Monopoly Power

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Monopoly Power

Advantages

  • Supernormal profit can be used to overcome short term difficulties
  • Supernormal profit can be used to invest and maintain a competitive edge
  • Supernormal profits can also be used for R+D
  • They have the financial power to match large overseas competitors
  • Cross subsidisation can lead to an increased range of goods and services available to the consumer
  • Price discrimination may raise total revenue which can allow the survival of a product
  • Take advantage of economies of scale
  • Supernormal profit act as an incentive for new firms to break down barriers to entry
  • Monopolists can avoid undesirable duplication of services

Disadvantages

  • Supernormal profits means there is less incentive to be efficient
  • Supernormal profits gives the resources to raise barriers to entry
  • Higher prices and lower output for consumers
  • Monopolists may undertake price discrimination to reduce consumer surplus
  • Monopolists may waste resources by undertaking cross subsidisation
  • Monopolists do not produce at the most productively efficient point of output
  • Monopolists can be complacent and develop inefficiencies
  • Monopolies may lead to a misallocation of resources by setting price above marginal cost

Evaluation

While monopolies can be beneficial in terms of economic growth and business confidences, they are inevitably disadvantageous to the consumer and other competition.

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