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< Back to question What are the pros and cons of monopolies? Show more Show less

The word monopolies has negative connotations in economic history, but recently monopolies have been praised by people such as Warren Buffett and Peter Thiel. The arguments for and against are not new, but now they have better empirical support.

Monopolies are damaging to economies Show more Show less

Monopolies choke economies: competition is central to a healthy economic system
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Monopolies reduce innovation

Monopolies do not have to worry about constantly making innovations to their product because consumers are forced to buy from them in the first place. A lack of market competition equals a lack of innovation.
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Proponents


The Argument

Monopolies dominate their market base and leave little to no room for competition. This creates an unbalanced market skewed in favour of the monopoly as they are the ones with all the power. With this comes a lack of innovation as monopolies lack the incentive to spend their profits on innovation when there is no one else in the market to outperform. They are able to manage without significant developments because consumers lack alternatives to turn to, meaning they must settle for the product offered by the monopoly. [1] In the late 19th and early 20th century, the US was a hotbed for innovation, with new products hitting the market left and right. [1] But by the middle of the century, however, large corporations began exploiting patents to monopolize the market. A patent grants the inventor the sole right to their invention, stopping others from making, using or selling the invention without their permission for a certain period of time.[2] Patent laws made it impossible for innovations to build off one another because of the exclusivity they granted. For example, Samuel Morse’s patent over the telegraph was so extensive that it halted the growth of the telegraph industry until 1954 when the Supreme Court ruled to narrow the patent in order to allow others into the market to develop and expand it.[1] The presence and increasing acceptance of monopolies in modern economies have slowed down economic growth. With a single company dominating a market, new or alternative suppliers refrain from entering the market because it is hard to compete with a monopoly. But what’s more, not only do monopolies keep competition (which would provide innovation) out, but they also invest less in research and development in order to maximize profits. Under the understanding that they have no one to compete with, monopolies are able to reinvest their profits, not in research and development, but rather they channel the money back into themselves. They may buy back their own stock which reduces supply while driving up demand, thus raising their stock price. They may pay their investors' high dividends or simply hoard the cash.[1] Either way, money that would ordinarily be spent on innovation is channeled away from the consumer and back into the monopoly.

Counter arguments

Opponents of this argument include Peter Thiel, an entrepreneur, and co-founder of eBay. Thiel argues that monopolies actually facilitate innovation because they don't have to worry about competition. Instead, Thiel argues that monopolies are able to focus more time, money, and attention on innovation. In these cases monopolies don't need to invest as much on marketing because they know people will buy their products, freeing up money for innovation and research & development. [3] Thiel also argues that monopolies understand that regardless of their dominance now, their place at the top is not guaranteed. As such, monopolies still have incentives to innovate even where there is no competition because innovation prevents room for competition to emerge. If a monopoly truly does not innovate, competition can seize the market and threaten the monopoly. [4]

Premises

[P1] Monopolies dominate their markets and leave no room for competition. [P2] Monopolies have little incentive to innovate where there is no competition. [P3] Rather than invest in research and development, monopolies keep their money to themselves. [P4] Monopolies channel money away from consumers and back into themselves and their investors. [P5] Monopolies reduce the likelihood of innovation.

Rejecting the premises

[Rejecting P2] Monopolies are inspired to innovate to prevent possible competition.

References

  1. https://www.openmarketsinstitute.org/learn/innovation-monopoly
  2. https://www.bl.uk/business-and-ip-centre/articles/what-is-a-patent
  3. https://www.hopesandfears.com/hopes/now/question/216743-is-competition-or-monopoly-more-innovative
  4. https://truthonthemarket.com/2014/09/13/peter-thiel-on-the-virtues-of-monopoly/

This page was last edited on Wednesday, 24 Jun 2020 at 20:33 UTC

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