Advantages of a Monopoly
As a result of price discrimination, the monopoly may lower prices for certain consumers in certain segments. Overall, this will be beneficial to the target client thereby increasing consumer welfare (Grant, 2000). If these reduced prices expand the demand, then there is likely to be an increase in overall consumer welfare. This will consequently increase the consumer surplus given the increased demand and/or expanded markets. In the context of energy consumers, Tempus Energy may get more clients as a result of affordable/lower pricing. Increased spending will result in the growth of the economy.
Secondly, cost of setting up a new firm to provide similar services is excessively high, for instance, setting up a new energy company will involve sinking huge costs before even starting operations (Anderton, 2008). This makes economic sense to have the same firm provide these services at constant fixed costs. The monopoly will also take advantage of the existing economies of scale to offer its services and passing on these benefits to the consumers.
Additionally, being the only supplier of its products, energy, in this case, the monopoly is likely to make good profits. In the year 2014 for instance, the total revenues from the big six energy companies amounted to £26.0bn (Ofgem.gov.uk, 2018). That means that the government will receive considerable revenues inform of taxes given that the overall sector had just one supplier.
The economy will also grow given monopolies with preference to creativity, development, and innovation (Anderton, 2008). Despite giving more edge to the monopoly to get more profits, the consumers and the economy at large will benefit from improved efficiencies, revolutionary and high-quality solutions and products. For instance, in the energy sector, a monopoly able to develop more green energy such as wind and solar energy, it will be more beneficial to the economy. The economy will save more on the provisions associated with climate change mitigations while at the same time providing clean and cost friendly energy. Tempus Energy (E) gives more preference to smart technology and encourages more flexibility amongst its clients with a potential to be flexible in a proportion of their use of energy.
Finally, a monopoly can only remain a monopoly through providing top-notch goods and services that no competition can match (Anderton, 2008). A monopoly enjoys natural benefits such as reduced costs of advertisement, being the only service provider; therefore, more funds are available for research and development. As such, they will continuously solve unique problems in the economy as well as exploring other competitive opportunities. Assuming Tempus Energy is a monopoly; consumers will continue benefiting from its flexibility innovative plan as well as the provision of clean energy (Pollitt and Brophy Haney, 2014).
Disadvantages of a Monopoly
Monopoly disadvantages
A major drawback of a monopoly is the obvious limitation to the customer (Grant, 2000). A client is therefore confined to the services/goods of the same supplier. The lack of competition may make the monopoly complacent and unmotivated to make improvements in offering their services. This will make the consumers more unsatisfied with the monopoly. This lack of competition will, therefore, hinder any push for research and development. Such a monopoly will only exist only with the regulation of the government.
Another disadvantage of a monopoly is the practice of price-fixing (Ofgem.gov.uk, 2018). The monopoly will set the price mostly above the market price. This price discrimination is severe to the target client because there is no alternative to provide similar services. Failure on the part of the government to offer regulatory obligations may result in such price discrimination tendencies. For example, the big six energy companies in the UK exhibited monopolistic tendencies to increase prices to a tune of an extra £1bn every year (Ofgem.gov.uk, 2018). This is pure exploitation and blatant greed that can only be a monopoly.
Under the monopoly, the economy is likely to be filled with inferior products (Anderton, 2008). Knowing the consumers lack an alternative to their services, the energy sector may offer sub-standard products. They lack the incentive to improve on their existing goods and services despite the obvious public outcry. Assuming, for instance, Tempus Energy abandoned their demand-side flexibility and ends up billing clients more for less power consumed. Their intended market disruptive nature would cease while clients continue to receive inferior services.
Further, a monopoly can create cost-push inflation (Anderton, 2008). This happens when a monopoly decides to control the output and creates temporary demand. To cover the demand, the monopoly will intern raise the prices and raise the costs to the consumers. This will be very disruptive to the economy. Relating to the UK energy sector, the enormous market power that can be exercised by a monopoly will affect the economy negatively. A lot will be spent by consumers for energy. Without government control, the monopoly will make supernormal profits for its shareholders at the expense of the consumers. Without the appropriate intervention and regulation through CMA, the effects of such inflation can be devastating in all sectors of the economy given that the energy sector is a major driver and component used in all other important sectors such as manufacturing.
Lastly, the establishment of a monopoly power will kill the existing competitors. Due to a possible huge financial strength, a monopoly can reduce the prices of its services and/goods thus rendering the business of its competition unsustainable (Anderton, 2015). Without competition, the monopoly can raise its current prices high enough to recover the losses and remain profitable. In the long-run, such tactics are unfair to the economy and consumers. Assuming Tempus Energy used this tactic to increase its market share to become a monopoly, UK consumers would end up paying to recover the losses incurred. This tactic will also make it deliberately hard for anyone willing to provide similar services.
Monopoly has far worse costs and disadvantages to be allowed to operate in UK (Hviid and Price, 2012). CMA should, therefore, offer more regulatory support to the existing businesses. Consumers should always be protected against unethical business practices by the oligopolistic firms. This will encourage more competition between firms making consumers make well-informed decisions while choosing between service providers.
References
Ofgem.gov.uk. (2018). Energy Supply Probe. [online] Available at: http://www.ofgem.gov.uk/Markets/RetMkts/ensuppro/Pages/Energysupplyprobe.aspx [Accessed 21 Feb. 2018].
Grant, S J (2000). Stanlake’s Introductory Economics. 7th ed. UK: Longman
Anderton, A (2008). Economics AS Level. 5th ed. UK: Pearsons Education
Pollitt, M. and Brophy Haney, A. (2014). Dismantling a Competitive Retail Electricity Market: Residential Market Reforms in Great Britain. The Electricity Journal, 27(1), pp.66-73.
Hviid, M. and Price, C. (2012). Non-Discrimination Clauses in the Retail Energy Sector*. The Economic Journal, 122(562), pp.F236-F252.
