Editing Monopoly (section)

== Monopoly and efficiency ==
[[File:Monopoly-surpluses.svg|thumb|upright=2|right|In a competitive market, everything above the horizontal line at ''Pc'' would be consumer surplus, and everything below, producer surplus. The monopolist pushes up the price (from ''Pc'' to ''Pm''), reducing consumption (from ''Qc'' to ''Qm'') but capturing some of the consumer surplus. '''The remaining consumer surplus is shown in red; the enlarged producer surplus in blue.''' But increasing the price means price-sensitive consumers do not buy, causing a [[deadweight loss]] (in yellow). Since the yellow area below line ''Pc'' (what the monopolist loses from lower sales) is smaller than the blue area above line ''Pc'' (what the monopolist gains from higher prices), the monopolist has a net gain, but society has a net loss; economic efficiency decreases. ]]
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| quote = The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which it is supposed they will consent to give; the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.<ref name="Smith">Smith, Adam (1776), [http://www2.hn.psu.edu/faculty/jmanis/adam-smith/Wealth-Nations.pdf Wealth of Nations] {{Webarchive|url=https://web.archive.org/web/20131020042323/http://www2.hn.psu.edu/faculty/jmanis/adam-smith/Wealth-Nations.pdf |date=2013-10-20 }}, Penn State Electronic Classics edition, republished 2005</ref>{{rp|56}}

...Monopoly, besides, is a great enemy to good management.<ref name="Smith" />{{rp|127}}

– Adam Smith (1776), ''[[The Wealth of Nations]]''
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According to the standard model, in which a monopolist sets a single price for all consumers, the monopolist will sell a lesser quantity of goods at a higher price than would companies by [[perfect competition]]. Because the monopolist ultimately forgoes transactions with consumers who value the product or service less than its price, monopoly pricing creates a [[deadweight loss]] referring to potential gains that went neither to the monopolist nor to consumers. Deadweight loss is the cost to society because it is inefficient. Given the presence of this deadweight loss, the combined surplus (or wealth) for the monopolist and consumers is necessarily less than the total surplus obtained by consumers by perfect competition. Where efficiency is defined by the total gains from trade, the monopoly setting is less [[economic efficiency|efficient]] than perfect competition.<ref>{{cite book|last1=McEachern|first1=William A.|title=Economics: A Contemporary Introduction|date=2009|publisher=Cengage Learning|isbn=978-0-324-57921-5|pages=216–218|url=https://books.google.com/books?id=JpuDoMDX4tsC&pg=PA218|language=en}}</ref>

It is often argued that monopolies tend to become less efficient and less innovative over time, becoming "complacent", because they do not have to be efficient or innovative to compete in the marketplace. Sometimes this very loss of psychological efficiency can increase a potential competitor's value enough to overcome market entry barriers, or provide incentive for research and investment into new alternatives. The theory of [[contestable markets]] argues that in some circumstances (private) monopolies are forced to behave ''as if'' there were competition because of the risk of losing their monopoly to new entrants. This is likely to happen when a market's [[barriers to entry]] are low. It might also be because of the availability in the longer term of substitutes in other markets. For example, a [[canal]] monopoly, while worth a great deal during the late 18th century United Kingdom, was worth much less during the late 19th century because of the introduction of railways as a substitute.{{citation needed|date=June 2012}}

Contrary to [[List of common misconceptions|common misconception]],{{according to whom|date=January 2022}} monopolists do not try to sell items for the highest possible price, nor do they try to maximize profit per unit, but rather they try to maximize total profit.<ref>McConnell, Campbell R. Economics : principles, problems, and policies / Campbell R. McConnell, Stanley L. Brue.– 17th ed.</ref>{{full citation needed|date=January 2022}}

=== Natural monopoly ===
{{Main|Natural monopoly}}

A natural monopoly is an organization that experiences [[Economies of scale|increasing returns to scale]] over the relevant range of output and relatively high fixed costs.<ref>Binger and Hoffman (1998), p. 406.</ref> A natural monopoly occurs where the average cost of production "declines throughout the relevant range of product demand". The relevant range of product demand is where the average cost curve is below the demand curve.<ref>Samuelson, P. & Nordhaus, W.: ''Microeconomics'', 17th ed. McGraw-Hill 2001</ref> When this situation occurs, it is always more efficient for one large company to supply the market than multiple smaller companies; in fact, absent government intervention in such markets, will naturally evolve into a monopoly. Often, a natural monopoly is the outcome of an initial rivalry between several competitors. An early market entrant that takes advantage of the cost structure and can expand rapidly can exclude smaller companies from entering and can drive or buy out other companies. A natural monopoly suffers from the same inefficiencies as any other monopoly. Left to its own devices, a profit-seeking natural monopoly will produce where marginal revenue equals marginal costs. Regulation of natural monopolies is problematic.{{Citation needed|date=August 2010}} Fragmenting such monopolies is by definition inefficient. The most frequently used methods dealing with natural monopolies are government regulations and public ownership. Government regulation generally consists of regulatory commissions charged with the principal duty of setting prices.<ref>{{cite book | last1 = Samuelson | first1 = W | last2 = Marks | first2 = S | page = 376 | title = Managerial Economics | edition = 4th | publisher = Wiley | year = 2005}}</ref> Natural monopolies are synonymous with what is called "single-unit enterprise", a term which was used in the 1914 book ''Social Economics'' written by Friedrich von Wieser. As mentioned, government regulations are frequently used with natural monopolies to help control prices. An example that can illustrate this can be found when looking at the United States Postal Service, which has a monopoly over types of mail. According to Wieser, the idea of a competitive market within the postal industry would lead to extreme prices and unnecessary spending, and this highlighted why government regulation in the form of price control is necessary as it helped efficient market.<ref>West E.G. (2008) Monopoly. In: Palgrave Macmillan (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London</ref>

To reduce prices and increase output, regulators often use average cost pricing. By average cost pricing, the price and quantity are determined by the intersection of the average cost curve and the demand curve.<ref name="ReferenceA">Samuelson and Marks (2003), p. 100.</ref> This pricing scheme eliminates any positive economic profits since price equals average cost. Average-cost pricing is not perfect. Regulators must estimate average costs. Companies have a reduced incentive to lower costs. Regulation of this type has not been limited to natural monopolies.<ref name="ReferenceA" /> Average-cost pricing does also have some disadvantages. By setting price equal to the intersection of the demand curve and the average total cost curve, the firm's output is allocatively inefficient as the price is less than the marginal cost (which is the output quantity for a perfectly competitive and allocatively efficient market).

In 1848, J.S. Mill was the first individual to describe monopolies with the adjective "natural". He used it interchangeably with "practical". At the time, Mill gave the following examples of natural or practical monopolies: gas supply, water supply, roads, canals, and railways. In his ''Social Economics'',<ref name="Palgrave Macmillan">{{cite book |title=The New Palgrave Dictionary of Economics |date=2008 |publisher=Palgrave Macmillan |location=Basingstoke, Hampshire |isbn=978-0-333-78676-5 |edition=2nd}}</ref> Friedrich von Wieser demonstrated his view of the postal service as a natural monopoly: "In the face of [such] single-unit administration, the principle of competition becomes utterly abortive. The parallel network of another postal organization, beside the one already functioning, would be economically absurd; enormous amounts of money for plant and management would have to be expended for no purpose whatever."<ref name="Palgrave Macmillan" />
Overall, most monopolies are man-made monopolies, or unnatural monopolies, not natural ones.

=== Government-granted monopoly ===
{{Main|Government-granted monopoly}}

A government-granted monopoly (also called a "''[[de jure]]'' monopoly") is a form of ''[[coercive monopoly]]'', in which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity. Monopoly may be granted explicitly, as when potential competitors are excluded from the market by a specific [[primary legislation|law]], or implicitly, such as when the requirements of an administrative [[delegated legislation|regulation]] can only be fulfilled by a single market player, or through some other legal or procedural mechanism, such as [[patents]], [[trademarks]], and [[copyright]]. These monopolies can also be the result of "rent-seeking" behavior, where firms will try to get the prize of having a monopoly, and the increase of profits in acquiring one from a competitive market in their sector.<ref>{{cite book|publisher=Gale Cengage Learning|location=Detroit|editor-first=Thomas|editor-last=Riggs|editor-first2=Mary|editor-last2=Bonk|series=Everyday Finance: Economics, Personal Money Management, and Entrepreneurship|title=Government-Granted Monopoly|year=2008|isbn=978-1-4144-1049-4|ol=OL21557400M|lccn=2007035070|url=https://archive.org/details/everydayfinancee0000unse|access-date=6 November 2018}}</ref>