Monopolies are generally considered to be a bad thing in modern economics because they can corner a market. This means that the business who owns a monopoly can essentially charge whatever they want for their goods or services because they know people are forced to pay that price to get what they need. In certain situations, however, a monopoly can also have specific advantages that help the consumer as well. Here is a look at the key points to consider when addressing the pros and cons of monopolies.
The Pros of Monopolies
1. They funnel a high level of profits back to shareholders and local communities.
Without competition in the way, the high level of profits that a business with a monopoly can achieve creates the foundation for future capital investments. This can ultimately improve standards, lower consumer costs, and create new products for future use. In the fast-paced technological industries, this can be a tremendous advantage for everyone.
2. It changes the economies of scale.
A business with a monopoly allows for an increased output of goods or services. This means prices can be lowered internally because there are more goods that are being offered or produced. With lower internal costs, the consumer can save money when those changes are reflected in the final retail price of what is being offered.
3. It allows for a business to compete internationally.
The internet has allowed many businesses to become international businesses, but that doesn’t mean that have the ability to actually compete on a large scale. Monopolies allow a business to create an enormous level of brand recognition on a global basis which does allow them to compete in foreign markets.
4. It requires good products or services to develop the foundation of a monopoly.
A business simply cannot create an item and then declare it is a monopoly. Consumers drive monopolies because of what they demand. People use Google more than Bing or other search engines because they prefer it. The iPhone is a preferred smartphone because of its construction, features, and innovation. This means the market gets high quality goods in a monopoly because that’s the only way to keep a monopoly.
The Cons of Monopolies
1. They limit competition, which means prices don’t have to be lowered.
Many businesses that own a monopoly will strive for internal cost savings, but not to save the customer money. They do it to increase their own profit margin. If they have goods which are the only ones available to the market, then people will pay whatever they need to pay in order to have them. That’s why such a high profit margin can be achieved.
2. It may limit innovation.
The only way to truly compete with a monopoly is to create a competitive product that is more innovative than what is already on the market. Because this act of research and development has a cost associated with it, competitive innovation is naturally limited because no one else has the same resources to draw upon as the business with the monopoly. This means most innovation within that field is driven by the business and market demands instead of ingenuity.
3. Quality doesn’t have to be maintained.
Monopolies can be on any economic scale. When a local monopoly is in place, there may not be an incentive to maintain the same levels of quality that may be required in larger scale economies. Take the example of a local grocery store. If it’s the only grocery store for a 70 mile radius, then people are forced to shop there. The store’s owners realize this and don’t have to put money into maintenance or quality control because they know their customers have no other choice.
4. Output levels can be controlled to artificially manipulate scarcity.
When goods or services are scarce, then the price for them naturally rises. A business that has a monopoly is able to artificially restrict items that come to the market, which creates scarcity based on their actions more than market demands. In return, prices naturally go up because of demand, so the business with the monopoly can make greater profits.
The pros and cons of monopolies show that many of the advantages or disadvantages which can be experienced are based on the internal ethics of the company involved. Some businesses may be keen to invest with the higher profits of a monopoly, while others may simply hoard profits and refuse to invest. That’s why this type of economy can often be fragile and dangerous.