The effects of monopolies on the U. S. Economy What is a monopoly? The concept of a monopoly is largely misunderstood and the mere mention of the term evokes lots of emotions that make clear judgment almost impossible. The standard economic and social case for or against monopolistic businesses is no longer straightforward. According to Mankiw (2009) a monopoly is defined as a market structure characterized by a single seller of a unique product with no close substitutes[1]. When a business dominates a market, it becomes a monopoly by virtue of its power.

A company (or a group of affiliated companies) is considered to have a dominant position in a particular market if it exerts a decisive influence over the general conditions of trade in that market or can restrict access to that market for other businesses. Markets keep changing with the times and so are the conditions in which businesses must operate regardless of whether they have any noticeable market power. [2] Monopolies have contributed significantly in transforming the US economy to be the leading economy worldwide.

This is largely due to the benefits arising from legal monopolies created by the Patent and copyrights law. Monopolies are in effect powerful tools of spurring economic growth in the US. How do monopolies arise? Two major conditions contribute to formation of a monopolistic trade environment. A product which has no close substitutes faces no competition thus its producer becomes a monopolist. Exclusive ownership of a key resource may lead to creation of a monopoly. A classical case is exemplified by the control of the computer hardware, market by International Business Machines (IBM) for nearly forty years.

Due to its market dominance over the hardware, institutions that intended to initiate a project had to do so with IBM. (Rise in Monopolies, n. d. ) Monopolies also develop where there are barriers to market entry. These barriers are obstacles that make it difficult or impossible for any potential competitors to penetrate a particular market. Such barriers could either be natural or legal constraints that protect a firm from competitors. A natural monopoly arises when technology for producing a product enables one firm to meet the entire market demand at a lower price than two or more firms could.

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Legal monopolies develop in a market in which competition and entry are restricted by the concentration of ownership of a natural resource or by the granting of a public franchise, government license, patent, or copyright. When Microsoft licensed an operating system from Seattle Computer Company in 1981 their explosion into dominance began. Microsoft’s dominance over the operating systems enabled it to diversify into producing spreadsheets and word processors. These new software were made such that they worked best with its operating system hence tightening Microsoft’s grip of the market. Mises,1981, p. 86). Certain circumstances do lead to creation of near monopolies or oligopolies. An oligopoly arises when a small number of firms have relatively large market shares. Though each firm is independent, interdependence may arise whereby one firm’s actions influence the profits of the other firms. In addition, when a small number of firms share a market, they can collude to increase their profits by forming a cartel and acting like a monopoly. Default monopolies may arise when there is lack of sufficient knowledge or interest on a particular subject[3].

A firm may end up being a small monopoly by having an upper hand when it comes to accessing knowledge on a particular trade. A case in point is the sole garbage collecting company in Taos. Are monopolies beneficial or detrimental to the US economy? Monopolies have been in existence throughout business history and several corporations have achieved complete dominance over a wide array of industries. The monopolies have been accused of charging exorbitant prices to earn super profits with little regard to consumer welfare .

A fundamental question is; Are these business practices ethical? (Haas, 2006) Citizens of The United States value competition in their market system. Competition not only keeps prices low and encourages production of new products to the market place but also fosters innovations that help to bring down the cost of doing business. Contrary to popular belief, monopolies are not illegal in the United States . Indeed a government-created monopoly is exemplified by the patent and copyright law. This is a law that governs intellectual property.

A pharmaceutical company that develops an original drug can patent it for several years during which it enjoys exclusive production rights. Such a patent offers the producer monopoly status where the producer can charge higher prices and earn greater profits. On the other hand, such a law is beneficial because it encourages innovation and continuous research within pharmaceutical companies to develop new and more superior products. Moreover only big monopolies with significant market power have the capacity to carry out research and development on their products.

This leads to innovation since new knowledge is applied to the production process. The nearly twenty year monopoly enjoyed by Microsoft in manufacturing of its computer software has not only ensured harmony and uniformity in computer software but also facilitated accessibility of computers by the greater population. Consequently, this has lead to the information technology revolution characterized by easier access to information by US citizens and thus the US economy remains to be the world’s superpower.

It is through such innovations that new channels of business for example e-commerce have sprung up . Citizens can now buy items and find good deals through iPods and other innovative devices arising from research and development by giant firms. From a different perspective, in the absence of real competition a monopolist may lack an incentive to invest in new ideas or consider consumer welfare. Monopolies may in certain instances offer inferior services or products. Amtrak enjoys a monopoly status in the passenger rail system.

It has been criticized severally for failing to develop hybrid high-speed locomotives that save on energy consumption as well as failing to service some of its tracks that remain to be under- par conditions. Donald,D (1997) suggests that monopolization can be advantageous to the consumers by enabling cheaper production due to economies of scale. A monopolist may manage to maintain lower marginal costs due to economies of scale and the advantages of division of labor . Consequently; this translates into higher output at lower prices than would have been possible under competitive conditions.

Such economies of scale also tend to guarantee uniform output and harmony in product characteristics. The benefits arising from economies of scale may be eroded due to X inefficiencies[4]. Monopolistic organizations cut on expenses that would have been wrought about by competition and by so doing they deny business opportunities to various support organizations like advertising and public relations firms. This has the net effect of creating unequal wealth distribution since vast wealth ends up in the hands of a few individuals.

Another issue to ponder over is what to make of those monopolies that have come into existence simply by being better than all the rest. A case in point is the Wal-Mart stores which has been accused of running small shop-owners out of business in locations where it opened stores due to its retailing efficiency. Sometimes a market dominated by few firms/sellers does not always indicate the absence of competition, it can reflect the success of leading firms in providing better quality products, more efficiently, than their smaller rivals. Some monopolies throttle the creativity of enterprises and are a detriment in certain sectors.

A classical example is the United States Postal Service that has continuously offered US citizens poor quality services at the expense of taxpayers. This sector needs to undergo restructuring in order to give market access to potential investors and thus improve on service delivery to the citizens. Inefficient production firms that enjoy monopoly status in essence fail to make optimal use of their scarce resources and in such circumstances, government intervention may be warranted through application of competition policy of market liberalization.

A major preposition that makes monopoly undesirable is that monopoly leads to a failure in the market mechanism because the monopoly price is generally higher than both the marginal and average costs. This in turn results in the monopolist offering an exploitative price to the consumer since this price is above the cost of resources used to make the product. Such actions restrict free trade and consequently the consumers’ needs and wants are not properly satisfied because the product is being under-consumed.

Some monopolies especially in the pharmaceutical industry have been criticized for monopolizing drugs for certain ailments like cancer and Aids though the patent laws. Such giant pharmaceutical companies have been accused of engaging in profiteering schemes at the detriment of the welfare of the American citizens. The higher average cost of production that may arise if there are inefficiencies in production also means that the firm is not making optimum use of its scarce resources. This may necessitate some form of government intervention for example by market liberalization in order scale down the monopoly dominance.

Government created monopolies in sectors that require enormous capital outlays have ensured consumers have access to certain crucial services which would not have been possible were such ventures to be entrust solely to private investors. These state-run monopolies are service providers whose main motivation is not profit but to cater for the welfare of the citizens[5]. Their services are crucial in providing enabling environments for the citizens to explore and achieve their goals in life. Monopolies arising from merges and restructuring can operate more efficiently and thus provide better quality services to the citizens.

The mergers eliminate several layers of bureaucracy and create efficient standardized processes. [6]However it is worth noting that some mergers may deprive consumers the benefit of choice. Conclusion Monopolies apparently exist because the quantity demanded in the market is completely satisfied by the monopoly (Peter 2003). The widespread view that the monopolist can fix prices at will is erroneous because the laws determining monopoly prices are the same as those which determine other prices. A monopolist can best serve its interests by separating consumers into classes based on their purchasing power.

A company that controls all aspects of a field can ensure harmony and uniformity. Microsoft offers an outstanding example on this front whereby the greatest proportion of computers run on their software thus enhancing compatibility. Monopolies have resulted in great innovations and immense growth in several sectors of the economy while in others they have been detrimental for example through collapse of small enterprises or delivery of poor quality services. Monopolies are both beneficial and detrimental to the economy and a cost benefit analysis needs to be done to ascertain the role played by individual monopolies in any particular market.

This demands a precise definition of what actually constitutes a market because in almost every industry, the market is highly segmented into different products. Globalization has made it very difficult to ascertain the real effects of monopoly power in any particular market more so due to the effects of the rapidly increasing competition. With proper regulation, monopolies have not only positively contributed towards economic progress but they also provided a stimulus for liberalization of major market segments.

Liberalization in return has opened up many channels of investment and the net effect has been a great expansion in available business opportunities on a global scale. References Donald,D. (1997). Microeconomics: The Analysis of Prices and Markets . New York, Oxford University Press. Haas,W. (2009) Microeconomics : The Effects of Monopolies . Retrieved Nov. 17, 2009, from http://www. associatedcontent. com/article/85453/microeconomics_the_effect_of_monopolies_pg3_pg3. html? cat=3, Mankiw,N.

G(2009). Principles of Microeconomics: South Western Cengage Learning Mises,V. L. (1981) Socialism: An Economic and Sociological Analysis Indianapolis: Liberty Fund. Peter,P. (2003)”Bullying the Monopoly” Arflington VA: Security Management. .47, 12; Rise of monopolies. Retrieved Nov. 17, 2009, from http://cse. stanford. edu/class/cs201/projects-95-96/corporate-monopolies/development. html ———————– [1] This applies largely to pure monopoly where by the monopoly has total control over output and prices within a free and fair market with near perfect competition. 2] A common assumption is that a company is said to dominate a market if it controls over 65% of that market. As a rule of thumb, if a company gains control of 30 % of a market, it poses the risk of acquiring monopoly status but this depends on the size of other competitors in the market. [3] Default monopoly is in reference to a hypothesis advanced by Mankiw in an effort to explain how some non-convectional monopolies come into existence. [4] X inefficiency is a term first coined by Harvey Libenstein.

It refers to the production losses incurred by monopolies arising from economies of scale and lack of incentives to be innovative. [5] The services of some of the state run monopolies are crucial in supporting the American citizens carry out their daily duties and thus their output in all spheres of their lives is thought to be enhanced by such ‘enabling environments’ [6] Mergers create more stable organizations that can guarantee continuous output of quality services and for an extended period of time unlike smaller companies that can be under constant threat by negative market threats.


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