Discuss whether monopolies should be disallowed on the basis that they exploit consumers.


  • Monopolies possess substantial market power, and can charge high prices,

exploiting consumers

  • In response, some have called for greater competition and the elimination of monopolies

Thesis: Monopolies exploit consumers, and hence should be disallowed.

  • Compared to a perfect market with same cost conditions, profit-maximising monopolists produce at lower output and higher price (P>MC)
  • Diagram to contrast PC outcome with monopoly outcome
  • Presence of barriers to entry allows monopolies to earn supernormal profits in the long run at the expense of consumers, which may be viewed as exploitation, and this is especially significant for large national/international monopolies (e.g. De Beers in the past)
  • Monopolies may further engage in directly unproductive profit-seeking (DUP) activities (e.g. government lobbying) that can help perpetuate their monopoly position, but the cost of such activities may be passed on to consumers in the form of higher prices
  • Monopolies may implement price discrimination, which results in even higher prices for consumers and hence loss of consumer welfare
  • For the above reasons, it may be justified to disallow monopolies, i.e. by increasing competition, which may be in the form of increased number of licenses issued by the government, breaking up existing monopoly into multiple firms

Antithesis: Monopolies can actually bring benefits to consumers, and should be allowed to persist.

  • Industries which are natural monopolies may suffer from a missing market if monopolies are disallowed: two firms supplying half the market each may be faced with higher costs that exceed the revenue they could obtain for each unit, hence resulting in them earning subnormal profits and ultimately leaving the industry
  • Even if not a natural monopoly, the monopolist may enjoy substantial economies of scale, such that the price it can offer is lower than if there were more firms in the market
  • Monopolies seeking to increase profits may conduct R&D and product innovation which benefits consumers, promoting dynamic efficiency. In particular, they have the financial ability to do so due to their supernormal profits. With process innovation, they could develop new, cheaper production techniques (e.g. use of robotics) that lower their LRAC in the long run.
  • Monopolies may avoid duplication of services and in fact increase variety available (e.g. a monopolist TV broadcaster showing a variety of programmes on their different channels, as compared to competing channels showing the same popular programme)
  • Price discrimination practised by monopolies may make product available at lower prices and higher quantities to certain groups (e.g. cross-subsidisation of the sub- market with more price elastic demand in 3rd degree price discrimination)


  • Given their benefits, monopolies should not be disallowed, but instead subject to government regulation to ensure they do not exploit consumers
  • These may include AC/MC pricing to reduce prices
  • Should also try to ensure they do not engage in DUP/rent-seeking activities
  • Alternatively, monopolies may be state-run such that they set lower prices
  • The extent to which government regulation is desired will ultimately depend on the nature of the product and the size of the market. A village store operating as a local monopoly and making small supernormal profits may not warrant state intervention, whereas the argument may be more convincing for an international, highly lucrative monopoly (c.f. Apple’s lawsuits against Samsung amidst the fear that Apple could in the future secure a monopoly of high-mobility electronic devices).

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