Monopolies do not constantly lead to increased costs, lower outputs and well-being losses. In fact, monopolies can frequently lead to boosts in society’s well-being as large monopolists gain from economies of scale in production and circulation. These falls in costs can frequently be handed down to customers in the type of lower priced products. We will now discuss quickly a few of the prospective advantages of monopolistic market structures.
Under monopoly, higher output and standardization can result in lower costs.
This can lead to economies of scale and scope, which can be passed on to customers in the type of lower priced items.
It could be argued that some industries are more effectively organized as monopolies. Industries such as water, gas, electrical power and communications are frequently described as ‘natural monopolies’. A natural monopoly occurs when the ratio of the minimum efficient scale to industry size is so large that industries can just support one efficient company.
In natural monopolies, fixed costs form a big part of total expenses.
If the monopoly remains in private hands, the monopolist makes the most of revenues where marginal expenses equivalent minimal earnings, and produces at output level and charges cost. The monopolist makes excess revenues equivalent to the shaded location. If the company were forced to charge a price that would prevail under competition, it would set rate equivalent to minimal costs and produce at output level. For instance, suppose we have a public utility that supplies a particular part of the country through a network of pipes.
It would mishandle for a new firm to enter the marketplace, established its own system of pipelines and then start supplying a sector of the marketplace. This is due to the fact that the level of output the company produces would yield insufficient earnings to cover overall costs. This competitors would therefore result in inefficient duplication (and competition) of systems.
Large monopoly profits may be used to finance research and development programmes. Monopoly profits are the reward for successful innovations. These innovations bring welfare gains to society in the form of new products and processes. Furthermore, these monopoly profits will not persist as there will eventually be entry by imitators or patents will lapse, which will eventually dissipate these profits. These assertions have been tested empirically for manufacturing and service industries in a number of countries.
Monopolies may avoid wasteful forms of competition such as advertising, which are prevalent features of many oligopolistic market structures. Given that monopolists to some extent have a captive market, there is little incentive for monopolies to advertise. In addition, monopolists may also generate a degree of price stability. They may be expert in accurately gauging the level of demand and supply. A monopolist may also be better placed to endure any downturn in the business cycle.