To many people, the word ‘monopoly’ connotes to nothing more than a family friendly board game. For a long time, I was one of those people. In fact, it wasn’t until recently, when I encountered a unique question in my Energy Law Exam that I began understanding the wider meaning of a monopoly.
The Economic Times defines a Monopoly as a sector in which a single entity faces no competition. In essence, the entity is so large that it has total control of the market. This allows the ‘monopolist’ to dominate the industry by charging a higher price and restricting total output, thereby reducing economic welfare. For this reason, monopolies are often criticised. However, the advantages and disadvantages of monopolies must be weighed up to fully critically analyse the commercial market.
It is unsurprising that the list of disadvantages outweighs the advantages for monopolies. As previously mentioned, one of the most well-known disadvantages is reduced economic welfare. Such a disadvantage often stems from price discrimination, in which a firm charges different prices to different consumers for the same product. As a result of such discrimination, consumers not only lose out on surplus but are left subject to inequitable practice. It is for this reason, that monopoly practice has become notorious for consumer exploitation. Crucially, as the only seller, the entity has the power to sell their services for an extortionate price. With no competition in the market, the seller has no option but to purchase. This results in many consumers paying high prices for low quality goods/services.
Undeniably, the leading economic advantage of monopolies are the powers they bring to firms. Referred to as economies of scale, the increased output of a monopoly may lead to a decrease in cost of production. This is most beneficial in industries with a typically high production cost. Additionally, monopolies are known to make supernormal profits which can be used to fund greater investments and spending. In the long term, this is highly beneficial to the research & development of the entity, particularly in markets which continue to grow in line with advancements in technology.
The question I faced in my exam read “which stages of energy production can be considered a monopoly?”. This was significantly different to any questions I had encountered in my legal education. I had never considered how the law could mix with economics in an exam situation and initially, I thought that the question was odd.
However, upon reflection it is clear that energy distribution is one of the few sectors in which a monopoly can most successfully operate. At the intersection of law, business and economics, monopolies and the discussions that follow them remain at the heart of the commercial world. And, whilst the board game will be an exceptional pass time for us to play in lockdown, it is important to use this time to develop our practical understanding of them and how they affect the market.
By: Lauren Pirouet – University of Aberdeen
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