Monopolies and Economies of Scale

Discussion today included a brief divergence into monopoly power. Such a divergence is natural given that we were discussing long-run Average Total Costs (ATCs), economies of scale, and the minimum efficient scale (MES). Generally speaking, industry’s with fewer producers are characterized by economies of scale over larger quantities of output. If that is the case (reasoned the student), then aren’t monopolies good since they are more likely to achieve a lower MES quotient then firms in industries with many competitors and economies of scale spread over fewer units of output? In other words, don’t we want monopolies?

As with any answer in economics, it all depends.

In my response during the ensuing discussion, I referenced a recent article by Joseph Stiglitz. As I read it, Stiglitz does not argue that monopolies are bad per se. Instead, Stiglitz argues that in the type of policy environment that characterizes America’s political economy since the 2000s, monopolies have abused their market position in a way that benefits the few over the many. These benefits may be seen in the disproportionate salaries and bonuses of their executives when set against wages for employees. In other words, long-run efficiency gains and their expectant lower ATCs have not been returned to employees in the form of wages. Instead, their monopoly position has been returned to the executives of the company.

Are these disproportionate returns worth it? From one perspective, yes. After all, their monopoly or monopoly-like position has decreased costs, which in turn lowers their product’s price. This leaves me the buyer with more resources to pursue other means to utility. From another perspective though, such disproportionate returns are not worth it. After all, with average workers not seeing these returns translate into higher wages, they are left with fewer resources (i.e., money) to spend. When this happens in many firms in many industries simultaneously, the resulting decrease in aggregate demand is too significant to ignore. Unless the concentration of returns in the elite leads them to spend more of their new resources to make up for that loss in aggregate demand (and as we know, they don’t), there will be fewer people spending any money. This can then lead to increased costs to make up for the loss of customers, thereby negating the benefits of the monopoly’s lower ATC curve.

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