Monopolies are always bad for consumers and so should always be banned or broken up ,
discuss (25 marks)
A economic monopoly is a market with one single seller that owns 100% of the market
share. A monopoly is the opposite of a perfect competition economic structure in which a
firm has complete control of the market. In the Uk economic monopolies are rare and
examples can only be seen through natural monopolies as seen in water companies such as
Thames Water. However there are many legal monopolies which are described as firms with
more than a 25% ownership of the market share. When one company has so much power
on one market consumers can be exploited but often monopolies can provide a social
benefit for society as a whole.
The Neo-classical school of thought believed that monopolies are inherently bad, believing
that the ‘monopolist is the greatest evil of the mainstream competition theory’.
Neoclassicists believe that monopolies will eliminate their competition through sub
competitive prices or dumping and then will abuse their dominant position by increasing the
prices and reducing the supply which will lead to losses for the consumer. As seen below
monopolies produce at a abnormal profit level of output in the long run and can increase
prices as they are not in a competitive market.
Figure 1
As seen in figure 1 the price has increased to p1 as there is no competition and firms can
exploit consumers by increasing prices as consumers have no other alternatives. This can be
seen by the shaded area which shows how monopolies are constantly making abnormal
profit. As there is higher prices for consumers it can affect everyone often having regressive
effects and affect the poor the most, making products from these dominant companies take
up a larger proportion of their income. This will decrease consumer surplus and lead to a
overall lower quality of life for consumers. This can be seen in the 1980s when Microsoft
had a monopoly on PC software and charged a high price for Microsoft office. The effects of
this in the long term can be severe as there is inelastic demand for some products that are
created by monopolies and monopolies create little to no choice for consumers, forcing
everyone to purchase from one company. Smaller companies that have to use Microsoft
office to operate would see huge increased costs as a result of an increase of price for the
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