Why monopolies are bad for consumers?
Congress enacted it in 1890 when monopolies were trusts. A group of companies would form a trust to fix prices low enough to drive competitors out of business. Once they had a monopoly on the market, they would raise prices to regain their profit.
Though monopolies may reduce prices temporarily to drive out the competition, they often raise them after all of their competitors have failed. Because small businesses have a harder time surviving than larger ones, smaller businesses sometimes merge to increase their resources.
- Price, Supply and Demand. A monopoly's potential to raise prices indefinitely is its most critical detriment to consumers. Because it has no industry competition, a monopoly's price is the market price and demand is market demand. As the sole supplier, a monopoly can also refuse to serve customers.
- Monopolies are formed under certain conditions, including: When a firm has exclusive ownership or use of a scarce resource, such as British Telecom who owns the telephone cabling running into the majority of UK homes and businesses. When governments grant a firm monopoly status, such as the Post Office.
- Laws allegedly passed to protect customers have been used to punish efficient companies that have increased output and lowered prices. Rather than protect consumers, it is possible that antitrust laws are enacted to subsidize and protect less-efficient firms from the rigors of the competitive process.
There are ways consumers benefit from monopolies. Monopolies are usually large dominant firms which allows them to achieve economies of scale as compare to small firms. Therefore, monopolies are able to produce at low costs which subsequently could be lower prices for consumers.
- Third, they prohibit the creation of a monopoly and the abuse of monopoly power. The Federal Trade Commission, the U.S. Department of Justice, state governments and private parties who are sufficiently affected may all bring actions in the courts to enforce the antitrust laws.
- Another advantage of a natural monopoly is that, as output increases, average costs will fall, offering the prospect of substantial benefits to be gained from economies of scale as costs will get spread out more over a larger amount of output due to the relatively small marginal cost and high fixed costs.
- However, economists maintain that a monopoly does not exist simply because there is only one provider of a good or service. For example, in the Microsoft case, the Windows operating system is enormously popular, but the potential for a competing firm to provide a similar product exists.
When firms have such power, they charge prices that are higher than can be justified based upon the costs of production, prices that are higher than they would be if the market was more competitive. The bottom line is that when companies have a monopoly, prices are too high and production is too low.
- In a perfectly competitive market, price equals marginal cost and firms earn an economic profit of zero. Monopolies produce an equilibrium at which the price of a good is higher, and the quantity lower, than is economically efficient.
- The government may wish to regulate monopolies to protect the interests of consumers. For example, monopolies have the market power to set prices higher than in competitive markets. The government can regulate monopolies through price capping, yardstick competition and preventing the growth of monopoly power.
- Predatory pricing. Predatory pricing , also known as undercutting, is a pricing strategy in which a product or service is set at a very low price with the intention to drive competitors out of the market or to create barriers to entry for potential new competitors.
Updated: 16th October 2019