What are Monopolies and How They Help and Harm the Economy and Their Regulation

How Economies Work Best When Free Market Forces are Truly Free and Fair

According to Economic Theories, Free Market Economies work best when they are left to themselves and be guided by the Hidden Hand of Markets.

In other words, what this means is that any capitalist economy works towards optimal outcomes as long as market forces of demand and supply determine the equilibrium, without outside intervention.

Another tenet of modern Economics is that markets work best when there is “free and fair” competition between the economic actors without distortions and perverse incentives.

What this means is that economies work towards equitable outcomes when they are free from outside interventions.

In addition, markets work well when governments do not interfere either in favour of particular firms or due to excessive regulation that stymies and throttles genuine economic activity.

However, in recent years, this has not always been the case as governments worldwide have tended to interfere and regulate the markets in favour of certain firms at the expense of others.

This leads to a situation where Monopolies are formed that help and harm the economy at the same time. Therefore, it is our argument that monopolies are economically harmful.

Why the Indian Economy is Moving towards Monopolies and How it is a Bad Thing

For instance, consider the case of India that in recent years has seen the rise of many Monopolies.

When the country opened up its economy in the 1990s and liberalized its rules and regulations paving the way for a capitalist economy, many believed that the “Shackled Elephant” was being let loose and it was only a matter of time before it started to lumber its way towards a genuinely pro growth and free market system.

However, what we have seen instead is the formation of a few huge business houses that control the economy due to the fact that successive governments have favoured them over others.

This leads to a situation where the absence of competition leads to these business houses determining prices and more importantly, setting narrative of what happens in the broader economy.

Indeed, when Ambani and Adani control the economy, there is precious little that other businesses can do except to follow their lead and agree to whatever prices that they are setting for the consumers in addition to constraining the choices that consumers have.

This is where such monopolies harm the economy and lead to situations where there are distortions and disincentives for the economic actors.

How Monopolies Benefit Consumers in Certain Situations and Harm Them in Other Ways

Having said that, there are some benefits of monopolies and it is that the scale and efficiencies tend to be higher than in a market that has several players.

When a handful of players control and dominate the market, they can achieve the Efficiencies of the Economies of Scale and the Synergies of Integration thereby benefiting consumers.

For instance, Reliance controls the End to End Supply and Value Chain of Petrochemicals leading to cost reductions and consequently, price decreases that accrue from scale and synergies.

This leads to a situation where consumers benefit from the existence of monopolies. Moreover, there is always the guarantee that they would be around for many years to come due to their size and this means that consumers do not have worry about insolvencies and bankruptcies of such monopolies disrupting supply and value chains.

Of course, there is the flip side as well since consumers are at the mercy of few players and in the absence of competition; they cannot switch to other firms.

This is the classic situation as described by Henry Ford, who remarked, that You Can Have any Car as Long as it is Black that effectively leaves consumers with zero choice.

Why Emerging Markets Have Monopolies and How Regulation is the Need of the Hour

This is the reason why monopolies ought to be regulated despite some benefits as outlined above. While the United States and Europe have strict Anti Trust laws and rules that limit the monopolistic tendencies, many developing and emerging countries are yet to have such regulations or worse, tend to ignore such laws in reality.

For instance, South Korea, which is one of the Asian Tiger economies, has large business houses known as Chaebols that control the economy.

India is moving in that direction with Ambani and Adani groups now on the way to control all sectors of the economy.

Moreover, monopolies are also formed due to political patronage and this has become pronounced in recent years in many countries worldwide.

This is the reason why many protests are happening across the world and especially in India, where farmers are up in arms against the alleged takeover of the farm sector by corporates.

This is more the reason why monopolies ought to be regulated and free and fair competition should be encouraged.

Again, monopolies in some sectors where huge capital investments are needed are ok and it is the other sectors where small operators tend to thrive that they are harmful.

Economies Should Work for Consumers

Last, economic theories often point to how free market systems allocate resources and distribute gains in an equitable manner.

Therefore, there is nothing wrong with capitalist economies as long as the governments and the regulators ensure that fair play is the norm and unjust business practices are not allowed.

So, it is incumbent upon political parties not to let certain business houses flourish at the expense of others and also to regulate the economy in such a way that consumers benefit.

After all, economists often say that the Consumer is the King and hence, economies should work to their benefit.



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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Managerial Economics