Pros, Cons of Monopoly

• Monopoly

  A highly concentrated market
• Pros of monopolies

  • Dynamic efficiency benefits - reinvest supernormal profits
  • Exploit greater economies of scale compared to competitive firms
  • Can cross-subsidize goods and services
• Cons of monopolies

  • Allocative inefficiency - price higher than marginal cost, lower consumer surplus
  • Restrict output, less choice, quality issues
  • Productive inefficiency - don't minimize costs, excess costs
  • Can cause inequalities, especially in necessity markets
• Monopoly price

  Higher than marginal cost
• Monopoly output

  Restricted
• Deadweight welfare loss


  • Difference between monopoly outcomes and competitive market outcomes
• Allocative inefficiency

  Higher prices, lower output
• Productive inefficiency

  Voluntarily forgoing economies of scale, operating beyond minimum average cost
• Monopoly profits

  Can be reinvested for dynamic efficiency benefits
• Monopoly size

  Can exploit greater economies of scale than competitive firms
• Natural monopoly

  Regulated natural monopoly can give desirable outcomes
• Monopoly power

  Can lead to cross-subsidization of goods and services
• Theoretical pure monopoly is not realistic, more realistic is a firm with monopoly power
• Competition, even potential competition, can keep monopolies honest and reduce inefficiencies
• Type of good/service produced by monopoly

  Impacts evaluation - necessities bad, luxuries may be acceptable with dynamic efficiency