Readers Question: If monopoly is always bad, why do firms seek to become monopolists and why does government tolerate monopoly?
It is true that Monopolies have many disadvantages for society:
- Higher prices than competitive markets
- Decline in consumer surplus
- Less incentives to be efficient.
- Possible diseconomies of scale.
For more detail see: Disadvantages of Monopoly
Most of these disadvantages are, of course, for the consumer and society. Firms benefit from monopoly power because:
- They can charge higher prices and make more profit than in a competitive market.
- The can benefit from diseconomies of scale
- They can use their monopoly profits to invest in research and development and also have resources for if the firm does badly.
Why Government Tolerates Monopolies
- It is difficult to break up monopolies.
- Governments can implement regulation of Monopolies e.g. OFWAT regulates the prices of water companies
- Monopolies can be more efficient because of the advantages from economies of scale. This is particularly important for firms operating in a natural monopoly. For example, it wouldn’t make sense to have many small companies providing tap water. The large scale infrastructure makes it more efficient to just have 1 firm
- Firms with monopoly power are not necessarily bad. Google has monopoly power on search engines – but can we say Google is an inefficient firm who don’t seek to innovate?
See also: Advantages of Monopolies