Economies of Scale and The Dangers of Monopolies
Economies of Scale and The Dangers of Monopolies
A pure Monopoly is a system or state of a market where there is just a single supplier, but most times monopoly power just refers to a system where a single body or firm has power over more than 24% of that market. The common perspective of all monopolies is that they tend to be more concerned with maximizing profit by any means.
This is usually done at the expense of consumers which in turn creates more costs to an economy than it does benefits. The most common type of monopoly that can be found in most societies is the monopoly of power; pure monopoly on the other hand is much rarer. A monopoly of power can be found even when there is more than just one supplier where just one company holds all the power.
In a natural monopoly, these barriers are other factors that do not involve any legal procedures like jacked up prices of rent spaces while in Legal monopoly there are legal rights that make any competitor at the risk of a lawsuit.
Economy of Scale
The economy of scale works in the economy very much like a scale in measuring weights. It measures the relationship between the size of an industry and the cost of its products. It is believed that the larger an industry grows, the lower its products are supposed to cost. The more a firm manufactures its products in the fastest time possible, the lower the price of that product is supposed to go. This drop-down in cost is known as the economy of scale. The introduction of new technologies and better resources can lead to a faster production process and result in an economy of scale. When the opposite happens it leads to a diseconomy of scale.
Monopoly and Economy of Scale
Now, the size of a particular market can be integrated with the economy of scale to remove any form of competition. This is the backbone of most firms that gives them monopolistic power.
If a firm that manufactures product X makes about 50 thousand of it in a month and at this rate, they cost about 5 dollars each. At this stage, other companies can enter that market and stand a chance of competing with this firm. But if this company finds better ways of making X and makes about 1 million in a month, then their prices can go down as low as 2 dollars per product.
This will eliminate one and all competitions. This means they just used economies of scale to discourage all competitions. These are the types of advantages that most big companies hold over small businesses. They also gain an advantage by creating long term contracts that reduce rates when obtaining loans and have more specialized management with special access to better financial instruments.
The Dangers of Monopolies
One of the first and obvious costs associated with a monopolistic market is the denial of choice. In economies and even everyday life, the concept of choice is very important no matter how controlled the choice may appear. A monopoly takes away that choice, which means consumers are stuck with that product or service no matter the condition, kind of like a dictatorship. The lack of choice in a monopoly is what results in the rest of the collective dangers of monopolies.
Without the availability of choice, monopolies can set the price however they want it. It could be low but it could also be extremely high. They will be able to get away with it because they have no competition that their consumers can turn to.
A good example is Microsoft in the 1980s and the Organization of Petroleum Exporting Countries (OPEC). This also a bigger problem when the product or service is a necessity like electricity or water.
Inefficiency in the Economy
There are many ways that a monopoly can bring inefficiency in an economy. The more power a monopoly acquires, the more it becomes impossible to communicate and coordinate the firm. This tends to make them appear above the law.
They can decide to pay lower wages to workers and cause large scale unemployment. The more mechanized their productions become the fewer workers they would need. The workers that would have been employed by their competition are non-existent because they have killed all competitions. This can cause disruptions, hostility, and tensions in an economy.
But that is not all; they can also acquire political power and become quite dangerous in a society that is not democratic. This can make them too powerful and give them way too much influence and control over people’s lives and choices like big tech firms.
There is a general rule that too much power in anyone’s hand is dangerous and the same thing applies to monopolies, they can drop the quality of products at will, and even go as far as using any methods(legally within their rights) to get rid of any competition that comes up.
They can practice unfair but not illegal trade practices. The presence of monopoly can also kill most beginners’ zeal for innovation. The companies themselves have to motivation to do better since they are kings of that industry. The allocations of resources are also very biased which may make them inaccessible to small firms.