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p. 7 of 62 BACK | NEXT Purpose and Structure of the Toolkit Overview of Practices Controlled by Competition Law Countries with Competition Law Systems Benefits of Competition Policy Summary of Typical Benefits of Competition Benefits of Competition Disadvantages of Monopoly Practices Controlled by Competition Law Key Concepts and Tools Competition, Privatization, and Regulation Emerging Economies Enforcement Mechanisms ADB Resources and Projects Other Resources Glossary and List of Abbreviations

Competition Law Toolkit : Benefits of Competition Policy

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Disadvantages of Monopoly

Under conditions of monopoly [ PDF ], the position is very different. The monopolist is in a position to affect the market price. Since it is responsible for all the output, and since it is aggregate output that determines price through the relationship of supply to demand, the monopolist will be able to either increase price by reducing the volume of its own production, or to reduce sales by increasing price: the latter occurs in the case of highly branded products which are sold at a high price, such as luxury perfumes. Furthermore, again assuming a motive to maximize profits, the monopolist will see that it will be able to earn the largest profit if it refrains from expanding its production to the maximum possible. The result will be that output is lower than would be the case under perfect competition and that consumers will be deprived of goods and services that they would have been prepared to pay for at the competitive market price. There is allocative inefficiency in this situation: society's resources are not distributed in the most efficient way possible. The inefficiency is accentuated by the fact that consumers, deprived of the monopolized product they would have bought, will spend their money on products which they wanted less. The economy to this extent is performing below its potential. The extent of this allocative inefficiency is sometimes referred to as the "deadweight loss" [ PDF ] attributable to monopoly; the loss itself is known as the social welfare cost of monopoly [ PDF ].

The objection to monopoly does not stop there. Productive efficiency may be lower [ PDF ] because the monopolist is not constrained by competitive forces to reduce costs to the lowest possible level. Instead, the firm becomes "X-inefficient." This term refers to a situation in which resources are used to make the right product, but less productively than they might be: management spends too much time on the golf course, outdated industrial processes are maintained, and a general slackness pervades the organization of the firm. Furthermore, the monopolist may not feel the need to innovate, because it does not experience the constant pressure to go on attracting customers by offering better, more advanced products. Thus, it has been said that the greatest benefit of being a monopolist is the quiet life that it is able to enjoy.

A final objection to the monopolist is that, since it can charge a higher price than in conditions of competition (it is a price-setter), wealth is transferred from the unfortunate consumer to the monopolist. This may be particularly true where it is able to discriminate between customers, charging some more than others. However, it is important to recognize that price discrimination in some circumstances may be welfare-enhancing, or at least neutral in terms of social welfare. While it is not the function of competition authorities themselves to determine how society's wealth should be distributed, it is manifestly a legitimate matter for governments to take an interest in economic equity, and it may be that one of the ways in which policy is expressed on this issue is through competition law.

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