What are the effects of monopolies?

My answer on Quora:

In general, monopolies are bad for consumers (higher prices and less choice), bad for workers (potentially lower wages) and suppliers, and bad for overall economic growth (less investment).

These results arise when a monopoly does everything it can to solidify its monopoly power so that it keeps all the profits in the market to itself. The monopoly then focuses on fighting off competition (and regulations) rather than fighting for profits — what economists call “rent-seeking”. This results in:

  • Lower incentives to innovate and improve the quality of the goods and services it provides to consumers.
  • Higher mark-ups in the prices it charges. Consumers would thus pay more than the value of the product.
  • Predatory practices to reduce or eliminate the threat of entry by other firms into that market (like keeping a huge inventory and threatening to flood the market (thereby reducing prices significantly) to deter competitors (who would not be able to operate at that new lower price)). Many of these predatory practices are against the law, but that doesn’t stop monopolies from finding ways to deter competition.
  • Monopolies may also be monopsonies, where they have more power in setting wages and costs of other inputs, which can often help drive up wage inequality and lower the quality (and quantity) of other forms of labor compensation (like benefits and pensions).
  • Stronger political power. Monopolies tend to seek influence in government (through lobbying, favors, money, even corruption and bribes) to secure and strengthen their monopoly power.

On the other hand, there are industries where monopolies persist not as a result of abuse of monopoly power to deter competition, but because their cost advantage is so great that no other firm can actually compete. These monopolies are called natural monopolies, and they are often seen in industries with very high fixed costs. Other Quora members have cited some good examples of natural monopolies here: What is example of natural monopoly?

These issues are becoming more and more prominent with the increasing strength of the big technology companies. Rana Foroohar has a good column showing how strong some tech companies’ market power has become and how they are strengthening their grip on power: Release Big Tech’s Grip on Power (FT). In June 2017, Google Fined Record $2.7 Billion in E.U. Antitrust Ruling. The debate is getting stronger and louder on the monopoly power of tech companies, especially those with network effects (“Google has 88 per cent of search advertising, Facebook owns 77 per cent of mobile social traffic and Amazon has a 74 per cent market share in the ebook market”Rana Foroohar, FT). This is a defining debate that will have a major impact on what competition will look like in the digital age.

Aside from the technology sector, however, there is evidence of increasing market concentration across industries in advanced economies. The chart below, taken from an article by Eduardo Porter at the NY Times (With Competition in Tatters, the Rip of Inequality Widens), shows that the number of industries in which the top eight companies increased their market share between 2002 and 2012 has outstripped the number in which the top companies’ share has declined.


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