Monopoly Market: Advantages (Pros) and Disadvantages (Cons)
Monopolies are companies that dominate the market. A monopoly market is a market structure in which only a single seller is available and sells a unique non-substitutable product in the market. The seller faces no competition in a monopoly market.
Even though monopolies are discouraged in free-market nations, there are certain advantages and disadvantages of a monopoly market.
Following are the Advantages and Disadvantages of the Monopoly Market.
Advantages (Pros / Positives / Benefits) of Monopoly Market
1. Research and Development
Monopoly companies enjoy a supernormal profit. The company can invest this profit to fund high capital research projects to bring more innovative products to the market. In the long term, successful research will pay the company higher profits.
2. Improve Efficiency with Economies of Scale
The monopolistic firm can gain lower long-run average costs by exploiting economies of scale.
For example, it is not practical for a small firm to enter into the rail infrastructure industry. This kind of industry requires initial capital with expertise. It may be efficient to have a single large-scale company handles such kinds of projects at a low cost.
3. Improve Innovation
Pharmaceutical companies invest heavily in producing new drugs because of the monopoly rights they get with patents. Because of patents, the pharmaceutical companies have certainty of getting returns to cover the initial capital invested. This kind of innovation will benefit society.
Almost all the pharmaceutical companies invest a large portion of the supernormal profit in research and development to make new drugs, which any other firm will not be able to do.
4. Continuous Development to Benefit the Society
Companies that benefit from monopoly power are considered as most effective and dynamic. Most of these companies do continuous development to bring more products to the consumers at a very low cost.
As an example, google benefits from a certain monopoly in the search engine industry. Google is continuously improving its platforms to uplift the user experience day by day.
5. International Competitiveness
If a firm has a domestic monopoly, the firm has a great advantage to expand its business internationally. The company can invest more in the international market with the good profits they earn in the domestic market.
6. Support Loss Making Services
Government or community-related services can support loss-making services from the supernormal monopoly profits.
As an example, railway companies usually have a monopoly. These companies enjoy a supernormal profit from the peak hour services. But this will be outset from the late-running services which is loss-making. So that the railway companies can cover their services around the clock.
7. Build up Cash Reserves for Difficult Times
Monopoly companies have more chance to pile up the cash reserves from the supernormal profits. They can utilize the profits to support them to survive in difficult times.
As an example, from 2020 to 2022, the covid pandemic has impacted most businesses around the globe. The companies that had cash reserves could easily overcome and survive this situation.
Disadvantages (Cons / Negatives / Drawbacks / Risks) of Monopoly Market
1. High Prices
A monopolist firm is the sole provider of the entire market output. Hence the monopolist can charge a higher price than in a competitive market.
Monopolist firms can increase the price without worrying about the competition (since no competition is available in a monopoly market).
2. Diseconomies of Scale
Monopolistic firms try to put much output into the market as they could, because due to the no competition in the market. Large companies will experience production processes becoming less efficient after a specific point in production output. The company will experience an increase in average per-unit cost when they start to produce an additional unit of output beyond a certain level. This is known as Diseconomies of Scale.
3. No Product Alternatives for Consumers
Consumers will be dissatisfied because there is no product alternative available for them. Only one choice is available in the market despite whether it is up to the quality and within the customer’s expected price range.
4. Less Innovation and Product Improvement
Monopolist firms will not be motivated to innovate and product improvement since there is no competition. This will be a disadvantage for the consumers since the same level of experience will be continued in the long run.
5. Pay Low Prices to Suppliers
Monopoly firms can take the approach to pay low prices for their supplies since these companies have the entire market control.
As an example, some leading supermarkets have a monopoly in their market. It was noticed that farmers complained about the monopsony power of large supermarkets, which received a low price for their supplies.
6. Lower Wages to Their Employees
Monopoly firms have entire market control in their hand. Hence, they could not worry much about internal employee well-being. They could get the approach to low the salaries of their employees.
7. Dissatisfied Consumers Due To Lack Of Output
Due to the economies of scale in large firms, monopolistic companies would try to produce at the optimum level to keep the average product cost at the minimum level possible. Sometimes, this output could not be adequate to satisfy the entire market. Consumers will be dissatisfied due to the scarcity of the products in the market.
- Definition, Examples, and Characteristics of Monopoly Market
- Real Examples of Monopoly Market (in the USA, Canada, Australia, World)
- Important Characteristics / Causes of Monopoly Market
- Definition, Types, and Characteristics of Oligopoly Market
- Real Examples of Oligopoly Market (in the USA, Canada, World)
- Seven Important Characteristics of Oligopoly Market
- Advantages and Disadvantages of Oligopoly Market
- Overview, Definition, & Features of Monopolistic Competition
- Main Characteristics / Causes of Monopolistic Competition
- Real Examples of Monopolistic Competition (in USA, Canada, World)
- Advantages and Disadvantages of Monopolistic Competition