The Negative Sides of Monopoly

The Negative Sides of Monopoly

Introduction

A monopoly refers to a business with exclusive possession or control over the trade and supply of services and goods. Microsoft Corporation is a perfect example of a monopolistic company on the global stage. In addition, the firm has exclusive copyrights that make it the only supplier of personal computer software. As a result, PC owners have no option but to pay $100 to access the Windows operating system. In the case of a competitive market, many firms offer identical products and hence have no control over the price they receive. A monopoly like Microsoft has no close competitors and therefore can influence market prices for its products. Other than pricing, monopoly firms reduce the overall consumer welfare. Hire our assignment writing services in case your assignment is devastating you.

Article Summary: The Economic Inefficiency of Monopoly By Jodi Beggs

Begg’s article “The Economic Inefficiency of Monopoly” delves into the market inefficiency resulting from monopoly. Begg avers that monopoly is a greater contributor to allocative inefficiency. Allocative inefficiency is when there is no optimal supply of goods and services to fulfill societal needs. An ideal supply situation requires an optimal quantity, such that the marginal benefit of the product to society equals the marginal cost (Beggs, 2019). However, a monopolist pursues a profit-maximizing behavior, such that the price is greater than the marginal cost. Consumers in a monopolistic market suffer because the monopolist supplies fewer quantities of a product at higher prices than would be the case in a perfectly competitive market.

The inefficiency of a monopoly goes beyond the short-term, non-optimal supply of goods and services. Another problem associated with monopoly markets is the incentives to innovate (Beggs, 2019). Counterbalancing needs exist when it comes to innovating. On the one hand, a monopolistic firm may invent because it wants to create more intellectual property rights and earn more profits. Inventing keeps a company ahead for some time until competitors catch up. However, the incentive to innovate ceases once a barrier to entry is imposed. When a barrier to entry exists in an industry, a monopolistic firm still makes profits even if it produces goods using old models.

Discussion on How the Article Relates to the Course

Begg’s article primarily analyzes the economic inefficiency caused by monopoly firms. The article’s content relates to the course content that explores other undesirable market outcomes caused by monopoly firms. These include a deterioration of social welfare and limited consumer choice.

 Deterioration of Social Welfare

The practices of a monopolized firm also reduce the overall consumer welfare. A monopoly’s desire to earn more profits means charging more than the standard market prices (Mankiw, 2016). The difference between a regular market price and what a monopolistic firm charges is a monopoly price. Sometimes, a monopoly firm incurs additional costs as it seeks to retain its monopoly power. For instance, firms with government-supplied monopolies may pay lobbyists to convince legislators to maintain monopoly power (Mankiw, 2016). In that case, a monopoly uses its profits to pay for these additional costs. These costs are ultimately transferred to the final consumer, thus reducing social welfare. Essentially, monopoly firms may trigger artificial inflation, which is a social problem. Normal inflation should be caused by rising production costs, not by monopoly firms’ profit-maximizing behavior.

Reduced Consumer Choice

According to Mankiw (2016), monopoly firms also use their power to reduce consumer choice. Large retailers like Walmart can use their monopoly power to dictate what is available to consumers. For instance, the retailer may only offer snacks from one among two competing large snack companies. The other snack companies will be automatically driven out of business if that happens. In this case, a consumer finds everything hidden from the system by a dominant producer.

Another way consumer choice is limited is when large-scale retailers strip away profits from suppliers. The leverage is known as monopsony power (Mankiw, 2016). Large retailers like Walmart use it to tell large-scale producers like Coca-Cola what ingredients to include in their products. That leaves suppliers with no option but to compromise on quality, innovation, and variety. Amazon is also characterized by monopsony power. The company has forced publishers to reduce book prices, leading to revenue and profit losses. Publishers are scared of signing new writers or investing in new risky projects.

Diminishing consumer choice leads to a rising concentration of markets. For instance, in the US context, market concentration represents a shift from the past decades. For most of the 20^th Century, the country enforced laws meant to reduce monopolies and the concentration of markets in specific industries. For instance, the Robinson-Patman Act allowed consumers to shop from large retailers like Sears while restricting them from undercutting other retailers through predatory pricing. Other federal anti-trust policies and laws also prevented large retailers from growing so much to the extent of quashing competition.

However, a retreat from deregulation and enforcement of anti-trust policies has permitted monopolization to thrive. Today, monopoly thrives in almost every economic sector, including critical sectors like banks and hospitals. Monopoly firms represent themselves as champions of consumer choice, which is inaccurate.

Conclusion

In summary, a monopoly is a negative market force. One of the negative forces of monopoly firms is that they cause allocative inefficiency since the supplying firm fails to supply optimally. Besides, monopoly reduces consumer choice as large firms use their influence to drive smaller firms out of the market. Finally, a monopolistic market reduces social welfare by imposing a monopoly price. Given the negative effect of monopoly on the consumer, economists consider it a negative microeconomic phenomenon.

References

Beggs, J. (2019, March 19). The Economic Inefficiency of Monopoly. ThoughtCo. https://www.thoughtco.com/the-economic-inefficiency-of-monopoly-1147784

Mankiw, G. (2016). Principles of microeconomics. Cengage Learning.

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(ECON201 – APUS) For the term paper, you are required to pick a current economic topic that relates to the material we have covered or will cover in this course. You will research and find an article that covers the topic you have chosen. You can use an article online or offline from any reputable source. You will write up a review of the article and integrate course concepts into your review. Please make sure you both summarize the article and discuss how it relates to the course.

The Negative Sides of Monopoly

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Client’s notes:
Hello, this paper is for my microeconomics class, and I was looking to reference Monopoly towards efficiency, the market, and pure competition. Basically, I am trying to say monopoly is a negative thing in microeconomics. Monopoly is the main topic of this paper.