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Monopoly
Monopoly is a condition wherein there is only a single producer for a specific good, which even does not have close substitutes. A pure monopoly is a single company having total control over the supply and sales of a product with no close substitutes. There are various degrees of monopoly and the possibilities for a pure monopoly in the real world are very low. Monopolies can be beneficial at times and harmful at times.
How can a monopoly be beneficial?
In spite of the ill-reputation of monopolies, they can in fact generate a net benefit for the citizens of a country under specific situations, where the power and duration of the firm is carefully restricted. In general, natural monopolies can be mainly beneficial, owing to their ability to attain lower costs of production than is possible with competitive firms manufacturing the same product in the same location. Nevertheless, there is a necessity to regulate these monopolies through uncorrupted government policies for the citizens to benefit from such a situation, because monopolies, when left to their own, have little incentive to give attention to the quality of their goods. There are studies which prove that technical innovations of a monopoly can positively impact the overall social welfare, provided that the profits of the monopoly are shared by the vast majority.
How can a monopoly be damaging?
Large monopolies can cause a considerable damage to economies as well as democratic governments. Though the beneficial effects are very visible, the damaging effects are not very obvious, since monopolies can frequently disguise these effects efficiently. The monopolies can cause the following damages to the welfare of the citizens of a country.
• Considerably higher prices due to lower production levels of one firm as compared to higher production levels and lower prices of competitive firms
• Quality of goods and services can be overlooked in such a case but which is a very important factor in a competitive economy.
• Development/advancement in technology will be very slow, since there will be no competition. Without these developments, quality cannot be improved and costs can be cut down. Innovations are not a necessity for a monopoly firm but are for a competitive firm.
• Research and development of monopolies may be solely directed to suppress the competitive technologies so that the firm can enjoy its power forever. Without innovation, an economy cannot improve, thus finally resulting in a serious disadvantage to the individuals.
• There will be lower employment levels and lower income and hence the citizens will not be able to afford the monopoly prices eventually.
The damaging effects of monopolies can be summarized to predatory pricing, conspiring with suppliers, inefficiency, lower choice of products and leveraging of monopoly profits.
Government policies to diminish the abuse of monopoly powers:
The following government policies need to be established in order to abuse the damaging effects or abuse of dominant position of a monopoly.
• Liberalization of markets: Liberalization helps new firms to enter the industry and compete with the monopoly, thus resulting in a competitive economy. This had occurred in the case of telecoms, electricity, etc in many countries.
• Regulation of prices and quality: Government can regulate the monopoly by placing price restrictions on products, introducing taxes and setting quality standards to be maintained. This eliminates price discrimination and enhances quality.
• Break-up monopoly: The Government can increase competition and break up a monopoly by encouraging innovation and offering contracts and financing to other firms.
• Introducing a merger policy such as no merger can occur when the new company includes more than one-third of the market share in the industry.
In these ways, the government can have a control over a monopoly rather than a monopoly over the welfare of the citizens of a country.