Q:

What are disadvantages of monopolistic competition?

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Quick Answer

Monopolies have a negative effect on the entire economy by making it harder for consumers to purchase goods, a trend that leads to lower production in the system. High prices do not affect only the consumer, they end up hurting the monopoly itself. Even systems with more than one competitor can be monopolistic if there are only a few. Competition benefits every human component in the economy.

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Full Answer

The ultimate consequence of a monopoly is that overall it reduces society's income. Monopolists take advantage of their unique hold on a market by raising prices above competition level. Because there is no other source from which to purchase the good, people buy it from the monopolist even though it is at a high price. However, the higher price causes consumers to purchase less of the product. As a result of fewer purchases, the monopolist produces less. Thus, goods and money do not diffuse throughout the system the way they do under competition. In this manner, a monopoly reduces aggregate economic welfare.

A monopoly is obviously disadvantageous for the consumer. It subjects them to higher prices and limits their access to goods or services. It restricts consumer choice and sovereignty. Another disadvantage of a monopoly is the lack of innovation. Under competition, firms innovate to offer more than their competitors and capture a greater share of the market. With a monopoly, this incentive to innovate is not present.

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