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Monopsony theory

Americans detest monopolies. And rightly so. Theoretically, monopolies represent an inefficient allocation of scarce resources.

By Jeffrey Spiers | Updated on October 20, 2010

Americans detest monopolies. And rightly so. Theoretically, monopolies represent an inefficient allocation of scarce resources. The monopolist is adept at converting consumer surplus into producer surplus because fewer goods are produced at a higher price. Remember long-distance telephone services? Under Ma Bell, prices were higher and services anemic. Today the cost of long-distance telephone service is inconsequential. Americans tend to value increased competition and fear monopoly power.

The monopolist has the luxury of producing fewer goods or services while charging a higher price. In this country “uncompetitive” equates to “unAmerican.” We not only desire competition; we expect it. The competitive, free market produces a surplus that society has come to expect and enjoy in the U.S.

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