Social Effects of a Monopoly

In the short run, the economy sees higher prices and lower output with a monopoly than it would under perfect competition. This is also true in the long run: under perfect competition, ease of entry makes it impossible for any firm to maintain earning above normal profits—increased competition from new competitors would ensure that all firms in the market earned normal profits. This keeps long-run prices down under perfect competition. In a perfectly competitive market, firms make profit by selling as much as they can at the given market price. However, a monopolist with its market control can charge higher prices than those in a perfectly competitive market. For example, historically in the United States, the corporation American Tobacco had a monopoly on cigarettes and sold them for a high price, profiting greatly.

In a monopoly, however, the high barriers to entry for new competitors and subsequent lack of competition allow the monopolist to keep earning above-normal profits in the long run, and there is no pressure for it to lower prices or to add output into the market. In the early period of home internet usage in the United States, many rural communities had slow or nonexistent internet connections. Internet service providers were not motivated to invest in these communities because they were not profitable. Today, there are still many rural areas in the United States that do not have high-speed internet access.

There is also the possibility of higher costs in the long run, as the monopolist has no need to innovate once it has secured the market. It has no need to develop new and more efficient techniques as it can make a high level of profit without doing so. In fact, as a way of maintaining its advantage, it may spend most of its time developing more barriers to entry instead of new technology.

An unequal distribution of income is also possible. The monopolist's producer surplus was created by reducing consumer surplus—a direct transfer of wealth from consumers to producers. Its higher profits could be seen as unfair as they are achieved by charging a higher price than a perfectly competitive firm could. This also reverberates through the wider economy: as a result of paying the monopolist's high price, consumers have less money to spend elsewhere in the economy than they would otherwise have. Producers in other markets are affected because consumers have less money to spend. And consumers are affected again because they cannot afford to buy all of the products they wish to buy in these other markets.

Although monopolies are generally regarded skeptically and are typically monitored closely where they exist in order to guard against the monopolists abusing their market power, monopolies also have some potential advantages.

In a market that is a natural monopoly, a single supplier can be the most efficient way of operating. As such, the monopolist actually charges a lower price than if there were even two firms competing in the market and much lower than if there were a large number of suppliers, as is possible in a perfectly competitive market. This could be because of high startup costs, such as in many public utilities, where high setup costs prevent others from entering the market and a monopoly may be the only way these goods are provided. For example, installing gas pipes and all the other infrastructure needed for a distribution network is expensive—just getting the permits needed to start construction costs time and money. Any new firm would seek to recover those costs. An established firm, on the other hand, has already created the network. Once that is done, much lower costs are needed for the monopolist to maintain the network. The monopolist's break-even price, the minimum that it needs in order to cover costs, is lower than a new supplier's could be, and as a result the market price is lower as well.

Alternatively, the market itself could be too small to have more than one firm operate profitably. Rural bus routes are a good example. With a fairly small population and fairly large distances between towns, a single provider may get enough customers to be successful. However, even with just two suppliers competing, having half-full buses might not allow either company to cover its costs (fuel, maintenance on the buses, wages for staff). With a small enough market, sometimes the choice is between having one supplier or having none at all.

Innovation is one of the barriers to entry in a monopoly. Lack of innovation in the long run is also a potential cost to society, but monopolies can be a long-run benefit to society. Research and development is expensive, and it too can have economies of scale. A monopoly making above-normal profits has a pool of money that it can spend on developing and supporting innovation, as well as an available market to implement all this cutting-edge research, the result being lower costs and greater innovation over time. For example, when AT&T had a monopoly in telephone services in the United States, part of its profits went to supporting research and development, both at its dedicated research facilities (Bell Labs) and its production arm (Western Electric).