Competition Matters

Recently, a nationally syndicated comic strip (think computer programmer with an iconic tie) poked fun at monopolistic behavior.  While a comic strip is meant to bring a chuckle to the reader, in reality, monopolistic behavior is no laughing matter.

While in some circumstances having only one large supplier of a good or service (think utilities, such as water) has benefits (such as keeping infrastructure simple), monopolies most often do more harm than good.  Besides increasing prices, the monopolist can use its power and position to coerce suppliers and customers not to do business with any company that dares to try to compete with it, or to extract major price concessions from a supplier, impacting the supplier’s bottom-line.  It may choose not to service geographic areas that are less profitable – areas that might be served if there were multiple sellers in the market.

Because they face little or no competitive pressure, monopolists often produce inferior products because they know that customers cannot find an alternative product or service.  Monopolists are free to limit production, driving prices even higher.  Higher prices are always harmful to purchasers, but they have an especially serious impact on the poor, or on public entities struggling to get the most out of limited taxpayer dollars.

Additionally, with a monopoly, there can be little incentive for innovation or improvement on a product/service.  Monopolies can also make it difficult for new and innovative companies to enter the market.  Even companies with legal patent-based monopolies at times try to extend those patents beyond their legitimate time periods through improper means such as sham patent litigation.

While in some respects larger firms can be more efficient than smaller ones, economists generally agree that monopolies don’t operate as efficiently as firms in competitive markets. 

While it is fun playing a board game that encourages one to obtain a monopoly and drive up prices (and there are now many versions of that game), that is the only place where monopolistic behavior is proper and encouraged.