Explain why monopolies may be an undesirable form of market structure

In theory, a monopoly is a situation in which the ‘industry is the firm’ however in reality in the UK we consider anything which controls 25% or more of the market to have monopoly power and the Competition Commission would investigate a report on any merger which goes up to this percentage.  A monopolist is a ‘price taker’ and is often considered to be an undesirable form of market structure due to the fact:

- Restricts competition due to structural and statute barriers to entry

- Leads to a lower output and increased costs.

Allocative and productive inefficiency

Monopolies are both allocatively and productively inefficient, in comparison to a situation under perfect competition, since the firm is not operating at its lowest point on the ATC curve nor where MC=P. 

- Allocative efficiency occurs where MC=P

- Productive efficiency occurs where MC=ATC

This hence means that the firm is not making optimal use of its resources, this therefore means that monopolies are undesirable since they are not statically efficient. 

Too much monopoly power may be considered to be undesirable since it can ‘kill the goose which lay the golden egg’ and prevent new innovative ideas surviving due to firms operating with high research and development costs alongside dominant advertising. 

X-Inefficient

In addition, a monopoly may have fewer incentives to cut costs because of a lack of competitors.  Therefore, it will also be X-inefficient meaning the cost curves of a monopoly would be higher than they would be if there was more competitive pressures.  Similarly a monopoly, whilst generating super normal profits, may in fact lack the incentives to innovate and offer good quality services due to the inelasticity of demand for the consumer. 

A monopoly may therefore not be considered to be desirable since economist Harvey Leibenstein proposed that a nationalised monopoly may be more concerned about the political implications of making people redundant rather than getting rid of its surplus workers to minimise costs. 

However – dynamically efficient

Whilst monopolies may be viewed as undesirable due to their lack of productive and allocative efficiency, others would argue these are desirable due to dynamic efficiency gains. 

Equally in cases such as a natural monopoly, it may be considered to be more beneficial for there to be one supplier to benefit from economies of scale in order to minimise waste and reach the minimum efficient scale of production.