Disadvantages of Monopoly
Disadvantages of Monopoly:
• Higher prices and lower output
Monopolies often mean that prices will be higher and output lower than is the case for an industry where competition prevails. Firms in one industry are producing under conditions of perfect competition, while the other firm is operating under conditions of monopoly. The costs of production are the same for each industry.
• Excess profits
High profits made by the monopolist are not necessarily an indication of efficient methods of production. The monopolist may, in fact, be using its market power to raise prices above marginal costs in order to increase its revenues.
• Higher costs and x-inefficiencies
Under competition, firms strive to minimize their inputs to produce a given level of output. Firms do not necessarily have to produce at the minimum efficient scale to be technically efficient, as long as they produce at the lowest costs for their given scale of output. Firms which produce on the average cost curve are technically efficient or x-efficient. In other words, they produce at the lowest cost possible given their respective sizes.
Competition normally implies that firms will be x-efficient. However, if firms are insulated from competition, as is the case for monopoly, then there is less incentive to minimize costs. Firms may instead adopt ‘expense preference’ behavior by investing in activities to maximize the satisfaction of senior managers, at the subsequent sacrifice of profitability.
• Price discrimination
Monopolists as sole suppliers can discriminate between different groups of customers (based on their respective elasticity’s of demand) separated into different geographic or product segments.
A monopolist can practice price discrimination in several ways:
• First-degree price discrimination. Often referred to as perfect price discrimination, this involves the monopolist charging each customer what he or she is willing to pay for a given product. By doing this the
• Higher prices and lower output
Monopolies often mean that prices will be higher and output lower than is the case for an industry where competition prevails. Firms in one industry are producing under conditions of perfect competition, while the other firm is operating under conditions of monopoly. The costs of production are the same for each industry.
• Excess profits
High profits made by the monopolist are not necessarily an indication of efficient methods of production. The monopolist may, in fact, be using its market power to raise prices above marginal costs in order to increase its revenues.
• Higher costs and x-inefficiencies
Under competition, firms strive to minimize their inputs to produce a given level of output. Firms do not necessarily have to produce at the minimum efficient scale to be technically efficient, as long as they produce at the lowest costs for their given scale of output. Firms which produce on the average cost curve are technically efficient or x-efficient. In other words, they produce at the lowest cost possible given their respective sizes.
Competition normally implies that firms will be x-efficient. However, if firms are insulated from competition, as is the case for monopoly, then there is less incentive to minimize costs. Firms may instead adopt ‘expense preference’ behavior by investing in activities to maximize the satisfaction of senior managers, at the subsequent sacrifice of profitability.
• Price discrimination
Monopolists as sole suppliers can discriminate between different groups of customers (based on their respective elasticity’s of demand) separated into different geographic or product segments.
A monopolist can practice price discrimination in several ways:
• First-degree price discrimination. Often referred to as perfect price discrimination, this involves the monopolist charging each customer what he or she is willing to pay for a given product. By doing this the