Monopoly: A Brief Introduction (from Linux)

Public policy with regard to monopolies should ideally be based on what is most efficient for the economy and society as a whole. For natural monopolies, it is generally most efficient to maintain the monopoly, but subject it to government regulation with regard to prices, quality of service, etc. In the case of monopolies that are not natural monopolies (i.e., products for which there is no great advantage in terms of economic efficiency to having a monopoly), public policy decisions should depend in large part on the behavior of the monopolist. If the monopolist is regarded as charging reasonable prices, providing high quality products, being innovative and not engaging in abusive practices, then there might be good reason to leave it alone. One reason to leave a monopoly alone in such circumstances is to avoid what can be the very substantial costs involved in regulating it or breaking it up. But if it is determined that a monopolist is charging prices substantially higher than, providing quality lower than, or being less innovative than would occur under competitive conditions or engaging in abusive practices, then there is good cause to take aggressive action. The ways in which governments can intervene to reduce the adverse effects of monopolies can be classified into three broad categories: (1) strengthening of existing competition or promoting the emergence of new competition by such means as encouraging innovation, providing government contracts to competitors and providing favorable financing to competitors, (2) regulating the monopoly to limit prices, eliminate price discrimination, set quality standards, restrict political activities, etc. and (3) breaking up the monopoly.

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Contributor: Shambhu Ghatak
Published Date: May 8, 2008