Four Reasons Why They're Bad for an Economy
Monopolies restrict free trade, preventing the market from setting prices. That creates the following four adverse effects:
1. Since monopolies are lone providers, they can set any prices they choose. That's known as price-fixing, and they can do this regardless of demand
because they know consumers have no choice. It's especially true when there is inelastic demand for goods and services. That's when people don't have a lot of flexibility. Gasoline is an example. Some drivers could switch to mass transit or bicycles, but most can't.
2. Not only can monopolies raise prices, but they also can supply inferior products. That's happened in some urban neighborhoods, where grocery stores know poor residents have few alternatives.
3. Monopolies lose any incentive to innovate or provide "new and improved" products. A 2017 study by the National Bureau of Economic Research found that U.S. businesses have invested less than expected since 2000 due to a decline in competition. That was true of cable companies until satellite dishes and online streaming services disrupted their hold on the market.
4. Monopolies create inflation. Since they can set any prices they want, they will raise costs to consumers. It's called cost-push inflation. A good example of how this works is the Organization of Petroleum Exporting Countries. The 12 oil-exporting countries in OPEC now control the price of 46 percent of the oil produced in the world.