How Does Monopoly Affect the Business and Consumer?
As the only producer of a particular service or product, monopoly firms face no price restrictions and no competition. A monopoly firm makes use of acquisitions, mergers, and patents to acquire industry dominance and also prevent any market entry. If the monopolies are left unregulated and unmonitored, they can severely affect the economy, consumers, and even businesses. This article will provide you a clear view of how monopoly affects the business and consumer.
Also, read: What Does Monopoly Mean?
Demand, Supply, and Price
The desire of a monopoly firm to raise the prices of a commodity indefinitely can be the most significant effect on the customers. Since the firm has no physical industry competition, the cost of the monopoly in the market and the demand for its commodity is crucial. Even if it offers its products at higher prices, the customers will be unable to find the direct substitute for the service and goods with an affordable alternative.
As the only supplier of the commodity, the monopoly firm may refrain from serving the consumer. In a case where the monopoly firm, refrains itself from selling an essential product to another company, the firm can shut down the other company. In a case where the monopoly serves the end-users, they can refuse to sell to customers from areas with lower profit.
Natural Monopolies Can lower Costs
A natural monopoly firm, for instance, the sewage and water system, can help prevent the duplication of infrastructure. Therefore, they can lower the potential costs for the customers. The natural monopoly firms that are in the real sense operated by the local governments and the non-profit organizations can afford to maintain the prices low enough to help provide services to the public. In a case where the for-profit companies own the monopoly firms, prices are higher than it is in the competitive market. For higher prices, a smaller number of customers can afford the commodity. This can be pretty detrimental to the impoverished and rural settings.
The Economic Results of Monopoly
Some people argue that the monopolies are profitable since the highly-profitable firms tend to invest more funds into development and research. Since the monopoly refers to a somewhat dominant position, it can also bear the risks that are involved with the invention. Even though a highly-productive monopoly additional have little intentions for improvement provided, the customers continue to demonstrate the requirement for the current service or product. In simple terms, firms in a competitive market compete, identifying and making positive changes to the existing facilities and products, and also lowering the price.
Monopolies, on the other hand, make sure that there are barriers to market entry. Therefore, there are no adaptations and free riding to their current patents. The labor force invested in the competitive industry is often more than that invested in a monopoly.
Dismantling a Monopoly
The desire to dismantle the monopoly if often one of the key options of the consumers and investors. The dismantling can be achieved by splitting up the monopoly into firms, dividing their bundled services or products, or separating their services into littler competing for regional services. The separation of the monopoly will lower the entry barriers to some level. The resulting competition will hence, create a wider array of options and reduction in the prices is most likely to occur.
For instance, in the year of 1980, the US faced nation-wide deregulation in terms of telecommunication. Although four “Baby Bells” out of the seven are back under the operation of the AT & T umbrella, the break is up to date, considered a success. The competition that resulted in the telecommunication sector is increasing, and start-ups are now lowering mobile tech to help disrupt the cost of telecommunication companies.
Lowering the Price with Policy
Another option that could result from the dominance of a monopoly is for a policymaker to focus on reducing the prices and not just breaking up the monopoly. They can set the pricing controls and name them as the price caps to prevent the monopoly firm from setting up unreasonable prices. The price capping method reduces the cost of the commodity. It works almost the same as a competitive market. Soon as competition rises within the sector, the policymakers can remove or reduce the price caps.
Read more about How to Create a Monopoly in the Market?