will be present in the monopolistic market as well as in the competitive one. In the case of monopoly, it will rather be driven by innovation and availability of capital, and not by the necessity to survive in the market, as in the case with perfect competition.
All things considered, modern market structure demonstrates clear preference towards competitive rather than monopolistic system. Many critics are against monopolies, because they have an ability to control market prices and buyers’ preferences. However, many of them fail to acknowledge that in some cases monopolies can offer even better conditions and prices than individual competitive entities. What is more, monopolies are an inevitable part of consumers’ lives, because sometimes there is just no choice. Thus, it may be argued that under the correct regulation, monopolies can benefit communities financially and technologically.
References
Carare, P. M. (2011). Monopoly: Advantages and disadvantages. Iasi: Alexandru Ioan Cuza University.
Baumol, W., J., & Blinder, A. S. (2009). Economics: Principles and policy (11th ed.). Mason, OH: South-Western/Cengage Learning.
Ison, S., & Wall, S. (2007). Economics (4th ed.). Harlow, Essex: Pearson Education Limited.
Monopoly. (n. d.). What Is Economics? Retrieved on April 1, 2016, from http://www.whatiseconomics.org/microeconomics/monopoly
Swedish Competition Authority. (2007). The pros and cons of high prices. Kalmar: Lenanders Grafiska.
