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What are the disadvantages of monopolies?

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Quick Answer

The disadvantages of monopolies are not to the monopolistic companies themselves, but are instead suffered by their competitors and the overall market through the effects of pricing discrimination, price fixing and the influence of "corporate cartels" that are able to deter competition through shared directorship and company mergers. Monopolies can act as "price makers" and force their competitors to become "price takers." Lacking the economies of scale enjoyed by a monopolistic company, a smaller company can then be "priced out" of the market, which leaves the field open to the monopoly company.

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Full Answer

The greatest disadvantage of monopolies, with respect to an overall market or economy, is that they destroy competition. The consumer has no alternative producer or service provider to turn to and once the competition has been driven out of the market, the monopoly company charges whatever price it wishes. A monopoly company can use a variety of tactics such as supply limiting, exclusive dealing and forced product bundling to drive out competition.

In order to prevent unfair advantages from deterring the entry of new businesses into the market, the United States enacted a series of laws, commonly known as the antitrust laws, designed to curtail abuses of monopolistic power. Originally enacted in the second half of the 1800s to break up the railroad and manufacturing conglomerates, a more recent use of the Sherman Antitrust Act was to break up the vast AT&T telecommunications monopoly, during the 1980s. The diversified and highly competitive modern telecom industry was created as a result of the AT&T breakup.

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