Benefits of Monopoly and Regulating Monopoly

Benefits of Monopoly

a) Scale Economies:

Oliver Williamson (1968) has suggested that if a merger to monopoly results in a decrease in industry-wide costs, these cost savings could easily compensate for any increase in allocative inefficiency.

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It is the value of the resources that were required under competition to produce QM units however isn’t required to produce that output level under monopoly. Williamson’s point is that it doesn’t take very large cost savings to compensate for the allocative inefficiency.

b) Research and Development (R&D):

Joseph Schumpeter (1965) argued that market power is a necessary incentive for research and development. He contended that without the lure of monopoly profits firms would have insufficient incentives to undertake research and development. Furthermore it was a mistake to focus on allocative inefficiency if that inefficiency made possible innovation of new products and technologies. For it is this type of innovation that is responsible for economic growth and substantial qualitative increases in living standards.

Regulating Monopoly:

a) Marginal Cost Pricing

b) Average Cost Pricing

c) Two-tier Pricing

d) Rate-of-Return Regulation

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