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regulate monopolies, is the fact that monopolies can be harmful even if they do not
engage in such practices.
If a monopolist engages in behavior that produces results similar to that by firms in an
industry that is characterized by intensive competition (i.e., charges prices close to cost
and does not engage in price discrimination), then there might not be a problem.
Unfortunately, however, this is rare even for a seemingly benevolent monopolist. The
reason is that the very strong incentives to maximize profits that exist for virtually any
business, whether pure monopolist, perfect competitor or somewhere in between,
produce very different results for a monopolist than they would for a firm in a highly
competitive industry. And monopolists (as is the case with competitive firms) usually do
not rank benevolence as a top corporate priority.
Thus, the management and employees in a monopoly might not at all be aware that
they are harming the economy, especially if their behavior is similar to that by a nonmonopoly. In fact, they may even genuinely believe that they are benefiting the
economy because of their conviction that they are more efficient and productive than a
number of firms competing with each other would be.
Another reason that the positive effects of even a benevolent monopolist would not be
as great as for a competitive company is that innovations that improve quality and
reduce production costs are often the result of desperation. (This is something that is
easy for many owners of struggling businesses to understand, but is often difficult for
others to fully grasp without experiencing it firsthand.) Monopolists generally consider
themselves successful, and thus, although they often are innovators to some extent
(typically mainly in their earlier years), they usually just do not have that extra motivation
to produce truly breakthrough innovations that smaller companies desperate to gain
market share (or to just survive) have.
Higher Prices Higher Price and Lower Output than under Perfect Competition.
This leads to a decline in consumer surplus and a deadweight welfare loss
Higher Prices to Suppliers - A monopoly may use its market power and pay
lower prices to its suppliers. E.g. Supermarkets have been criticised for paying
low prices to farmers.
A Few Problems
Three problems often associated with a market controlled totally by a single firm are: (1)
inefficiency, (2) income inequality, (3) political abuse.
Political Abuse: A third potential problem, one tied directly to the concentration of
income by the monopoly resources, is the abuse of political power. The
monopoly could use its economic profit to influence the political process,
especially policies that might prevent potential competitors from entering the
market.