Among the four competitive market structures, monopoly occupies the other end of the competition spectrum, in stark contrast with the structure and behavior of industries under perfectly competitive conditions. Monopoly is typically characterized by high industry concentration where there are many buyers but with only one seller, very high barriers to entry and exit, and bounded rationality in the face of absence of perfect or sufficient knowledge. The strongest argument against monopolies may have been voiced by Adam Smith (Church and Ware, 2000) and reinforced in U.S. Anti-Trust Laws (USDOJ, 2008) when they favored more competition than less because competition leads to outcomes that are socially optimal since there is efficiency in production and distribution.
Under perfectly competitive markets, there is full utilization of resources because of the interaction between the absence of dominant players and presence of perfect knowledge, which allow buyers to seek the suppliers who must engage themselves in some competition for market shares. Ultimately, perfect competition conditions produce the outcome, socially desirable to be sure, where resources are fully utilized, prices stabilize at a flat rate, the demand is perfectly elastic and there are no profits to be made. On the other hand, monopolists behave so under conditions of excess capacity where the profit maximizing condition where marginal revenue is equal to marginal cost yield the production outcome where price is greater than where marginal revenue is equal to marginal cost. In this scenario, the optimal production level is where there are economies of scale to be made and the firm is producing with “excess” capacity because some of its resources are not fully utilized. In which case, the perfect competition efficiency ideal is lost on the monopoly model because the profit-maximizing behavior dictates that it produce wisely at that level of production where there is always excess capacity.
Monopolies are said to exist when two factors are present. One is the exercise of monopoly power, or the power to control prices or exclude competition (USDOJ, 2008). The other is the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen or historic accident. (US DOJ, 2008). It is argued that firms which have monopoly power can reduce output (since demand is relatively inelastic) while charging higher prices than under more competitive conditions (perfect competition or monopolistic competition or even oligopoly). This tendency of monopolies to dictate the price of a good or service has adverse impact on consumers who face a relative inelastic demand curve. Having no other producer to source the good or service from, the consumer has no other choice but to clear the exchange at a higher price. In reality of course, there are very few firms which qualify as perfectly competitive market players or price-takers.
There are views that reflect a positive note on the role of monopolies and how monopolies can be a benefit to consumers. Two notable benefits that monopolies can generate are that these can realize economies of scale because as a single seller, monopolists can churn up huge production levels big enough to bring average costs down. This is especially true in heavily capitalized industries that require huge production levels to recover entry costs alone. This would be favorable to the consumers, as this presents an opportunity for the selling price to go lower. Another benefit would be incentive for research and development for more innovations that can be pursued in the market. Monopoly profits are an incentive to producers to enter a particular industry and invest in research and development that can bring in more profit to companies as it pursues innovations that can mean better incomes that will ensure qualitative living outcomes.
There is another view that would support a monopolist competitive market structure and that would be the case of a natural monopoly. Natural monopolies are monopolies created by government intervention acts that are granted to private enterprise for the generation, utilization and distribution of natural resources and assets such as electricity, water services, defense and armed forces, port facilities and other franchises. Often, there are social and political rather than economic goals that constrain the competitive structures of these industries. When all is considered though, the decision to grant a natural monopoly is to “reward” investors by allowing them to effectively shore up profit and recover the costs that have been undertaken in order to deliver a vital resource, good or service of value. On another note, there are instances of natural monopoly in which government plays a central role. These instances arise from the necessity to pursue socially desirable outcomes that may not be realized when the market system is allowed to work its profit-seeking motives through. When there is clear and present danger of market failures that result to sub-optimal resource allocation that exclude certain sectors or groups within the bigger society, or lead to welfare concerns for these sectors, then the functioning of government as a state enterprise or even a state monopoly is seen as beneficial to all of society. This is because government corrects market outcomes that miserably fail to deliver its promised social good, compromising efficiency perhaps in the process.
References
Cantoria, Ciel. Is a Naturally Occurring Monopoly Good or Bad? 15 August 2011. Web. 3 May 2013.
Church, Jeffrey and Ware, Roger2000. Industrial Organization: A Strategic Approach. Boston: Irwin McGraw-Hill.
Mayer, David A. N.d. “The Good, the Bad, and the Ugly”. Netplaces. N.d. Web. 2 May 2013.
U.S. Department of Justice. “Competiton and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.” 2008. Web. 2 May 2013.
