Merits and Demerits of Monopoly Market are described below:
Before we get carried away with some of the negative features of monopoly, let us look at its positive features too. A monopoly possesses the following merits.
(i) Potential to stand depression:
Due to its extensive financial resources, a monopoly firm can survive the shocks of falling prices and the consequential losses, which, to small sized competitive firms, prove fatal during the period of depression.
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Small competitive firms close down due to losses, while monopoly firms not only fare through them but even succeed in maintaining the price level.
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(ii) Potential for Research and Development:
Due to its large financial resources, a monopoly can introduce any type of invention or improved technology which is deemed crucial for its commercial success. On the contrary, small competitive firms turn commercially non-viable due to their inability to afford technological innovations.
(iii) Potential to Face Foreign Competition:
A large monoploy is capable of competing with foreign firms because of scale economies that it reaps due to its large scale operations. It is for this reason that many European countries encourage formation of cartels and syndicates. Small competitive firms suffer from diseconomies, and hence, fail to face foreign competition.
(iv) As a Remedy to Unhealthy Competition:
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Many industries consist of a large number of inefficient firms indulging in unhealthy competition. Combining these firms into one often leads to eliminating inefficiency, reducing costs and widening the markets through intelligent advertising.
(v) As a Source of Essential Public Utilities:
Industries producing essential goods and services need to operate on a large scale so that enough may be produced to cater to the needs of the people at fair and uniform prices. Such industries require huge capital investment and hence are often state managed.
Examples are public transport, power generation, water supply, communication and the like. They are all state monopolies. They operate on large scale so that they may avail of the benefits of scale economies for providing basic amenities at fair and uniform prices.
Demerits of Monopoly Market
From the discussions so far, it may appear that a monopoly is a social evil requiring strict control, regulation and, in some cases, even elimination. It is the abuse of monopoly power that has led to these allegations. Let us enumerate them.
(i) Higher Price and Restricted Output:
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Monopoly is often criticised for charging higher price and restricting output. Both reduce consumers’ welfare. In fact, it is the temptation to secure high monopoly prices and profit margins that induces the competing firms to join hands to form a monopoly.
In practice, however, there are some limitations in the ability of the monopoly to fix a very high price or to restrict output.
High prices and restricted outputs of monopoly firms initiate production of substitute goods and thus place a restraint on the price-output decisions of the monopoly. Government intervention is yet another measure that puts a check on such decisions.
(ii) Biased Allocation of Economic Resources:
The profit intent of monopoly firms leads them to produce such goods that yield high profit margins. Production of luxury goods provides an example. It is generally high-tech. Smaller competitive firms lack access to it.
This helps the monopoly to sustain its monopoly power to fix high price and to restrict supply. Due to this, monopoly curtails employment of factors and ends up paying higher remuneration to them than that paid by a competitive firm. In other words, there is a general distortion of distribution and allocation of resources under monopoly.
(iii) Discouraging the Technological Progress:
As long as possible, a monopoly avoids high costs, and hence, incurring expenditure on research and development. Instead, it would leave no stone unturned to abandon development of new technology so that it may not have to incur heavy expenditure on it.
If a monopoly opts for advanced technology, it does so only with a view to barring entry to other firms. Here, the purpose is to sustain monopoly power.
(iv) Unfair Trade Practices:
A monopoly resorts to all sorts of unfair trade practices to oust its rivals. It may indulge in cut-throat competition with them by fixing prices below the costs so that the rivals either quit or decide to merge with it.
For instance the trust companies frequently resort to fixing ridiculously low prices with a view to forcing rivals either to quit or to merge with the trust companies. As soon as the purpose of gaining the monopoly power is served, the trust companies revert back to high price to make good the losses suffered by them in the process.
Another example of unfair trade practice from the past is a system of secret rebates in freight charges which an American trust company managed from railway companies by threatening not to patronise them if such rebates were not granted. The rivals having no such advantage soon ran themselves out of steam paying higher freight charges.
The trust company enjoyed the fruits of fixing lower prices due to lower cost of transportation. A number of countries, including India, have antitrust legislation now to deal with such unfair trade practices.
In India, the ‘MRTP ACT of 1969’ is such a legislation. The purpose of such legislation is to permit only those mergers, acquisitions and trade practices that increase efficiency and to prevent those that enhance the monopoly power of the trust companies.
(v) Exploitation of Corrupt System:
Monopolies in many countries bribe corrupt legislators to prevent passing of legislation against their unfair trade practices. There are instances of bribing judges to interpret anti-trust laws favourably.
Monopolies, even elsewhere, are not far behind in exploiting corrupt politicians and judges and availing of special favours to strengthen their monopoly power.
Influencing political parties by contributing substantially to their election funds is a common practice in many democracies. The obliged political parties return the favours as soon as they resume power.
They come out with such economic policies that benefit the monopolies at least during the tenure of their government. All the anti-trust legislations, however strict, prove, at times, of little consequence owing to the manipulative potential of the monopoly firms.