Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. By limiting supply of these competing products, the monopolist drives up demand for its own. The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products-usually by blocking low-cost substitutes. These productivity losses are a dead weight loss for the economy, and far from trivial. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. 2 This research shows that monopolies are not well-run businesses, but instead are deeply inefficient. In this essay, I review recent research that upends both the theoretical and empirical elements of this consensus view. And because empirical studies have found that monopolists do not restrict output or raise prices by very much, most economists have concluded that monopolies inflict relatively little harm on the economy. This consensus is based on a theory that assumes monopolies are well-run businesses that limit their output in order to drive up prices and maximize profit. Schmitz, Jr.Photo by Stan WaldhauserĮconomists overwhelmingly agree that the actual costs of monopoly are small, even trivial.
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