Are monopolies in business' ever good--and under what conditions?

Question

Are monopolies in business' ever good--and under what conditions?

Answer 1

Yes they can be good.

They are good when there is a decreasing average incremental cost of production. This means that every time you produce and extra unit of a good, it becomes cheaper to produce all of the goods on average.

So say if you make 10,000 tires the the total cost is $10,000 so an average cost of $1.  And say if you produce 100,000 tires the total cost is now $80,000. An average cost of $ .80. In this case say that the economy is going to need 100,000 tires in total, it would be less costly for 1 person to produce 100,000 tires at a cost of $80,000 than it would for 10 companies to make 10,000 tires each at a total cost of $100,000.

In the single product case (assuming that the company is only making one good) economies of scale (that it becomes cheaper to produce the good as you produce more) will ensure that a monopoly can produce more efficiently than separate producers.

That being said a monopoly will constrain production to command a price premium (to charge more than their marginal cost, the cost of producing an additional good) and thereby earn economic profit. This reduction in production produces a deadweight loss (the loss associated with the reduction in output).

Regulating said monopoly is one possible solution to ensure that they charge reasonable prices according to some rule the government can devise. Also the theory of Contestable markets by Baumol suggests that a monopoly can be constrained from charging a very high price for its products if entrants can threaten to start producing and undercutting the monopolist.

So in sum, monopolies can be good when economies of scale are present, but a monopoly has the power to influence price unlike a group of firms under perfect competition by constrain which is why many people view monopolies with caution.

Answer 2

no, they never are! all sorts of apologies are pushed out by the terrible publicity they can command - the mass media are also controlled by monopolies. It is the worst tyranny that humans has been subjected to.

One apology made for monopolies is that the favour innovation and technological advance. I believe that is topsy turvy. Innovation arises out of human need to solve a problem. But monopolies take successful innovations up, and make them subserve the profit motive of the monopoly concerned. I remember a cartoon I saw years back - a scientist comes up and claims he has invented a razor blade that remains keen, shave after shave for ever. The tycoon is unimpressed. He says he has another model which remains keen, shave after shave, for two years. tycoon says 'hm'. and finally, the scientist says  he has invented one that remains keen just one more shave than the best currently available. Tycoon jumps up and says hurrah and gives a pay hike.