How Does a Monopoly Affect Business and Consumers?

All power in one fist

Monopolies have no competition, they are the sole providers of a product or service, therefore, no price restrictions. They use mergers, patents and acquisitions to acquire industry dominance and prevent market entry. Without monitoring and regulation, monopolies can adversely affect businesses, consumers and even the economy. Monopolies have come a long way in our markets today and for clarification, you need to understand the following:

 

Price, Supply and Demand

Because a monopoly has no competition, the potential to increase price of product and services indefinitely is very critical and detrimental to the consumers. The price raised by the monopoly is the market price and demand is market demand. At a very high price, customers will not be able to substitute the good or service with a more affordable one because there’s no competition.

Furthermore, as the sole supplier, a monopoly can also refuse to serve customers. When a monopoly refuses to sell an important good to a wholesalers or marketers, there’s a potential to indirectly shut down that business. If the supplier sells to consumers, it can refuse to serve areas that have lower profit potential, which could further impoverish a region.

The option available for policy makers would be to stop the monopoly and this can be achieved by dividing the monopoly into two companies, separate their bundled products or services, or separating services into smaller competing regional services. The activation of the monopoly’s separation will reduce the barriers to entry for start ups. With this, the new competition will bring about a wider variety of options and most likely reduce the prices for consumers.

 

Natural Monopolies can Reduce Costs

Natural monopoly such as water and sewage system, can prevent the duplication of infrastructure and thus reduce potential costs to consumers. Natural monopolies that are run by non-profit organisations and local governments can afford to keep prices low enough to provide services to the majority of the public. When monopolies are privately owned by for-profit organisations, prices can become significantly higher than in a competitive market. As a result of higher prices, fewer consumers can afford the good or service in mobile security, which can be detrimental in a rural or impoverished setting.

 

Economic Repercussions of Monopolies

Some argue that monopolies are beneficial because highly-profitable companies tend to pump more funds into research and development. Because the monopoly is in a dominant position, it can comfortably bear the risks associated with innovation. Although, a highly-profitable monopoly also may have little incentive for improvement as long as consumers still demands for their current product or service. In comparison, businesses in a competitive market can compete by making changes to existing products and services and lowering prices.

Monopolies ensure there are high barriers to entry and thus no free riding or adaptations to their current patents. The labor force in a monopolised industry may also be significantly less than that of a competitive industry.

 

Dismantling a Monopoly

The option available for policy makers would be to stop the monopoly and this can be achieved by dividing the monopoly into two companies, separate their bundled products or services, or separating services into smaller competing regional services. The activation of the monopoly’s separation will reduce the barriers to entry for start ups. With this, the new competition will bring about a wider variety of options and most likely reduce the prices for consumers.

For instance, in the 1980s the US experienced nation-wide deregulation in the telecommunications industry. While four of the seven “Baby Bells” are back under the AT&T umbrella, the breakup is still considered a great success. Competition in the telecommunication industry again is increasing as start-ups begin using mobile technology to disrupt the cost structures of the telecom companies.

Lowering Prices with Policy

The other angle is for policy makers to focus on lowering prices instead of dismantling the monopoly. Regulators can set pricing controls called price caps in order to prevent the company from setting unreasonable prices. Prices can be reduced through price capping, the benefit of being a monopoly will infuse the monopoly to reduce price to that of a competitive market. Once competition increases in the industry, policy makers can reduce or remove the price caps.

According to The Energy Journal, all US electricity independent system operators have price caps. Similarly, setting rate-of-return price regulations can help reduce artificially high utility prices. The policy makers can also opt to nationalise natural monopolies to ensure that utility prices are in the best interest of the public and when a monopoly refuses to sell an important good to a wholesalers or marketers, there’s a potential to indirectly shut down that business. If the supplier sells to consumers, it can refuse to serve areas that have lower profit potential, which could further impoverish a region.

For the purpose of enriching the economy the policy for monopoly should be divided.