Advantages & Disadvantages of Monopolies

A monopoly is a market structure having only one producer or seller of a product or service. Some of the negative aspects of a monopoly include the single business being able to control pricing and charge relatively high prices, exceptional power over the market and a lack of new products being introduced into the market. Monopolies are created by economic, social or political factors. When one entity has control over a natural resource, a monopoly market for that resource is created. An example would be Saudi Arabia where the government has complete control over the oil industry. Monopolies are also formed when companies have copyright or patent rights to a product.

Research and Development

In a monopoly market, products or services that require large scale capital benefit when only one firm produces these goods or services. A monopolist will have more resources to invest in research and development of the product. Monopolies in their own way encourage economies of scale which is increased output and decreased unit cost. Monopoly of a particular product or service encourages research and development for the production of better products because the resources are available.

Domestic Monopoly but International Competition

When a company wields considerable domestic monopoly power, it is in a very strong position to charge prices as it sees fit to increase profits of the firm. However, when the same company faces intensive international competition, it reduces market power and this helps to keep the prices down for customers. An example would be U.S. Steel Corporation which controls over half the steel production in the country, but faces intensive competition in international markets from the U.K., Japan, China and India.

Poor Quality of Products

Monopoly markets may produce a poor quality of product because of lower levels of output than would normally exist if there were competitive companies producing the same products. The company with the monopoly is free to buy cheap materials to reduce the cost of producing the products. Because of the lack of substitute products, consumers are forced to buy the products offered by the monopoly company, giving them freedom to sell substandard products.

Unfair Treatment Towards Employees

In a monopoly market, employees often suffer unfair treatment at the hands of the company management. Because the company has a monopoly in a certain industry area, employees may be forced to accept low wages, lack of proper benefits and zero motivation in their jobs. The management can dictate the terms of the salary package leaving little room for negotiation for the employees. This is done because the company knows that the employees have no choice but to accept its terms.

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