Monopolies Research Paper
10 November 2015
Monopolies date back for well over one hundred years and have continuously been studied and debated upon. One of the first notable monopolies in United States history was John D. Rockefeller’s Standard Oil Company. While it is ideal for a business to be the sole provider of a good or service because it eliminates competition, this monopoly power can be bad for the economy. Such monopolies can be detrimental to the economy because of the lack of incentive for innovation, the deadweight loss they present, and the price-fixing ability of the businesses.
Firms with no incentive to innovate can be harmful to the economy; Herbert Hoover once stated, “Competition is not only …show more content…
It is easy to see why a deadweight loss is not ideal for the economy, yet when there is a monopoly these losses occur. Monopolies disregard the idea of an efficient level of output. By taking a look at Figure 1 in the Appendix, it is easy to see what an efficient level of output is. The quantity a monopolist should choose based on this graph is where the value to buyers (blue) is equal to the cost to the monopolist (where the demand curve intersects with the marginal cost curve). A smaller output would reduce total surplus because the value to buyers would be greater than the cost to the monopolist; and vise versa, an increase in output would reduce total surplus because the cost to the monopolist would be greater than the value to the buyers. Monopolists are price setters, and because of this can set a price that exceeds the marginal cost. Figure 2 shows this, and what results from it. In order for a monopoly to maximize profit, they set the quantity of production at the value where marginal revenue is equal to marginal cost. From there, a monopolist uses that quantity while using the corresponding value on the demand curve, the value to the buyers. This is what causes the deadweight loss, represented with a red triangle in Figure 2. This area is the total surplus that is lost due to the monopolies setting their price above the marginal cost. …show more content…
If there is no competition, there is very little motive to get better because the product is the already the best in the market. This is the attitude of most monopolists and is the reason for less innovation. Monopolists can charge an amount above the marginal cost of the good or service, and this reduces the total surplus in the economy. The government should regulate this type of monopoly but if there is a natural monopoly it should be left alone because that firm supplies the good at a lower cost than several others in the market and needs no intervention. With little to no competition, a monopolist gains great pricing power, which allows them to make enormous profits. Examples of monopolies can be seen all throughout history to the present day, as seen through Standard Oil’s past and through some modern beliefs about Apple. Not all monopolies are automatically bad, but some are and it is important for our government to regulate the ones that prove to have a negative effect on the