Are monopolies good or bad and why?
Monopolies are bad only when they have unethical business models or biased support of the government, or both.
Monopolies are widely looked down upon in our society.
The term monopoly, however, has taken on bad connotations to the point where goodness is rarely, if ever, associated with it. The one-sided evil ascribed to monopoly is so pronounced in most people's thinking that one is tempted to coin a new term to convey the idea of monopoly in its good sense.
However, monopolies are not as bad as they appear on the outside. Here's what people say about monopolies which are not completely true.
- Monopolies are bad because the monopolists have no incentive to innovate or invest in R&D of new technologies.
- I believe, monopolies actually foster innovation and new technologies. When companies are not involved in a cut-throat competition, they have one less thing to worry about. Companies in very competitive markets fight so hard for survival and making profits, that they can hardly allot time and resources for innovation in their product and technology, and for research and development. Take Google for example. Do you think Google could have invested in newer technologies (self-driving cars, wearable computers, mobile phones) if it faced fierce competition from Yahoo and Bing?
- Monopolies strangle budding companies and stop competition.
- A company becomes a monopoly by merit by offering a service or product which is so good that it is way above its substitutes. In a free-exposure market, a new company entering the market with the same business model has no other option than to compete against the years of experience, expertise, and trust.
- "It's easier to copy a model than to make something new: doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1. Tomorrow's champions will not win by competing ruthlessly in today's marketplace; they will escape competition altogether, because their businesses will be unique."- Peter Theil
- This again explains how monopolies help in innovation in the long run. If you are merely copying the giants to become a giant, you will go nowhere. You have to create something new to dominate the market. There's no reason to think that new innovations can't stand against monopolies. AT&T dominated the US telecom market throughout the 20th century. This is how the near-present scenario looks like:
If the monopoly is what economists call a "natural monopoly" that is able, by economies of scale, to produce at a lower cost than a number of smaller companies, then probably most economists would offer a qualified "good".
The reason for qualified "good" is still that if a perfectly competitive firm, competing against other perfect competitors, could exist, its price would be lower and output higher than a monopolist's. So monopoly usually is not the preferred market structure if alternative market structures, even including oligopoly, might be preferable.
Hence the need for some form of regulation. And here's where it gets tricky.
IF you require the monopolist to set his price at exactly marginal cost, like a perfect competitor, it may be that price is actually less than average total cost. If this is true, then eventually the monopolist has to go bankrupt, because in the long run, price must at least equal average total cost. Does this make sense?
Usually the solution is to regulate prices so that the monopolist can get a "fair" return on capital, allowing him to price at or possibly slightly above average total cost. This allows the monopolist to stay in business for the long run and assures output isn't artificially restricted to boost prices.
The trouble here is what's called "regulatory capture", where people from the regulated industry or firm join the regulator, or regulators go to the regulated firm or industry. Usually there is some waiting period during which an monopolist employee cannot work for the regulator, and vice versa.
I hope that this helps.
In the short term they aren't much of a problem but in the long run they are big problems because:
1. Monopolies stop competition. The whole point of a free market is to have competition so that companies are always improving. Without competition companies become inefficient and wasteful.
2. Monopolies stop creating new technology. As pointed out by the other answers monopolies have little incentive to do any Research and Development. Why create new products when you control an entire industry? R&D is extremely costly and without incentive to do it monopolies will not take on that cost.
3. Monopolies drive up prices. Without competition monopolies have complete control over prices. Are monopolies going to keep prices down when the completely control a market? Heck no! Just look at the diamond industry which is controlled by the monopoly of De Beers. Are diamonds cheap? Heck no! Don't just think that diamonds are rare so that is why they are expensive. De Beers has underground warehouses full of diamonds because they want diamonds on the market to be rare and expensive.
4. Monopolies get too powerful. The government had many problems with the power of monopolies. When a few men control most of an economy they hold all the cards and that is very bad for a democracy. The powers of the monopolies lead to corruption and the government having little control of the economy. Think if we still had a monopoly on oil today like Standard Oil. How powerful would one company be if they controlled 95% of the US oil market? Many industrial countries think OPEC is bad but OPEC doesn't control the refining and point-of-sale that monopolies do. Who would have more power in the US: the president or the CEO of Standard Oil? The CEO of a modern day Standard Oil could bring the US to its knees over night with a price increase of gas to $8/gallon.
Monopolies are generally bad for the economy, and I'll tell you why. Monopolies are when a business has no competition; in other words, no other businesses are in the same market. Competition is really good for the economy because it businesses will try to attract customers more than other businesses, so they will go to lengths like lowering prices and high quality products to make them appear "the best". However, without any competition, prices skyrocket and it hurts people financially. Let's say there is only one internet company in the US, and let's call it Company x. Company x could raise the price however much they want, because no matter what there is no better deal out there to beat. Everybody who uses the internet, which is almost everyone in our society, would have no one else to buy from, so they would HAVE to buy from the ridiculously overpriced Company x, or they would have no internet. They could also make really crappy internet that is cheap, because nobody will be able to get any better internet, and people would have low quality products at very high prices. This concept is something that people don't recognize about monopolies, that they aren't just "the best" company. Google is not a good example of a monopoly because there are so many search engines out there it's ridiculous.
Monopolies take away the opportunity for economic growth in our country. There is a reason we made monopolies illegal, and I simply do not understand as to why people think monopolies are healthy when there is little good about them. They basically ruin what we as consumers want in our goods and services.
Monopolies are only bad when they're supported by force, e.g. a government. If a company became a monopoly by a free choice of its customers, than it really was the best in the market. And if the company wants to stay big, it must continue to be the best.
Take Microsoft or Google for example. They constantly invest in innovation and pour a lot of free stuff. And we all greatly benefit from it.
It can be argued though, that there's a momentum to a big company presence on the market, when it loses its edge, but I don't think it's a problem of monopolies either. Assuming all interactions are voluntary, that is a reflection of inertia in people's views. Eventually the market, or more precisely, the customers correct themselves. And the better our technologies of spreading and verifying information are, the faster it happens.
In short, the problem is using force, not monopolies per se.
Let us please focus on a monopoly as a very real boardgame, complete with property deeds and Monopoly Money that sure spends fast&furious as you frantically buy up any property your piece lands on. If you don't own it and niether does anyone else, you buy if you can. Don't mortgage unless you MUST own that piece before anyone else can wreck your dreams of owning your own expensive monopoly (definition needed here: a game monopoly consists of owning all the property grouped together colored the same shade, say Boardwalk and Park Place. They are next to each other and positioned immediately before a players small token (boot, I was always the Boot. My Dad got the horseshoe.) can pass GO where the trip around the board begins and every time you pass it, you get $200 which is not much. And it's easy to land on the Boardwalk/Park Place monopoly. Owning a monopoly allows you to buy&place unlimited numbers of little plastic houses on it, but 3 houses allows you to replace them with one hotel, bigger and red, which allows you to charge rent, the more you own, the more you can charge to "rent" it to the hapless player who lands on it. Two dice are cast to determine how many moves you can make around the board. Doubles lets you roll again. Stop, look, the owner must watch his/her properties for trespassers trying to not get noticed but folks become very competitive and watch like hawks, even a peacenik hippie which was and is me. Once it was down to my dad&me&unlike me, he was mean and super-competitive but not always lucky which I tended to be but my luck ran out and I foundered on the Bdwalk/ParkPlace monopoly with a zillion hotels and even mortgaging everything I owned (I was not very liquid at this point, after setting up a trap of my own with hotels waiting for HIM at 2 points where I held lesser but longer monopolies)...all I had to do was get to GO but them bones were not good to me and so it goes. I lost and nearly cryed for Heaven's sake! This game may last for days and was a good substitute for real life, which nobody was living because they had no jobs.
A peacenik li'l hippie learned a lot about real life this way, exactly this way, and I stay away from my dad! And way into any property deals I am able to make. Making sweet little side deals was totally part of the game, teaming up to drive others out is OK. Agreeing to forgive rent for each other is OK. Don't look for any sweetness when it is down to 2 players! Don't even look for a "Nice try!". The other player no longer honors any former deals, neither sweetness nor light nor motherhood&apple pie. No more Jesus nor Party affiliation or coffee with the "neighbors". But one thing we could not do is dishonor our nation's flag by not standing as footballers now do because it is allowed by our Constitution. Why? My dad did serve as an Army Corps engineer in Korea, the first of the "Why are we fighting this war?" wars. It was scary and I honor the flag, too, but that is my choice.