An analysis of the effects of monopolies on resource allocation

In a more complex economy with production, an allocation would consist both of consumption vectors and production vectors, and feasibility would require that the total amount of each consumed good is no greater than the initial endowment plus the amount produced. In principle, a change from a generally inefficient economic allocation to an efficient one is not necessarily considered to be a Pareto improvement. Even when there are overall gains in the economy, if a single agent is disadvantaged by the reallocation, the allocation is not Pareto optimal. For instance, if a change in economic policy eliminates a monopoly and that market subsequently becomes competitive, the gain to others may be large.

An analysis of the effects of monopolies on resource allocation

Whether this is true or not, depends on the specific company, but certain characteristics are possible to define. It is these I will describe in the following, and hence conclude if monopolies worsen or improve resource allocation.

It is important to distinguish between competition and monopoly before describing advantages and disadvantages of both. Many monopolies are government owned.

This means that the incentive to strive for more profit, better conditions etc. This is due to the fact that, if there is a loss, the government will cover it, and government owned companies seldom strive to achieve maximum profits. A lot of the characteristics are also seen in privately owned monopolizing firms.

When they become so big, that competition is practically gone, the incentive to make even more profits, and being innovative diminishes.

In a competitive industry this is not the case. The fear of loosing your job, not being able to compete, your products becoming obsolete etc. It is therefor obvious that the competitive industry will try harder to allocate their resources in the most efficient way.

To land, the external costs in a competitive industry will often be pollution, seeing that the firm will strive hard to diminish their costs resulting in the firm ignoring 'unnecessary' costs.

The monopoly owned by the government, would never be able to ignore such a serious matter, and they would have to pay the costs. A monopoly would also have to be careful not to damage its image, seeing that is, in many cases, already is unpopular.

Capital, on the other hand, is often to the benefit of a monopoly, since they produce at a large scale.

An analysis of the effects of monopolies on resource allocation

To fully utilize capital, a lot of labour is needed, labour which a monopoly is expected to have, and a smaller competitive firm may lack. For example, a blast furnace might need a crew of 24 men working night and day, to fully utilize it.

The monopolizing company may be able to provide the men, but the smaller firm might not have the money to hire all the 24 men at night, seeing wages are much higher at then.

The question then is if the competitive company is so much more efficient due to hard work, that they still can produce more than the monopoly. When it comes to labour, it is obvious that a competitive industry will strive to utilize the workers at a maximum level, due to the desire of minimizing costs, and workers will in general be very efficient due the reasons mentioned above.

The workers in a monopoly, often loose the feeling, that their work makes a difference in the firm, making it hard for managers to fully utilize the them.

In my opinion, the characteristics described above are not as valid any more. Companies, which enjoyed monopoly status in the beginning of the 80's, like IBM, are now realizing that nothing lasts forever, and they have be innovative, even if the competition is not a great threat.

Bill Gates, owner of MicroSoft, has very admirable policies concerning this. His firm is not a monopoly, but it is definably a cutting-edge firm, which is shaping the future. It is his goal to make his own products obsolete, not letting others do it, and it seems he is achieving that goal.

Allocating resources in monopoly does not have to be worsening, but times change and so must management.

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