Monopoly is a market structure in

which there is a single seller, there

are no close substitutes for the
commodity it produces and there
are barriers to entry

EVILS OF
ROLL NO 27263
MONOPOLY
 Social Impact of monopoly
COURSE CODE GEN 114  Impact of monopoly on the
DUE DATE 3 APRIL 2023 consumer and the market

M. Ibrahim Hussain
 EVILS OF MONOPOLY

Table of Contents
Introduction................................................2
What is a monopoly?.................................2
Impacts of monopoly on the market..........3
Market Failure...........................................3
Monopsony power....................................3
Higher prices than in competitive markets4
Influence of the monopolist on the
markets......................................................4
Social impacts of monopoly.......................5
Reduced efficiency.....................................5
Reduced Innovation...................................6
Impacts of economy on the consumer.......7
Price Discrimination...................................7
Restricted output.......................................7

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 EVILS OF MONOPOLY

Introduction

This assessment aims to point out/identify and analyse the

harms inflicted by monopoly, for it is often believed that
monopoly is a harmful market structure, this assignment will
explain the reasons behind this belief held by the masses.

What is a monopoly?
To put it simply, a monopoly is an economic term that refers to
a lack of competition in a market or industry. Without
competition, one business can become the sole proprietor of all
relevant goods or services. For example, if a state only has one
internet company operating within state lines, that business
has a monopoly on internet services in that area. Since there
aren’t any competitors to challenge the company, its prices
may rise as demand increases.

This assignment is organized around three dimensions.

 Impact of monopoly on the market
 Social Impact of monopoly
 Impacts of monopoly on the consumer

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Impacts of monopoly on the market

Market Failure
When a market fails to allocate its resources efficiently, market failure
occurs. In the case of monopolies, abuse of power can lead to market
failure. Market failure occurs when the price mechanism fails to take
into account all of the costs and/or benefits of providing and consuming
a good. As a result, the market fails to supply the socially optimal
amount of the good. A monopoly is an imperfect market that restricts
output in an attempt to maximize profit. Market failure in a monopoly
can occur because not enough of the good is made available and/or the
price of the good is too high. Without the presence of market
competitors it can be challenging for a monopoly to self-regulate and
remain competitive over time.

Monopsony power
Monopolies often have monopsony power in paying a lower price to
suppliers. For example, farmers have complained about the monopsony
power of large supermarkets – which means they receive a very low
price for products. A monopoly may also have the power to pay lower
wages to its workers.
In a monopsony, a large buyer (In this case/context, the monopolist)
controls the market. Because of their unique position, monopsonies
have a wealth of power. For example, being the primary or only
supplier of jobs in an area, the monopsony has the power to set wages.
In addition, they have bargaining power as they are able to negotiate
prices and terms with their suppliers

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Higher prices than in competitive markets

Monopolies face inelastic demand and so can increase prices therefor
giving consumers no alternative. Monopolies have the ability to limit
output, thus charging a higher price than would be possible in
competitive markets. Unlike a competitive company, a monopoly can
decrease production in order to charge a higher price. For example, in
the 1980s, Microsoft had a monopoly on PC software and charged a
high price for Microsoft Office

Influence of the monopolist on the markets

Monopolies can gain political power and the ability to shape society in
an undemocratic and unaccountable way, especially with big IT giants
who have such an influence on society and people’s choices. There is a
growing concern over the influence of Facebook, Google and Twitter
because they influence the diffusion of information in society.
In the late nineteenth-century, large monopolist like Standard Oil
gained a notorious reputation for abusing their power and forcing rivals
out of business. This led to a backlash against monopolists. But, in the
Twenty-First Century, there are new monopolies which have an
increasing influence on people’s lives.

Social impacts of monopoly

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Reduced efficiency
A societal risk of monopolies is the fact that competition is closely
linked to incentives. As a result, no competition will provide the
monopoly very little reason to improve internal inefficiencies or cut
costs. A competitive market will see constant strives to reduce costs in
order to capture higher market share and provide goods at lower
prices, while monopolies do not have this incentive.
Monopolies can become inefficient and less innovative over time
because they do not have to compete with other producers in a
marketplace.
In a monopoly, the firm will set a specific price for a good that is
available to all consumers. The quantity of the good will be less and the
price will be higher (this is what makes the good a commodity). The
monopoly pricing creates a deadweight loss because the firm forgoes
transactions with the consumers. The deadweight loss is the potential
gains that did not go to the producer or the consumer. As a result of
the deadweight loss, the combined surplus (wealth) of the monopoly
and the consumers is less than that obtained by consumers in a
competitive market. A monopoly is less efficient in total gains from
trade than a competitive market.

Reduced Innovation
A monopoly will also have limited motivation to innovate, as there is
little value in differentiation (The act of distinguishing a product from
the others in the market) in a thoroughly controlled market (for the
only incumbent). As a result there is reduced improvements that could

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substantially improve the ability of the firm to fulfill the needs of the

consumer.
Deadweight Loss: A monopoly will choose to produce less and charge
more than would occur in a perfectly competitive market. As a result, a
monopoly causes deadweight loss, an inefficient economic outcome.
In summary, Monopolies do not have to worry about constantly making
innovations to their product because consumers are forced to buy from
them in the first place. A lack of market competition equals a lack of
innovation.
Monopolies dominate their market base and leave little to no room for
competition. This creates an unbalanced market skewed in favour of
the monopoly as they are the ones with all the power. With this comes
a lack of innovation as monopolies lack the incentive to spend their
profits on innovation when there is no one else in the market to
outperform. They are able to manage without significant developments
because consumers lack alternatives to turn to, meaning they must
settle for the product offered by the monopoly.

In summarizing these various societal drawbacks, monopolies pose the

risk of reducing consumer choice and consumer power to incentivize
companies to innovate and reduce costs, as there is limited prospective
returns on investment. A monopoly with total control over the supply
can charge any price that the consumer is willing to pay, and therefore
can generate excessive margins while doing very little to improve their
product/service or relevant processes.

Impacts of economy on the consumer

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Price Discrimination
This concept is often strongly emphasized as a potential economic risk
of monopolies and the economic justification is easily illustrated.
Picture a supply and demand chart, where supply and demand intersect
to generate a fair price point and overall quantity provided. Now
assume one company has the entire supply under it's control, and can
discriminate prices along the demand curve to capture higher prices
than the available supply should allow. This allows monopolies to
charge customers with a higher willingness to pay a higher price, while
still charging consumers with a lower willingness to pay the standard
prices. This is unfair to consumers, who will be forced to pay whatever
is asked as a result of no alternative options.

Restricted output
As it is mentioned above, a monopoly is an imperfect market that
restricts output in an attempt to maximize profit. Due to the fact that
monopolist is a single seller, it faces the market demand curve for the
product produced. This demand curve is negatively sloped and shows
that the monopolist can sell more output only by lowering the price of
the product. This means that the output the monopolist chooses to sell
affects price. Since Consumers have no substitutes they are forced to
pay the price for the goods dictated by the monopolist via the
restricted output